-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OGshtZvCSCaYG7mH2JrpeY83KQcJRPrhxWzSwqdt3S6JLh+mMPcBeq6p0OTlmrYm z8CNJK2jQIWt//JVUziUBw== 0000912057-96-015576.txt : 19960729 0000912057-96-015576.hdr.sgml : 19960729 ACCESSION NUMBER: 0000912057-96-015576 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960726 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: C CUBE MICROSYSTEMS INC CENTRAL INDEX KEY: 0000919870 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770192108 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-06653 FILM NUMBER: 96599694 BUSINESS ADDRESS: STREET 1: 1778 MCCARTHY BLVD CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 408-944-6300 MAIL ADDRESS: STREET 1: 1778 MCCARTHY BLVD CITY: MILPITAS STATE: CA ZIP: 95035 S-4/A 1 C-CUBE S-4 AMENDMENT NO. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 1996 REGISTRATION NO. 333-6653 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 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) Delaware 3674 77-0192108 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION ORGANIZATION) NO.)
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: 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
------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- (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; Selected Historical and Selected Pro Forma Combined Financial Data; Comparative Per Share Data; Approval of the Merger and Related Transactions; Information Concerning C-Cube; Information Concerning DiviCom; 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; Selected Historical and Unaudited Pro Forma 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 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 Financial Statements 11. Incorporation of Certain Information by Reference.... *
- ------------------------ *Not Applicable.
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 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-2 or S-3 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-2 or S-3 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 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..... *
- ------------------------ *Not Applicable. [LETTERHEAD OF DIVICOM INC.] July , 1996 Dear Stockholder: A special meeting of stockholders of DiviCom Inc. ("DiviCom") will be held on August 20, 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 (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 an amendment of DiviCom's Certificate of Incorporation (the "Certificate Amendment"). 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 Amendment, 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 $ and closed at $ on the day before the printing of this proxy statement. If the Merger were consummated when the Average Price of C-Cube's stock was $ , the DiviCom stockholders would receive, in the aggregate, consideration valued at $ . 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 Amendment 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. 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 and the Merger. As a result of their agreement, DiviCom believes it is assured of its ability to obtain the necessary votes for the Reorganization Agreement and the Merger. 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 DIVICOM INC. 1708 McCarthy Blvd. Milpitas, California 95035 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To be held on August 20, 1996 TO THE STOCKHOLDERS: A Special Meeting of Stockholders of DiviCom Inc., a Delaware corporation ("DiviCom"), will be held on August 20, 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 (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. 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) assuming that no holders of vested shares elect to receive "stock only" consideration and that the Average Price is not less than $25.75, 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) will be converted into the right to receive an amount of cash equal to approximately $2.16 and a fraction of a share of C-Cube Common Stock equal to between 0.063684065827 and 0.070761532111 per share depending on the average closing price of C-Cube Common Stock on the twelve (12) trading days prior to the DiviCom Meeting and (iii) all outstanding unvested shares of DiviCom Common Stock will be converted into the right to receive a fraction of a share of C-Cube Common Stock equal to between 0.103811571616 and 0.151017023831 per share depending on the average closing price of C-Cube Common Stock on the twelve (12) trading days prior to the DiviCom meeting. If holders of vested shares elect to receive "stock only" consideration, the cash per share paid to the holders of vested shares will increase and the exchange ratio 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 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, (ii) delete 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 (iii) delete the preemptive rights provision contained in DiviCom's Certificate of Incorporation (such amendments collectively constitute the "Certificate Amendment"). Only stockholders of record at the close of business on July , 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 AMENDMENT 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, Nolan Daines PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Milpitas, California July , 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. [C-CUBE LOGO] [DIVICOM LOGO] PROSPECTUS/PROXY STATEMENT 2,680,412 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 2,680,412 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 (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." 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) or vested Shares 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. Assuming (w) that the capitalization of DiviCom at the Effective Time is in all respects identical to the capitalization of DiviCom at July 31, 1996, (x) a closing date of August 20, 1996, (y) that no holders of vested shares elect to receive "stock only" consideration and (z) that the Average Price is between $53.89 and $25.75 (although there can be no assurance as to the foregoing), 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 approximately $2.16 in cash and the right to receive approximately between 0.063684065827 and 0.07076153211 of a share of C-Cube Common Stock. Each unvested share of DiviCom Common Stock or vested Shares as to which a "Stock only" election has been made exchanged in the Merger will be converted into the right to receive approximately between 0.103811571616 and 0.151017023831 of a share of C-Cube Common Stock. 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 20, 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 July , 1996. Certain major stockholders of DiviCom have agreed to vote in favor of the Reorganization Agreement and Merger 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 and Merger. 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 JULY , 1996. TABLE OF CONTENTS
PAGE ---- 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 Certificate Amendment............................................... 4 The Merger.............................................................. 4 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 Amendment................................................... 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
i
PAGE ---- DiviCom Board Recommendation of Approval of the Merger.................. 28 Material Contacts....................................................... 29 TERMS OF THE MERGER....................................................... 31 Effective Time.......................................................... 31 Overview of Merger Consideration and Exchange Ratios.................... 31 Manner and Basis of Converting Shares................................... 32 Stock Ownership Following the Merger.................................... 34 Employee Benefit Plans.................................................. 34 Escrow Fund............................................................. 35 Legal Structure of the Merger........................................... 35 Conduct of DiviCom's Business Prior to the Merger....................... 35 No Solicitation......................................................... 37 Expenses................................................................ 37 Conditions to the Merger................................................ 37 Termination of Reorganization Agreement................................. 39 Transition Agreement.................................................... 40 Registration Rights Agreement........................................... 41 Voting Agreement........................................................ 41 Noncompetition Agreements............................................... 42 Affiliate Agreements.................................................... 42 Certain Benefits to DiviCom Management and Employees.................... 42 Certain Federal Income Tax Considerations............................... 42 Governmental and Regulatory Approvals................................... 45 Accounting Treatment.................................................... 45 Appraisal and Dissenters' Rights........................................ 45 C-CUBE AND DIVICOM UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............................................................... 48 INFORMATION CONCERNING C-CUBE............................................. 53 The Company............................................................. 53 Background.............................................................. 53 Markets and Applications................................................ 54 Dependence on Emerging Markets.......................................... 57 Products................................................................ 58 Customers............................................................... 62 Research and Development................................................ 62 Sales and Marketing..................................................... 63 International Business Activities....................................... 63 Manufacturing........................................................... 64 Competition............................................................. 66 Intellectual Property and Licenses...................................... 67 Employees............................................................... 68 Facilities.............................................................. 68 Legal Proceedings....................................................... 68 Acquisitions............................................................ 68 C-Cube Stock Price and Dividend Information............................. 69 Dividend Policy......................................................... 69 C-CUBE MICROSYSTEMS INC. SELECTED FINANCIAL DATA.......................... 70 C-CUBE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................... 71 Overview................................................................ 71
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PAGE ---- Results of Operations................................................... 73 Factors that May Affect Future Results.................................. 77 Liquidity and Capital Resources......................................... 78 MANAGEMENT OF C-CUBE...................................................... 80 Executive Officers and Directors........................................ 80 Executive Compensation.................................................. 83 Summary Compensation Table.............................................. 83 Option Grants in Last Fiscal Year....................................... 84 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values.......................................................... 84 Certain Relationships and Transactions of C-Cube........................ 85 C-CUBE STOCKHOLDERS....................................................... 86 INFORMATION CONCERNING DIVICOM............................................ 88 Background.............................................................. 88 Business Model.......................................................... 89 Markets and Applications................................................ 89 Relevant Standards...................................................... 89 Products................................................................ 90 Customers............................................................... 92 Marketing & Sales....................................................... 92 Manufacturing........................................................... 93 Research and Development................................................ 93 Competition............................................................. 94 Proprietary Rights...................................................... 95 Employees............................................................... 95 Facilities.............................................................. 95 SELECTED CONSOLIDATED FINANCIAL DATA OF DIVICOM........................... 97 DIVICOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................... 98 Overview................................................................ 98 Results of Operations................................................... 98 Year to Year Comparisons................................................ 98 Comparison of Six Months Ended June 30, 1995 and June 30, 1996.......... 99 Liquidity and Capital Resources......................................... 100 MANAGEMENT OF DIVICOM..................................................... 101 Executive Officers and Senior Management................................ 101 Executive Compensation.................................................. 102 Summary Compensation Table.............................................. 102 Option Grants in Last Fiscal Year....................................... 103 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values.......................................................... 103 Certain Transactions of DiviCom......................................... 104 DIVICOM STOCKHOLDERS...................................................... 105 COMPARISON OF CAPITAL STOCK............................................... 106 Description of C-Cube Capital Stock..................................... 106 Description of DiviCom Capital Stock.................................... 106 COMPARISON OF RIGHTS OF HOLDERS OF C-CUBE COMMON STOCK AND HOLDERS OF DIVICOM CAPITAL STOCK.................................................... 108 EXPERTS................................................................... 108 LEGAL MATTERS............................................................. 108
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PAGE ---- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1 ANNEX A -- 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............ B-1 ANNEX C -- Restated Certificate of Incorporation of DiviCom............... C-1
iv 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 , 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 1 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." 2 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 20, 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 an amendment (the "Certificate Amendment") to DiviCom's Certificate of Incorporation (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) delete the preemptive rights provision contained in DiviCom's Certificate of Incorporation. A copy of the Certificate Amendment is attached as Annex C. RECORD DATE AND VOTE REQUIRED. Only DiviCom stockholders of record at the close of business on July , 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 Amendment 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 majority of the outstanding shares of DiviCom Preferred Stock, voting separately as a single class. 3 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 18.5% 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 Amendment, as has the Chief Executive Officer of DiviCom (who beneficially owns a total of 1,877,895 shares of DiviCom Common Stock representing 16.98% of the Common Stock of DiviCom as of May 31, 1996). In addition, C-Cube and its affiliates hold 3.6% of the Series A Preferred Stock and 12.4% of the Common Stock of DiviCom and intend to vote in favor of the Merger and the Certificate Amendment. Therefore, assuming that such stockholders vote as described above, the Merger and the Certificate Amendment will be approved at the DiviCom Meeting. As of the DiviCom Record Date, there were stockholders of record of DiviCom Common Stock and five stockholders of record of DiviCom Preferred Stock. On July , 1996, a notice meeting the requirements of Delaware law was mailed to all DiviCom stockholders of record as of the DiviCom Record Date. THE CERTIFICATE AMENDMENT Although three provisions of DiviCom's Certificate of Incorporation are being amended, they constitute only one proposal which is intended to ensure that DiviCom's Certificate of Incorporation not conflict with the actual terms of the proposed Merger. The Certificate Amendment, 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 Amendment ensures 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 Amendment, 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 Certificate Amendment 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 Amendment will be voted on. Given the Voting Agreement signed by the SAGEM Entities, the Certificate Amendment will be approved. It is a condition to closing of the Merger that the Certificate Amendment be approved and effective prior to the Effective Time of the Merger. 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, 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 4 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. 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 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 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. Assuming (i) no change in DiviCom capitalization since July 31, 1996, (ii) a closing date of August 20, 1996, (iii) that no holders of vested DiviCom Common Stock elect to receive "stock only" consideration, and (iv) that the C-Cube Average Price is between $53.89 and $25.75, although there can be no assurance as to these assumptions, all vested DiviCom Capital Stock on the Closing Date that have not elected to receive "stock only" in the Merger will be converted into C-Cube Common Stock at a rate that will be between 0.063684065827 and 0.070761532111 of a share of C-Cube stock for each share of DiviCom Capital Stock (meaning that each holder would receive one share of C-Cube stock for every approximately 15.7 to 14.9 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. The lower exchange ratio will apply if the average closing price of the C-Cube Common Stock for the 12 trading days immediately preceding the date of the DiviCom Meeting (the "Average Price") is $53.89 or above, with this exchange ratio being adjusted progressively up to the higher conversion ratio until the Average Price is $48.50 and then declining again as the C-Cube Average Price declines or as shares of DiviCom vested Common Stock elect to receive "stock only" consideration. The conversion ratio for DiviCom Common Stock does not increase even if the C-Cube stock price for such period is lower than $48.50. On July 22, 1996, the closing price of C-Cube stock was $25.75. Since no adjustment to the aggregate number of shares is required under the Reorganization Agreement, at an Average Price of $25.75, the value of the aggregate value of the consideration to be delivered by C-Cube in the Merger would be $139 million. Each share of DiviCom Capital Stock issued and outstanding immediately prior to the Effective Time that is not subject to a right of repurchase at original purchase price whose holder has not elected to receive "stock only" consideration will also be entitled to receive a "Per-Share Cash Amount" equal to $70 million divided by the number of all such shares electing to receive both cash and stock in the merger. See "Terms of the Merger -- Manner and Basis of Converting Shares." 5 Assuming the Closing occurs on August 20, 1996 (although there can be no assurance as to this assumption) and that 32,370,372 Vested Shares of DiviCom Capital Stock will be outstanding at the Effective Time by shareholders electing to receive cash in the Merger, the Per Share Cash Amount will be approximately $2.16. 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 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 the SAGEM Entities, C-Cube and Mr. Daines 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 $2.63 in cash and an exchange ratio of 0.048689419327. All unvested DiviCom Capital Stock or vested DiviCom Capital Stock as to which a "stock only" election has been made will be converted into C-Cube Common Stock at a rate that will be between 0.103811571616 and 0.151017023831 of a share of C-Cube stock for each share of DiviCom stock (the "Unvested Exchange Ratio"). In other words, each holder of DiviCom Capital Stock would receive one share of C-Cube stock for every approximately 9.6 to 6.6 shares of unvested DiviCom Capital Stock or vested DiviCom Capital 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. Assuming the Merger closes on August 20, 1996, that the Average Price is equal to $25.75 (the closing price of C-Cube stock on July 22, 1996), and that no holders of DiviCom Vested Shares elect to receive "stock only" consideration, although there can be no assurance as to these assumptions, the Per-Share Cash Amount will be approximately $2.16, the Vested Exchange Ratio will be 0.067037556374 and the Unvested Exchange Ratio will be 0.151017023831. 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 -- 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 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 6 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 20, 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 20, 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 % of C-Cube's total issued and outstanding shares, and holders of former DiviCom Options would hold options exercisable for approximately % 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 ("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 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. 7 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 July 22, 1996, the closing price of C-Cube Common Stock as reported on Nasdaq was $25.75 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." 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 8 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 18.50% 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 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 9 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. 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 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." 10 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." 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.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA: 1995 1996 - ------------------------------------------------------------ ------------ ----------- 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.................................................. 19,253 24,611 Net income per share........................................ 0.52 0.64 JUNE 30, PRO FORMA COMBINED BALANCE SHEET DATA: 1996 - ------------------------------------------------------------ ----------- 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
11 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.
PRO FORMA COMBINED C-CUBE DIVICOM C-CUBE AND HISTORICAL HISTORICAL DIVICOM ----------- ----------- ------------- Net income (loss) per share: Year ended December 31, 1995.............................. $ 0.72 $ (0.11) $ 0.52 Six months ended June 30, 1996............................ $ 0.76 $ 0.02 $ 0.64 Book value per common share at June 30, 1996................ $ 3.81 $ 1.48 $ 2.50 Tangible book value per common share at June 30, 1996....... $ 3.67 $ 1.48 $ 1.86
12 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 13 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. 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 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 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 16 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 17 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 18 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, 19 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, 20 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 21 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. 22 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 20, 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 , 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 holders of record of DiviCom Common Stock holding an aggregate of 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 , 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 matter 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 Amendment"). A copy of the Certificate Amendment 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 Amendment. 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). 23 VOTE REQUIRED Approval and adoption of the Reorganization Agreement, the Merger and the Certificate Amendment 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 % 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 29.38% 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 AMENDMENT Although three provisions of DiviCom's Certificate of Incorporation are being amended, they constitute only one proposal which is intended to ensure that DiviCom's Certificate of Incorporation not conflict with the actual terms of the proposed Merger. The Certificate Amendment, 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 Amendment ensures 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 Amendment, 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. 24 Pursuant to the Reorganization Agreement, the Certificate Amendment 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 Amendment will be voted on. Given the Voting Agreement signed by the SAGEM Entities, the Certificate Amendment will be approved. It is a condition to closing of the Merger that the Certificate Amendment be approved and effective prior to the Effective Time of the Merger. 25 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. 26 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. 27 - 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. 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; (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. 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 28 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. 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. 29 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. 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 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. 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. 30 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, 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 20, 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. 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. 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. 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. 31 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 2,680,412. 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 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 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 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. "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 32 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. 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 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 [ ] outstanding DiviCom Options. Assuming that the vesting of such DiviCom Options is calculated as of an assumed Merger consummation date of August 20, 1996, and assuming that as of that date [ ] unvested DiviCom Options are assumed by C-Cube, between [ ] and [ ] 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. 33 STOCK OWNERSHIP FOLLOWING THE MERGER Based upon (i) the capitalization of DiviCom as of the close of business on May 31, 1996, (ii) the assumption that no holder of DiviCom Capital Stock exercises appraisal or dissenters' rights, (iii) a closing date of August 20, 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 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 % of C-Cube's total issued and outstanding shares, and holders of former DiviCom Options would hold options exercisable for approximately % 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 May 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 May 31, 1996, DiviCom Options to acquire an aggregate of 3,132,817 shares of DiviCom Common Stock were issued and outstanding of which 1,798,042 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 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 34 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 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 35 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, 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; 36 (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, 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 37 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 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. 38 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 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 39 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, 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. 40 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. 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 2,046,217 shares of DiviCom Common Stock and 20,723,855 shares of DiviCom Preferred Stock representing 18.5% 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 May 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 16.98% of the number of shares of DiviCom Common Stock outstanding as of May 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 12.4% 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. 41 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 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 certain of the principal federal income tax considerations 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, 42 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. The Merger is intended to constitute a "reorganization" under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code"), with the result that, as discussed more fully below, (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. Assuming that the Merger qualifies as a reorganization, that DiviCom is not a "collapsible corporation" within the meaning of Section 341 of the Code and that the DiviCom Capital Stock exchanged and the C-Cube Common Stock received by each DiviCom stockholder are held as capital assets within the meaning of Section 1221 of the Code, the following tax consequences should 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 43 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 "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 44 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 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 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 45 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. 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 46 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 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. 47 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. 48 C-CUBE AND DIVICOM UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS) ASSETS
PRO FORMA PRO FORMA C-CUBE DIVICOM ADJUSTMENTS* COMBINED ----------- ---------- ------------------- ------------ 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 ----------- ---------- ---------- ------------ ----------- ---------- ---------- ------------
*See accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 49 C-CUBE AND DIVICOM UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA C-CUBE DIVICOM ADJUSTMENTS* COMBINED ----------- --------- ------------- ----------- 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 (3,309)(i) (1,087) ----------- --------- ------------- ----------- Income (loss) before income taxes & minority interest........ 30,039 (1,016) (5,953) 23,070 Income tax expense (benefit)................................. 4,933 (169) (1,158)(j) 3,606 ----------- --------- ------------- ----------- Income (loss) before minority interest....................... 25,106 (847) (4,795) 19,464 Minority interest in net income of subsidiary................ 211 -- 211 ----------- --------- ------------- ----------- Net income (loss)............................................ $ 24,895 $ (847) $ (4,795) $ 19,253 ----------- --------- ------------- ----------- ----------- --------- ------------- ----------- Net income per share......................................... $ 0.72 $ (0.11) $ 0.52 ----------- --------- ----------- ----------- --------- ----------- Shares used in computation................................... 34,651 7,670 2,680(h) 37,331 ----------- --------- ------------- ----------- ----------- --------- ------------- -----------
*See accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 50 C-CUBE AND DIVICOM UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
C-CUBE DIVICOM SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 PRO FORMA PRO FORMA 1996 1996 ADJUSTMENTS* COMBINED ----------- ----------- ------------- ----------- 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 (1,654)(i) (797) ----------- ----------- ------------- ----------- Income before income taxes and minority interest............ 43,919 1,356 (4,746) 40,529 Income tax expense.......................................... 15,811 624 (1,198)(j) 15,237 ----------- ----------- ------------- ----------- Income before minority interest............................. 28,108 732 (3,548) 25,292 Minority interest........................................... 681 681 ----------- ----------- ------------- ----------- Net income.................................................. $ 27,427 $ 732 $ (3,548) $ 24,611 ----------- ----------- ------------- ----------- ----------- ----------- ------------- ----------- Net income per share........................................ $ 0.76 $ 0.02 $ 0.64 ----------- ----------- ------------- ----------- ----------- ----------- ------------- ----------- Shares used in computation.................................. 35,869 34,873 2,680(h) 38,549 ----------- ----------- ------------- ----------- ----------- ----------- ------------- -----------
*See accompanying Notes to Unaudited Pro Forma Combined Financial Statements. 51 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: 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 ------------- -------------
The purchase price is expected to be allocated as follows: 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 ------------- -------------
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 loss of interest income due to the cash portion of the purchase price. (j) 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 and due to the loss of interest income due to the cash portion of the purchase price. The deferred tax assets recorded by DiviCom are included in the current assets assumed. 52 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 leading 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 53 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. 54 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. 55 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. 56 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. 57 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.
PRODUCTION MARKET PRODUCT NAME AND FUNCTION APPLICATION EXAMPLES RELEASE 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 2Q 96 CLM4720 MPEG 2 Storage Encoder 2Q 96 CLM4740 MPEG 2 Broadcast 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
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. 58 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. 59 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 60 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 61 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:
MARKET CUSTOMERS 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
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 62 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 63 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 64 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. 65 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. 66 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, 67 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 68 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).
HIGH LOW ------- --------- Fiscal 1996 Third Quarter through July , 1996)...................... 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
At April 30, 1996, there were approximately 650 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. 69 C-CUBE MICROSYSTEMS INC. SELECTED FINANCIAL DATA 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.
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) STATEMENT OF OPERATIONS DATA: Net revenues........................... $ 149,058 $ 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
- ------------------------ (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the computation of net income (loss) per share. 70 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:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- 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)% --------- --------- --------- --------- --------- ---------
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. 71 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 72 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:
QUARTER ENDED JUNE 30, -------------------- 1996 1995 --------- --------- 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% --------- --------- --------- ---------
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 73 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:
QUARTER ENDED JUNE 30, -------------------- 1996 1995 --------- --------- 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% --------- --------- --------- ---------
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 74 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 $2.4 million for the second quarter of 1996 from $5.3 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. 75 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:
SIX MONTHS ENDED JUNE 30, -------------------- 1996 1995 --------- --------- 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% --------- --------- --------- ---------
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
SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1995 ----------- ----------- 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% ----------- ----------- ----------- -----------
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. 76 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 77 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. 78 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 the Company expanded and formalized its relationship with Taiwan Semiconductor Manufacturing Corporation (TSMC) to provide additional wafer production capacity over the 1996 to 2001 timeframe. The agreement with TSMC requires C-Cube to make two advance payments totaling $49 million. The first advance payment of $24.5 million was made in June 1996, and the final payment is due June 1997, which is secured by a 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. 79 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 February 29, 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.
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------------------ Alexandre A. Balkanski, Ph.D.............. 35 President, Chief Executive Officer and Director -- Class II, term to expire at the 1999 Annual Meeting of Stockholders James G. Burke............................ 52 Vice President of Finance and Administration, Chief Financial Officer and Secretary Didier Le Gall, Ph.D...................... 39 Vice President of Research and Development Brian T. Connors.......................... 41 Vice President of Sales Richard S. Rasmussen...................... 37 Vice President and General Manager Alex Daly................................. 34 Vice President of Marketing Sai-Wai Fu................................ 39 Vice President of Hardware Engineering Sanjeev Renjen, Ph.D...................... 40 Vice President of Decoder Engineering Richard Foreman........................... 41 Vice President and Chief Information Officer Mark K. Allen............................. 40 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....................... 63 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.............................. 47 Director -- Class III, term to expire at the 1997 Annual Meeting of Stockholders
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. 80 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. 81 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. 82 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
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) - ------------------------------ ------------ --------- ------------- --------------- ------------- ------------- 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
- ------------------------------ (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 interest 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. 83 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:
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% ($) 10% ($) - --------------------------------------- --------- ----------- ----------- ---------- ----------- ----------- 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
- ------------------------------ (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:
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 ($)(1) EXERCISABLE UNEXERCISABLE ($) ($) - ------------------------------ ----------- ----------- ----------- ------------- ----------- ------------- 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
- ------------------------------ (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. 84 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. 85 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.
C-CUBE COMMON STOCK ------------------------ NAME AND ADDRESS OF NUMBER OF PERCENT BENEFICIAL HOLDER SHARES OF CLASS ----------------------- ----------- ----------- 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%
- ------------------------ * 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 86 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 share 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 26, 1996. Also includes 429,084 shares subject to options that are exercisable within 60 days of February 29, 1996. 87 INFORMATION CONCERNING DIVICOM DiviCom Inc. ("DiviCom"), incorporated in Delaware in 1993, is a leading 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. 88 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 89 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 90 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 91 testing. DiviSys utilizes DiviCom's expertise in the areas of TV broadcast, networking, and compres- sion 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:
INDUSTRY DIRECT CUSTOMER DEPLOYMENT 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
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 & 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 92 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. 93 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 94 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 95 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. 96 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.
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) 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
97 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:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------- ---------------------------- 1995 1995 1996 ------------- ------------- ------------- 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% ----- ----- ----- ----- ----- -----
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. 98 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. 99 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. 100 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:
NAME AGE POSITION - -------------------- --- ----------------------------------------------------- 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
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. 101 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
LONG-TERM COMPENSATION AWARDS ------------- ANNUAL COMPENSATION SECURITIES --------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) OPTIONS (#) COMPENSATION ($)(2) - ---------------------------------- --------- ------------ ------------- ------------- -------------------- 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 -- -- -- --
- ------------------------ (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 $3,696 as a discretionary matching contribution to DiviCom's 401(k) plan. 102 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning the grants of options to purchase DiviCom Common Stock to the DiviCom Named Executive Officers during the fiscal year ended December 31, 1995:
INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENTAGE OF ANNUAL RATES OF SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM (2) OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION ------------------------ NAME GRANTED (#)(1) GRANTED (#)(1) PRICE DATE 5% ($) 10% ($) - -------------------------- -------------- --------------- ----------------- ----------- ----------- ----------- Nolan Daines.............. -- -- -- -- -- -- Nai-Ting Hsu.............. 350,000 13.4% $ 0.10 4/10/05 22,011 55,781 Brian Johnson............. -- -- -- -- -- -- Thomas Lookabaugh......... -- -- -- -- -- -- Robert Natwick............ -- -- -- -- -- --
- ------------------------ (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:
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) - ------------------------------------ ----------- ------------- --------------------- ---------------------- 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
- ------------------------ (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. 103 (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. 104 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 May 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.
SHARES OF PERCENT OF DIVICOM DIVICOM TOTAL SHARES C-CUBE C-CUBE COMMON STOCK PREFERRED STOCK OF DIVICOM PERCENT OF COMMON STOCK COMMON STOCK ------------------ ------------------- CAPITAL ALL BENEFICIALLY BENEFICIALLY PERCENT PERCENT STOCK DIVICOM OWNED AFTER OWNED AFTER NAME AND ADDRESS OF NUMBER OF OF NUMBER OF OF BENEFICIALLY CAPITAL THE THE BENEFICIAL HOLDER SHARES CLASS SHARES CLASS OWNED STOCK MERGER (1) MERGER (1) - ------------------------- --------- ------- ---------- ------- ------------ ---------- ------------ ------------ SAGEM Entities (2)(5) 2,046,217 18.50% 20,723,855 97.35% 22,770,072 70.39% [ ] [ ] Nolan Daines (3)(6) 1,877,895 16.98% -- -- 1,877,895 5.80% [ ] [ ] C-Cube Microsystems Inc. (4)(7) 1,372,000 12.40% 546,145 2.65% 1,918,145 5.92% [ ] [ ] Thomas Lookabaugh (3)(8) 1,128,948 10.21% -- -- 1,128,948 3.49% [ ] [ ] Brian Johnson (3)(9) 1,049,822 9.49% -- -- 1,049,822 3.18% [ ] [ ] Michael Perkins (3)(10) 958,430 8.66% -- -- 958,430 2.95% [ ] [ ] Nai-Ting Hsu (3)(11) 350,000 3.16% -- -- 350,000 1.08% [ ] [ ] Robert Natwick (3) 141,119 1.28% -- -- 141,119 * [ ] [ ] Patrice Fallevoz (2)(12) -- -- -- -- -- -- -- -- Francis Galliard (2)(12) -- -- -- -- -- -- -- -- Michel Toussan (2)(12) -- -- -- -- -- -- -- -- Gabriel Matter (2)(12) -- -- -- -- -- -- -- -- All directors and executive officers of DiviCom as a group (nine persons) 4,547,784 41.11% -- -- 4,547,784 14.06% [ ] [ ]
- ------------------------------ * Less than 1%. (1) Assumes conversion of all shares of DiviCom Preferred Stock into C-Cube Common Stock. (2) Mailing address: c/o SAGEM S.A.; 6, Avenue d'Iena; 75783 Paris; Cedex 16, France. (3) Mailing address: DiviCom Inc., 1708 McCarthy Boulevard, Milpitas, California 93035. (4) Mailing address: C-Cube Microsystems Inc., 1778 McCarthy Boulevard, Milpitas, California 93035. (5) All 2,046,217 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. One of the SAGEM Entities also has the right to acquire from a DiviCom stockholder 329,276 shares of DiviCom Common Stock. (6) Includes 62,500 shares held by the children of Nolan Daines. (7) 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. (8) Includes 64,679 unvested shares of Common Stock subject to repurchase at original cost by DiviCom. (9) Includes 697,026 shares represented by options that vest within 60 days. (10) Includes 167,579 shares represented by options that vest within 60 days. (11) Includes 240,625 unvested shares of Common Stock subject to repurchase at original cost by DiviCom. (12) 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. 105 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 shares of DiviCom Common Stock outstanding and held of record by approximately 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. The principal rights, privileges and preferences of the issued and outstanding shares of DiviCom Preferred Shares are as set forth below. 106 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 107 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. 108 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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
F-1 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 C-CUBE MICROSYSTEMS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS) ASSETS
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ 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 ------------ ------------ ------------ ------------
See notes to consolidated financial statements. F-3 C-CUBE MICROSYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 ----------- --------- --------- 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 ----------- --------- --------- ----------- --------- ---------
See notes to consolidated financial statements. F-4 C-CUBE MICROSYSTEMS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK DEFERRED NOTES ACCUMULATED ---------------------- -------------------- STOCK RECEIVABLE FROM TRANSLATION SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS ADJUSTMENTS ----------- --------- --------- --------- ------------- --------------- --------------- 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) ----------- --------- --------- --------- ------------- ------ ------ ----------- --------- --------- --------- ------------- ------ ------ UNREALIZED RETAINED TOTAL LOSS ON EARNINGS STOCKHOLDERS' INVESTMENTS (DEFICIT) EQUITY ----------- ----------- ------------- 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 ----------- ----------- ------------- ----------- ----------- -------------
See notes to consolidated financial statements. F-5 C-CUBE MICROSYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 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
See notes to consolidated financial statements. F-6 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 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 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 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): 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 --------- ---------
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):
1995 1994 ----------- --------- Net sales............................................................ $ 130,720 $ 47,822 Net income........................................................... 28,606 4,325 Net income per share................................................. $ 0.83 $ 0.14
NOTE 3. INVESTMENTS Investments include the following debt securities as of December 31, 1995 and 1994:
UNREALIZED UNREALIZED AMORTIZED MARKET HOLDING HOLDING COST VALUE GAINS LOSSES ----------- --------- ----------- ----------- (IN THOUSANDS) Available-for-sale corporate debt securities: December 31, 1995.......................... $ 10,689 $ 10,675 $ 11 $ 25 ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- December 31, 1994.......................... $ 30,240 $ 30,159 $ 99 $ 180 ----------- --------- ----------- ----------- ----------- --------- ----------- -----------
There were no gains or losses on the sale of investments in 1995 or 1994. F-10 C-CUBE MICROSYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 NOTE 4. INVENTORIES Inventories consist of:
DECEMBER 31, -------------------- 1995 1994 --------- --------- (IN THOUSANDS) Finished goods............................................ $ 7,572 $ 867 Work-in-process........................................... 1,667 1,170 Raw materials............................................. 2,632 2,510 --------- --------- Total................................................. $ 11,871 $ 4,547 --------- --------- --------- ---------
NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, -------------------- 1995 1994 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
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 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:
DECEMBER 31, -------------------- 1995 1994 --------- --------- (IN THOUSANDS) 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 --------- --------- --------- ---------
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 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:
OPERATING CAPITAL ----------- --------- (IN THOUSANDS) 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 --------- ---------
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 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:
NUMBER OF OPTION PRICE SHARES PER SHARE TOTAL ---------- ------------- ----------- 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 ---------- ------------- ----------- ---------- ------------- -----------
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 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:
DECEMBER 31, 1995 -------------- (IN THOUSANDS) Current: Federal........................................... $ 8,779 State............................................. 1,636 Foreign........................................... -- -------------- Total........................................... 10,415 Deferred: Federal........................................... (4,606) State............................................. (876) Foreign........................................... -- -------------- Total........................................... (5,482) -------------- Total............................................... $ 4,933 -------------- --------------
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:
YEARS ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) 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 --------- --------- --------- --------- --------- ---------
The components of the net deferred tax asset as of December 31 were as follows:
1995 1994 --------- ---------- (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 $ -- --------- ---------- --------- ----------
F-15 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
1995 1994 1993 ----------- --------- --------- (IN THOUSANDS) Net revenues from unaffiliated customers by geographic region: United States................................. $ 107,341 $ 37,691 $ 18,700 Japan......................................... 17,261 7,328 5,039 ----------- --------- ---------
F-16 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) 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 ----------- --------- --------- ----------- --------- ---------
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:
1995 1994 1993 ----- ----- ----- Europe....................................................... 4% 8% 6% Japan and Asia............................................... 51 13 9 -- -- -- 55% 21% 15% -- -- -- -- -- --
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 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 SCHEDULE II C-CUBE MICROSYSTEMS INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND FROM END OF OF PERIOD EXPENSES RESERVES PERIOD ----------- ----------- ----------- ----------- 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
F-19 C-CUBE MICROSYSTEMS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
DECEMBER 31, 1995 JUNE 30, ------------ 1996 ----------- (UNAUDITED) 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 ----------- ------------ ----------- ------------
See notes to unaudited condensed consolidated financial statements. F-20 C-CUBE MICROSYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
QUARTER ENDED JUNE SIX MONTHS ENDED JUNE 30, 30, -------------------- ---------------------- 1996 1995 1996 1995 --------- --------- ----------- --------- 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 --------- --------- ----------- --------- --------- --------- ----------- ---------
See notes to unaudited condensed consolidated financial statements. F-21 C-CUBE MICROSYSTEMS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------------- 1996 1995 ----------- ---------- ----------- ---------- 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
See notes to unaudited condensed consolidated financial statements. F-22 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. 2. INVENTORIES CONSIST OF:
JUNE 30, 1996 ------------- (IN THOUSANDS) Finished goods....................................................... $ 17,260 Work-in-process...................................................... 3,764 Raw materials........................................................ 2,225 ------------- Total.......................................................... $ 23,249 ------------- -------------
3. WAFER SUPPLY AGREEMENT In the second quarter of 1996 the Company expanded and formalized it relationship with Taiwan Semiconductor Manufacturing Corporation ("TSMC") to provide additional wafer production capacity over the 1996 to 2001 timeframe. The agreement with TSMC requires C-Cube to make two advance payments totaling $49 million. The first advance payment of $24.5 million was made in June 1996, and the final payment is due June 1997, which is secured by a 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 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 DIVICOM INC. BALANCE SHEETS, DECEMBER 31, 1994 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS
DECEMBER 31, ---------------------- 1994 1995 ---------- ---------- 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 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. F-25 DIVICOM INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------------- 1993 1994 1995 ------------ ---------- ---------- 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) ------------ ---------- ---------- ------------ ---------- ----------
The accompanying notes are an integral part of these financial statements. F-26 DIVICOM INC. STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
ADDITIONAL PAID-IN CAPITAL ------------------------------------- PREFERRED STOCK COMMON STOCK RESEARCH -------------------- -------------------- PREFERRED COMMON AND SHARES AMOUNT SHARES AMOUNT STOCK STOCK DEVELOPMENT --------- --------- --------- --------- ----------- --------- ------------- 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 --------- --------- --------- --------- ----------- --------- ------------- --------- --------- --------- --------- ----------- --------- ------------- RECEIVABLE TOTAL FROM SUBSCRIBED ACCUMULATED STOCKHOLDERS' STOCKHOLDER STOCK DEFICIT EQUITY ----------- ----------- ------------ ------------ 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 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
The accompanying notes are an integral part of these financial statements. F-27 DIVICOM INC. STATEMENT OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, --------------------- 1993 1994 1995 ------------ ---------- --------- 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
The accompanying notes are an integral part of these financial statements. F-28 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 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:
DECEMBER 31, -------------------- 1994 1995 --------- --------- Raw materials........................... $ 1,841 $ 1,968 Work in process......................... 1,314 1,186 Finished goods.......................... 1,482 --------- --------- $ 3,155 $ 4,636 --------- --------- --------- ---------
F-30 DIVICOM INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 3. BALANCE SHEET DETAIL: (CONTINUED) PROPERTY AND EQUIPMENT:
DECEMBER 31, -------------------- 1994 1995 --------- --------- 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 --------- --------- --------- ---------
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: 1996............................................................... $ 582 1997............................................................... 617 1998............................................................... 418 1999............................................................... 89 --------- Total commitments.................................................. $ 1,706 --------- ---------
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 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:
OUTSTANDING OPTIONS SHARES ---------------------------------------- AVAILABLE NUMBER OF AGGREGATE FOR GRANT SHARES EXERCISE PRICE PRICE ----------- ----------- -------------- ----------- 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 ----------- ----------- -------------- ----------- ----------- ----------- -------------- -----------
F-32 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 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:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, -------------------- 1993 1994 1995 --------------- --------- --------- 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
DECEMBER 31, -------------------- 1994 1995 --------- --------- Accounts receivable: SAGEM..................................................................... $ 3,021 EURODEC................................................................... $ 69 C-Cube.................................................................... 125 52 Accounts payable: SAGEM..................................................................... 490 EURODEC................................................................... 104 C-Cube.................................................................... 885 SAT....................................................................... 7
F-34 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:
DECEMBER 31, -------------------- 1994 1995 --------- --------- 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 --------- --------- --------- ---------
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. Current: Federal.......................................................... $ 1,885 State............................................................ 267 --------- 2,152 --------- Deferred: Federal.......................................................... (1,861) State............................................................ (460) --------- (2,321) --------- Total benefit...................................................... $ (169) --------- ---------
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 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 DIVICOM INC. CONDENSED CONSOLIDATED BALANCE SHEET, JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) ASSETS 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 --------- ---------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-37 DIVICOM INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1995 1996 1995 1996 --------- --------- --------- --------- 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 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-38 DIVICOM INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------- 1995 1996 ---------- ---------- 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 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-39 DIVICOM INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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:
JUNE 30, DECEMBER 31, 1996 1995 --------- ------------- IN THOUSANDS Finished goods...................................................... $ 11,808 $ 1,482 Work-in-process..................................................... 3,630 1,186 Raw materials....................................................... 2,494 1,968 --------- ------------- Total........................................................... $ 17,932 $ 4,636 --------- ------------- --------- -------------
F-40 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 , 1996 TABLE OF CONTENTS
PAGE ----- 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-11 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
(i) TABLE OF CONTENTS (CONTINUED)
PAGE ----- 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-24 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 Agreements Between the Company and the Seller......................... 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
(ii) TABLE OF CONTENTS (CONTINUED)
PAGE ----- 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
(iii) INDEX OF EXHIBITS
EXHIBIT DESCRIPTION - -------------- -------------------------------------------------------------------------------------------------- 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
(iv) 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 as of July , 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"). 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 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 A-2 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 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 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 A-3 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 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. 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 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. A-4 (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. (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 A-5 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, 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. A-6 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. (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 A-7 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, (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 A-8 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; (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 A-9 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 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: A-10 (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 (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 A-11 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-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 A-12 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; A-13 (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, A-14 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 A-15 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 A-16 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 A-17 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 A-18 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). A-19 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). A-20 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; A-21 (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 A-22 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 A-23 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. A-24 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. A-25 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. A-26 (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). A-27 (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. A-28 (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 A-29 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 A-30 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 A-31 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 A-32 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 A-33 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); A-34 (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 A-35 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 A-36 (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. A-37 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. A-38 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 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. B-1 (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 B-2 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. B-3 (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.) B-4 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 C-1 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. C-2 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 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 C-4 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 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 (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 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 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. C-9 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. C-10 TABLE OF CONTENTS 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
C-11 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
EXHIBIT NUMBER DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------------ 2.1(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, and amended as of July , 1996. 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. 5.1(2) Legal Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the registrant. 8.1(2) Tax Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the registrant. 10.1(3) Form of Indemnity Agreement for directors and officers. 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. 23.1(2) Consent of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1 hereto). 23.2 Consent of Deloitte & Touche LLP, independent auditors. 23.3 Consent of Coopers & Lybrand L.L.P., independent auditors.
II-1 24.1 Power of Attorney (included herein on page II-3). 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.
- ------------------------ (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) To be filed by amendment. (3) 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). (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-2 (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-3 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:
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------------------------ ------------------- /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
II-4 DIVICOM INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON AUGUST 20, 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 July , 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 , August 20, 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, among C-Cube Microsystems Inc., 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"). / / 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 the Certificate of Incorporation of Divicom to (a) provide that the Merger is not to be treated as a liquidation for which the holders of the Preferred Stock of Divicom will receive a liquidation preference, (b) delete the rights of the holders of the Series A Preferred Stock of Divicom to buy certain Divicom technology for $1.00 upon a dissolution of Divicom and other DiviCom assets at fair market value, and (c) delete the preemptive rights provision contained in DiviCom's Certificate of Incorporation. / / 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 AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF DIVICOM. IF NO ELECTION IS MADE WITH RESPECT TO CONSIDERATION TO BE RECEIVED FOR VESTED DIVICOM COMMON STOCK, THE HOLDER OF VESTED DIVICOM SHARES WILL RECEIVE CASH AND C-CUBE COMMON STOCK DETERMINED BY THE VESTED EXCHANGE RATIO. 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. EX-10.2 2 EXHIBIT 10.2 EXHIBIT 10.2 AFFILIATE AGREEMENT This Affiliate Agreement (this "AGREEMENT") is made and entered into as of May 28, 1996, between C-Cube Microsystems Inc., a Delaware corporation ("C- CUBE"), DiviCom Inc., a Delaware corporation ("DIVICOM"), Sagem S.A., Sagem International S.A. 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, "STOCKHOLDER"). RECITALS A. Concurrently with the execution of this Agreement, C-Cube and DiviCom have entered into an Agreement and Plan of Reorganization (the "REORGANIZATION AGREEMENT") which provides, among other things, for the merger (the "MERGER") of DiviCom with and into C-Cube Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of C-Cube ("MERGER SUB"). Pursuant to the Merger, all outstanding capital stock of DiviCom will be canceled and extinguished and be converted automatically into the right to receive shares of C-Cube Common Stock pursuant to the Reorganization Agreement. B. The Stockholder is the beneficial owner (as defined in Rule l3d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of such number of shares of the outstanding capital stock of DiviCom as is indicated on Exhibit A to Agreement (the "SHARES"). NOW THEREFORE, the parties agree as follows: 1. TAX TREATMENT: RULE 145. Stockholder understands and agrees that it is intended that the Merger will be treated as a "reorganization" for federal income tax purposes. Stockholder further understands and agrees that Stockholder may be deemed to be an "affiliate" of DiviCom within the meaning of Rule 145 ("RULE 145") promulgated by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"), although nothing contained herein should be construed as an admission of such fact. 2. RELIANCE UPON REPRESENTATIONS WARRANTIES AND COVENANTS. Stockholder has been informed that the treatment of the Merger as a reorganization for federal income tax purposes requires that former stockholders of DiviCom maintain a meaningful continuing equity ownership interest in C-Cube after the Merger. Stockholder understands that the representations, warranties and covenants of Stockholder set forth herein will be relied upon by C-Cube, DiviCom and their respective counsel. 3. REPRESENTATIONS WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder represents, warrants and covenants as follows: (a) Stockholder has full power and authority to execute this Agreement, to make the representations, warranties and covenants herein contained and to perform Stockholder's obligations hereunder. (b) Set forth below the signatures below is the number of Shares owned by Stockholder, including all Shares as to which Stockholder has sole or shared voting or investment power and all rights, options and warrants to acquire DiviCom Capital Stock owned or held by Stockholder. (c) The shares of C-Cube Common Stock issued to Stockholder as consideration in the Merger, and any C-Cube securities issued in exchange therefor, are hereinafter referred to as "Restricted Securities". The Stockholder agrees, in addition to the limitations set forth in Section 3(d), that as to a portion of the Restricted Securities representing two-thirds of all Restricted Securities acquired by Stockholder less the amount contained in the Escrow Fund pursuant to the Reorganization Agreement in respect of Stockholder, Stockholder will not, for a period of 270 days from the date of this Agreement, sell, transfer, exchange, pledge (except in connection with a bona fide loan transaction), make charitable contributions in respect of; or otherwise dispose of such portion of the Restricted Securities (or any option, right or other interest with respect thereto). (d) Notwithstanding the foregoing, Stockholder will not sell, transfer, exchange, pledge (except in connection with a bona fide loan transaction) or make charitable contributions in respect of; or otherwise dispose of any Restricted Securities (or any interest with respect thereto), unless: (i) such transaction is permitted pursuant to Rule 145(c) and 145(d) under the Securities Act; or (ii) counsel representing Stockholder, which counsel is reasonably satisfactory to C-Cube, shall have advised C-Cube in a written opinion letter reasonably satisfactory to C-Cube and C-Cube's legal counsel, and upon which C-Cube and its legal counsel may rely, that no registration under the Securities Act would be required in connection with such transaction; or (iii) a registration statement under the Securities Act covering the Restricted Securities (or interests with respect thereto) proposed to be disposed of, describing the manner and terms of the proposed disposition, and containing a current prospectus, shall have been filed with the SEC and made effective under the Securities Act; or (iv) an authorized representative of the SEC shall have rendered written advice to Stockholder (sought by Stockholder or counsel to Stockholder, with a copy thereof and all other related communications delivered to C-Cube) to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take any action, with respect to the proposed disposition if consummated. (e) Stockholder has no present plan or intent to sell, transfer, exchange, pledge (other than in a preexisting bona fide margin account) or otherwise dispose of; including a distribution by a corporation to its stockholders (but excluding transactions among family members for tax or estate planning purposes or among corporate affiliates, and transfers occurring by operation of law or pursuant to court order) any of the shares of C-Cube Common Stock that Stockholder may acquire in connection with the Merger. If any of Stockholder's representations in this subsection (e) cease to be true at any time prior to the Effective Time of the Merger, Stockholder will deliver to each of DiviCom and C-Cube, prior to the Effective Time of the Merger, a written statement to that effect, signed by Stockholder. 4. RULES 144 AND 145. From and after the Effective Time of the Merger and for so long as is necessary in order to permit Stockholder to sell the C- Cube Common Stock held by Stockholder pursuant to Rule 145 and, to the extent applicable, Rule 144 under the Securities Act, C-Cube will use its best efforts to file on a timely basis all reports required to be filed by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, referred to in 2 paragraph (c)(1) of Rule 144 under the Securities Act. In addition, C-Cube acknowledges that the covenants herein are given by Stockholder in reliance upon the Registration Rights Agreement being executed concurrently with the Merger and are contingent upon C-Cube's compliance with such Registration Rights Agreement. 5. LIMITED RESALES. Stockholder understands that, in addition to the restrictions imposed under Section 4, the provisions of Rule 145 limit Stockholder's public resales of Restricted Securities, in the manner set forth in subsections (a), (b) and (c) below: (a) Unless and until the restriction "Cut-off" provisions of Rule l45(d)(2) or Rule l45(d)(3) set forth below become available, public resales of Restricted Securities may only be made by Stockholder in compliance with the requirements of Rule 145(d)(1). Rule 145(d)(1) permits such resales only: (i) while C-Cube meets the public information requirements of Rule 144(c); (ii) in broker's transactions or in transactions with a market maker; and (iii) where the aggregate number of Restricted Securities sold at any time together with all sales of restricted C-Cube Common Stock sold for Stockholder's account during the preceding three (3) month period does not exceed the greater of (A) one percent (1%) of the C-Cube Common Stock outstanding or (B) the average weekly volume of trading in C-Cube Common Stock on all national securities exchanges, or reported through the automated quotation system of a registered securities association, during the four (4) calendar weeks preceding the date of receipt of the order to execute the sale. (b) Stockholder may make unrestricted sales of Restricted Securities pursuant to Rule l45(d)(2) if: (i) Stockholder has beneficially owned (within the meaning of Rule 144(d) under the Securities Act) the Restricted Securities for at least two (2) years after the Effective Time of the Merger; (ii) Stockholder is not an affiliate of C-Cube; and (iii) C-Cube meets the public information requirements of Rule 144(c). (c) Stockholder may make unrestricted resales of Restricted Securities pursuant to Rule 145(d)(3) if Stockholder has beneficially owned (within the meaning of Rule 144(d) under the Securities Act) the Restricted Securities for at least three (3) years and is not, and has not been for at least three (3) months, an affiliate of C-Cube. (d) C-Cube acknowledges that the provisions of Section 5(c) will be satisfied as to any sale by the undersigned of the Restricted Securities pursuant to Rule 145(d), by a broker's letter and a letter from the undersigned with respect to that sale stating that each of the above-described requirements of Rule 145(d)(1) has been met or is inapplicable by virtue of Rule l45(d)(2) or Rule l45(d)(3); PROVIDED, HOWEVER, that C-Cube has no reasonable basis to believe that such sales were not made in compliance with such provisions of Rule 145(d). (e) C-Cube acknowledges that none of the foregoing restrictions is applicable during any period in which a registration statement in respect of the C-Cube Common Stock acquired by Stockholder is in effect pursuant to the Registration Rights Agreement, and acknowledges its obligations, as set forth therein, to maintain an effective registration statement on behalf of Stockholder under the circumstances and for the periods therein contemplated; provided, however, that Seller shall not request registration as to the Restricted Securities and for 3 the period specified in Section 3(c) hereof. 6. LEGENDS. Stockholder also understands and agrees that stop transfer instructions will be given to C-Cube's transfer agent with respect to certificates evidencing the Restricted Securities and that there will be placed on the certificate evidencing the Restricted Securities legends stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE OTHER CONDITIONS SPECIFIED IN THAT CERTAIN AFFILIATE AGREEMENT DATED AS OF _________, 1996, AMONG C- CUBE MICROSYSTEMS INC., DIVICOM, INC. AND THE PERSON OR ENTITY NAMED THEREIN. A COPY OF SUCH AFFILIATE AGREEMENT MAY BE INSPECTED BY THE HOLDER OF THIS CERTIFICATE AT THE OFFICES OF C- CUBE MICROSYSTEMS INC., OR C-CUBE MICROSYSTEMS INC. WILL FURNISH, WITHOUT CHARGE, A COPY THEREOF TO THE HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST THEREFOR." C-Cube agrees to remove promptly such stop transfer instructions and legend upon full compliance with this Agreement by the undersigned, including, without limitation, a sale or transfer of C-Cube Common Stock permitted under Section 3. 7. TERMINATION. This Agreement shall be terminated and shall be of no further force and effect upon the termination of the Reorganization Agreement pursuant to Article VIII of the Reorganization Agreement. 8. COUNTERPARTS. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 9. BINDING AGREEMENT. This Agreement will inure to the benefit of and be binding upon and enforceable against the parties and their successors and assigns, including administrators, executors, representatives, heirs, legatees and devisees of Stockholder and pledgees holding Restricted Securities as collateral. 10. WAIVER. No waiver by any party hereto of any condition or of any breach of any provision of this Agreement shall be effective unless in writing and signed by each party hereto. 11. GOVERNING LAW. This Agreement shall be governed by and construed, interpreted and enforced in accordance with the internal laws of the State of Delaware. 12. ATTORNEYS' FEES. In the event of any legal actions or proceeding to enforce of 4 interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. 13. EFFECT OF HEADINGS; DEFINITION OF TERMS. The Section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. Capitalized terms that are not defined herein shall have the meanings set forth in the Reorganization Agreement. 14. THIRD PARTY RELIANCE. Counsel to the parties shall be entitled to rely upon this Agreement. IN WITNESS WHEREOF, the parties have caused this Affiliate Agreement to be duly executed on the day and year first above written. C-CUBE MICROSYSTEMS INC. By: ______________________________________ Name: Title: DIVICOM INC. By: ______________________________________ Name: Title: 5 SAGEM S.A. By: ______________________________________ Name: Title: 6 SAGEM INTERNATIONAL S.A. By: ______________________________________ Name: Title: IENA INTERNATIONAL S.A. By: ______________________________________ Name: Title: TREGOR ELECTRONIQUE S.A. By: ______________________________________ Name: Title: Stockholder's Address for Notice: SAGEM S.A. 27 rue Leblanc 75015 Ponnant France 7 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 [Signature Page to Affiliate Agreement] 8 EX-10.3 3 EXHIBIT 10.3 EXHIBIT 10.3 FORM OF AFFILIATE AGREEMENT This Affiliate Agreement (this "AGREEMENT") is made and entered into as of May 28, 1996, between C-Cube Microsystems Inc., a Delaware corporation ("C-CUBE"), DiviCom Inc., a Delaware corporation ("DIVICOM"), and the undersigned affiliate ("STOCKHOLDER") of DiviCom. RECITALS A. Concurrently with the execution of this Agreement, C-Cube and DiviCom have entered into an Agreement and Plan of Reorganization (the "REORGANIZATION AGREEMENT") which provides, among other things, for the merger (the "MERGER") of DiviCom with and into C-Cube Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of C-Cube ("MERGER SUB"). Pursuant to the Merger, all outstanding capital stock of DiviCom will be canceled and extinguished and be converted automatically into the right to receive shares of C-Cube Common Stock pursuant to the Reorganization Agreement. B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of such number of shares of the outstanding capital stock of DiviCom as is indicated on the final page of this Agreement (the "SHARES"). NOW THEREFORE, the parties agree as follows: 1. TAX TREATMENT: RULE 145. Stockholder understands and agrees that it is intended that the Merger will be treated as a "reorganization" for federal income tax purposes. Stockholder further understands and agrees that Stockholder may be deemed to be an "affiliate" of DiviCom within the meaning of Rule 145 ("RULE 145") promulgated by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT"), although nothing contained herein should be construed as an admission of such fact. 2. RELIANCE UPON REPRESENTATIONS, WARRANTIES AND COVENANTS. Stockholder has been informed that the treatment of the Merger as a reorganization for federal income tax purposes requires that former stockholders of DiviCom maintain a meaningful continuing equity ownership interest in C-Cube after the Merger. Stockholder understands that the representations, warranties and covenants of Stockholder set forth herein will be relied upon by C-Cube, DiviCom and their respective counsel. 1 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder represents, warrants and covenants as follows: (a) Stockholder has full power and authority to execute this Agreement, to make the representations, warranties and covenants herein contained and to perform Stockholder's obligations hereunder. (b) Set forth below the signatures below is the number of Shares owned by Stockholder, including all Shares as to which Stockholder has sole or shared voting or investment power and all rights, options and warrants to acquire DiviCom Capital Stock owned or held by Stockholder. (c) The shares of C-Cube Common Stock issued to Stockholder as consideration in the Merger, and any C-Cube securities issued in exchange therefor, are hereinafter referred to as "Restricted Securities". The Stockholder agrees, in addition to the limitations set forth in Section 3(d), that as to a portion of the Restricted Securities representing two-thirds of all Restricted Securities acquired by Stockholder less the amount contained in the Escrow Fund pursuant to the Reorganization Agreement in respect of Stockholder, Stockholder will not, for a period of 270 days from the date of this Agreement, sell, transfer, exchange, pledge (except in connection with a bona fide loan transaction), make charitable contributions in respect of, or otherwise dispose of such portion of the Restricted Securities (or any option, right or other interest with respect thereto). (d) Notwithstanding the foregoing, Stockholder will not sell, transfer, exchange, pledge (except in connection with a bona fide loan transaction) or make charitable contributions in respect of, or otherwise dispose of any Restricted Securities (or any interest with respect thereto), unless: (i) such transaction is permitted pursuant to Rule 145(c) and 145(d) under the Securities Act; or (ii) counsel representing Stockholder, which counsel is reasonably satisfactory to C-Cube, shall have advised C-Cube in a written opinion letter reasonably satisfactory to C-Cube and C-Cube's legal counsel, and upon which C-Cube and its legal counsel may rely, that no registration under the Securities Act would be required in connection with such transaction; or (iii) a registration statement under the Securities Act covering the Restricted Securities (or interests with respect thereto) proposed to be disposed of, describing the manner and terms of the proposed disposition, and containing a current prospectus, shall have been filed with the SEC and made effective under the Securities Act; or (iv) an authorized representative of the SEC shall have rendered written advice to Stockholder (sought by Stockholder or counsel to Stockholder, with a copy thereof and all other related communications delivered to C-Cube) to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take any action, with respect to the proposed disposition if consummated. (e) Stockholder has no present plan or intent to sell, transfer, exchange, pledge (other than in a preexisting bona fide margin account) or otherwise dispose of, including a distribution by a corporation to its stockholders (but excluding transactions among family members for tax or estate planning purposes or among corporate affiliates, and transfers occurring by operation of law or 2 pursuant to court order) any of the shares of C-Cube Common Stock that Stockholder may acquire in connection with the Merger. If any of Stockholder's representations in this subsection (e) cease to be true at any time prior to the Effective Time of the Merger, Stockholder will deliver to each of DiviCom and C-Cube, prior to the Effective Time of the Merger, a written statement to that effect, signed by Stockholder. 4. RULES 144 AND 145. From and after the Effective Time of the Merger and for so long as is necessary in order to permit Stockholder to sell the C-Cube Common Stock held by Stockholder pursuant to Rule 145 and, to the extent applicable, Rule 144 under the Securities Act, C-Cube will use its best efforts to file on a timely basis all reports required to be filed by it pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, referred to in paragraph (c)(1) of Rule 144 under the Securities Act. 5. LIMITED RESALES. Stockholder understands that, in addition to the restrictions imposed under Section 4, the provisions of Rule 145 limit Stockholder's public resales of Restricted Securities, in the manner set forth in subsections (a), (b) and (c) below: (a) Unless and until the restriction "Cut-off" provisions of Rule 145(d)(2) or Rule 145(d)(3) set forth below become available, public resales of Restricted Securities may only be made by Stockholder in compliance with the requirements of Rule 145(d)(1). Rule 145(d)(1) permits such resales only: (i) while C-Cube meets the public information requirements of Rule 144(c); (ii) in broker's transactions or in transactions with a market maker; and (iii) where the aggregate number of Restricted Securities sold at any time together with all sales of restricted C-Cube Common Stock sold for Stockholder's account during the preceding three (3) month period does not exceed the greater of (A) one percent (1%) of the C-Cube Common Stock outstanding or (B) the average weekly volume of trading in C-Cube Common Stock on all national securities exchanges, or reported through the automated quotation system of a registered securities association, during the four (4) calendar weeks preceding the date of receipt of the order to execute the sale. (b) Stockholder may make unrestricted sales of Restricted Securities pursuant to Rule 145(d)(2) if: (i) Stockholder has beneficially owned (within the meaning of Rule 144(d) under the Securities Act) the Restricted Securities for at least two (2) years after the Effective Time of the Merger; (ii) Stockholder is not an affiliate of C-Cube; and (iii) C-Cube meets the public information requirements of Rule 144(c). (c) Stockholder may make unrestricted resales of Restricted Securities pursuant to Rule 145(d)(3) if Stockholder has beneficially owned (within the meaning of Rule 144(d) under the Securities Act) the Restricted Securities for at least three (3) years and is not, and has not been for at least three (3) months, an affiliate of C-Cube. (d) C-Cube acknowledges that the provisions of Section 5(c) will be satisfied as to any sale by the undersigned of the Restricted Securities pursuant to Rule 145(d), by a broker's letter and a letter from the undersigned with respect to that sale stating that each of the above-described 3 requirements of Rule 145(d)(1) has been met or is inapplicable by virtue of Rule 145(d)(2) or Rule 145(d)(3); PROVIDED, HOWEVER, that C-Cube has no reasonable basis to believe that such sales were not made in compliance with such provisions of Rule 145(d). 6. LEGENDS. Stockholder also understands and agrees that stop transfer instructions will be given to C-Cube's transfer agent with respect to certificates evidencing the Restricted Securities and that there will be placed on the certificate evidencing the Restricted Securities legends stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE OTHER CONDITIONS SPECIFIED IN THAT CERTAIN AFFILIATE AGREEMENT DATED AS OF MAY __, 1996, AMONG C-CUBE MIRCROSYSTEMS INC., DIVICOM INC. AND THE PERSON OR ENTITY NAMED THEREIN. A COPY OF SUCH AFFILIATE AGREEMENT MAY BE INSPECTED BY THE HOLDER OF THIS CERTIFICATE AT THE OFFICES OF C-CUBE MICROSYSTEMS INC., OR C-CUBE MICROSYSTEMS INC. WILL FURNISH, WITHOUT CHARGE, A COPY THEREOF TO THE HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST THEREFOR." C-Cube agrees to remove promptly such stop transfer instructions and legend upon full compliance with this Agreement by the undersigned, including, without limitation, a sale or transfer of C-Cube Common Stock permitted under Section 3. 7. TERMINATION. This Agreement shall be terminated and shall be of no further force and effect upon the termination of the Reorganization Agreement pursuant to Article VIII of the Reorganization Agreement. 8. COUNTERPARTS. This Agreement shall be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 9. BINDING AGREEMENT. This Agreement will inure to the benefit of and be binding upon and enforceable against the parties and their successors and assigns, including administrators, executors, representatives, heirs, legatees and devisees of Stockholder and pledgees holding Restricted Securities as collateral. 10. WAIVER. No waiver by any party hereto of any condition or of any breach of any provision of this Agreement shall be effective unless in writing and signed by each party hereto. 11. GOVERNING LAW. This Agreement shall be governed by and construed, interpreted and 4 enforced in accordance with the internal laws of the State of Delaware. 12. ATTORNEYS' FEES. In the event of any legal actions or proceeding to enforce of interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. 13. EFFECT OF HEADINGS; DEFINITION OF TERMS. The Section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. Capitalized terms that are not defined herein shall have the meanings set forth in the Reorganization Agreement. 14. THIRD PARTY RELIANCE. Counsel to the parties shall be entitled to rely upon this Agreement. 5 IN WITNESS WHEREOF, the parties have caused this Affiliate Agreement to be duly executed on the day and year first above written. C-CUBE MICROSYSTEMS INC. STOCKHOLDER: By: ___________________________ By: ___________________________ Name: _________________________ Name: _________________________ Title: ________________________ Stockholder's Address for Notice: _______________________________ DIVICOM INC. _______________________________ By: ___________________________ _______________________________ Title: ________________________ Shares beneficially owned: ____________ shares of DiviCom Common Stock ____________ shares of DiviCom Series A Preferred Stock ____________ shares of DiviCom Series B Preferred Stock [Signature Page to Affiliate Agreement] 6 EX-10.4 4 EXHIBIT 10.4 EXHIBIT 10.4 VOTING AGREEMENT This Voting Agreement (this "AGREEMENT") is made as of May 28, 1996, by and among C-Cube Microsystems, Inc., a Delaware corporation ("C-CUBE"), and Sagem, S.A., Sagem International S.A. 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, each a stockholder (collectively, the "STOCKHOLDER") of DiviCom Inc., a Delaware corporation ("DIVICOM"). RECITALS A. Pursuant to an Agreement and Plan of Reorganization dated as of May 28, 1996 (the "REORGANIZATION AGREEMENT") among C-Cube, C-Cube Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of C-Cube ("MERGER SUB"), and DiviCom, DiviCom will merge with and into Merger Sub (the "MERGER"), with Merger Sub continuing as the surviving corporation and wholly-owned subsidiary of C-Cube; and B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) of such number and class of shares of the outstanding capital stock of DiviCom as is indicated on Exhibit A to this Agreement (the "SHARES"). NOW, THEREFORE, the parties agree as follows: 1. AGREEMENT TO RETAIN SHARES. 1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except for transfers among family members for tax and estate planning purposes, transfers among corporate affiliates and as may be specifically required by court order or by operation of law), sell, exchange, pledge (except in connection with a bona fide loan transaction, provided that any pledgee agrees not to transfer, sell, exchange, pledge or otherwise dispose of or encumber the Shares or any New Shares (as defined in Section 1.2) prior to the Expiration Date or otherwise dispose of or encumber the Shares or any New Shares, or to make any offer or agreement relating thereto, at any time prior to the Expiration Date. As used herein, the term "Expiration Date" shall mean the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Reorganization Agreement, and (ii) the date of termination of the Reorganization Agreement in accordance with its terms. 1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of DiviCom that Stockholder purchases or with respect to which Stockholder otherwise acquires beneficial ownership after the date of this Agreement and prior to the Expiration Date ("NEW SHARES") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. 2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of DiviCom called with respect to any of the following, and at every adjournment and postponement thereof, and on every action or approval by written consent of the stockholders of DiviCom with respect to any of the following, Stockholder shall vote the Shares and any New Shares (i) in favor of approval of the Reorganization Agreement, the Merger and any matter that could reasonably be expected to facilitate the Merger, (ii) against any proposal for any recapitalization, merger, sale of assets or other business combination (other than the Merger and any other matter referred to in clause (i) of this Section 2) between DiviCom and any person or entity other than C-Cube or any other action or agreement that could result in a material breach of any covenant, representation or warranty or any other obligation or agreement of DiviCom under the Reorganization Agreement or which could result in any of the conditions to DiviCom's obligations under the Reorganization Agreement not being fulfilled, and (iii) in favor of amending the Certificate of Incorporation of DiviCom pursuant to Section 1.13 of the Reorganization Agreement. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder hereby represents, warrants and covenants to C-Cube that Stockholder (i) is the beneficial owner of the Shares, which at the date of this Agreement and at all times up until the Expiration Date will be free and clear of any liens, claims, options, charges or other encumbrances; (ii) does not beneficially own any shares of capital stock of DiviCom other than the Shares (excluding shares as to which Stockholder currently disclaims beneficial ownership in accordance with applicable law); and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement. 4. TERMINATION. This Agreement shall terminate and shall have no further force or effect as of the Expiration Date. 5. MISCELLANEOUS. 5.1 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 5.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without the prior written consent of the other. This Agreement is intended to bind Stockholder as a stockholder of DiviCom only with respect to the specific matters set forth herein. 5.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified, amended, altered or supplemented except by the execution and delivery of a written agreement 2 executed by the parties hereto. 5.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge that C-Cube will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to C-Cube upon any such violation, C-Cube shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to C-Cube at law or in equity. 5.5 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 certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) 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 C-Cube 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 Attn: Larry W. Sonsini, Esq. Aaron J. Alter, Esq. Facsimile No.: (415) 493-9300 Telephone No.: (415) 493-6811 (b) if to Stockholder, to: Sagem S.A. 27 rue Leblanc 75015 Ponnant France Attention: Michel Toussan Telephone No.: 011-33-1-40-70-64-56 3 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 Attn: Jennifer Bellah, Esq. Telephone: (213) 229-7000 Facsimile: (213) 229-7520 5.6 GOVERNING LAW. This Amendment shall be governed by and construed, interpreted and enforced in accordance with the internal laws of the State of Delaware. 5.7 ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties in respect of the subject matter hereof, and supersede all prior negotiations and understandings between the parties with respect to such subject matters. 5.8 COUNTERPART. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 5.9 EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. 4 IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly executed on the day and year first above written. C-CUBE MICROSYSTEMS INC. Name: _______________________________ Title: _______________________________ STOCKHOLDER: SAGEM S.A. By: _______________________________ Francis Gaillard Title: Corporate Comptroller SAGEM INTERNATIONAL S.A. By: _______________________________ Francis Gaillard Title: Authorized Representative IENA INTERNATIONAL S.A. By: _______________________________ Francis Gaillard Title: Authorized Representative TREGOR ELECTRONIQUE S.A. By: _______________________________ Francis Gaillard Title: Authorized Representative [Signature Page to Voting Agreement] 5 EXHIBIT A Common Stock 2046217 Series A Preferred 14629855 Series B Preferred 5500000 6 EX-23.2 5 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF DELOITTE & TOUCHE LLP We consent to the use in this Amendment No. 1 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 July 25, 1996 EX-23.3 6 EXHIBIT 23.3 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 July 25, 1996 -----END PRIVACY-ENHANCED MESSAGE-----