SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 _____________________ FORM 11-K ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One): [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]. For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]. For the transition period from _____to _____ Commission file number _____ A. Full title of the plan and the address of the plan, if different from that of the issuer named below: C-Cube Microsystems Employee Savings and Investment Plan B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: C-Cube Microsystems, Inc. 1778 McCarthy Blvd. Milpitas, California 95035 REQUIRED INFORMATION The C-Cube Microsystems Employee Savings and Investment Plan (the "Plan") is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Therefore, in lieu of the requirements of Items 1-3 of Form 11-K, the financial statements and schedules of the Plan for the two fiscal years ended December 31, 1998 and 1997, which have been prepared in accordance with the financial reporting requirements of ERISA, are attached hereto and incorporated herein by reference. C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN _____________________ Financial Statements Years Ended December 31, 1998 and 1997 And Independent Auditors' Report C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN TABLE OF CONTENTS - ------------------------------------------------------------------------ Page(s) ------- FINANCIAL STATEMENTS: Independent auditors' report 1 Statements of net assets available for plan benefits as of December 31, 1998 and 1997 2 Statements of changes in net assets available for plan benefits for the years ended December 31, 1998 and 1997 3-4 Notes to financial statements 5-8 SUPPLEMENTAL SCHEDULES FOR THE YEAR ENDED DECEMBER 31, 1998: Item 27a - Schedule of assets held for investment purposes 9-11 Item 27d - Schedule of reportable plan transactions 12 INDEPENDENT AUDITORS' REPORT Administrative Committee C-Cube Microsystems Employee Savings and Investment Plan San Jose, California We have audited the accompanying financial statements of the C-Cube Microsystems Employee Savings and Investment Plan (the Plan) as of December 31, 1998 and 1997, and for the years then ended as listed in the accompanying table of contents. These financial statements are the responsibility of 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 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 net assets available for plan benefits of the Plan as of December 31, 1998 and 1997, and the changes in its net assets available for plan benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules as listed in the accompanying table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan's management. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Zajac & Perrone, LLP - ------------------------- Morgan Hill, California July 8, 1999 1 C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS DECEMBER 31, 1998 AND 1997 C-Cube Benham Microsystems, Schwab Intermediate- Harbor Managers Managers Inc. Money Term Founders Capital Income Special Common Market Treasury Balanced Appreciation Equity Equity Stock Funds Fund Fund Fund Fund Fund Fund ---------- --------- ---------- ---------- --------- --------- --------- December 31, 1998 - ---------------------- ASSETS: Noninterest bearing cash deposit $ - $ - $ - $ - $ - $ - $ - Interest bearing cash deposits 2,142,228 - - - - - - Mutual funds - 653,927 1,992,201 1,767,527 1,194,539 318,861 - Common stocks and options - - - - - - - C-Cube Microsystems, Inc. common stock - - - - - - 906,979 Dividends receivable - 2,750 12,584 - - - - Contributions receivable 515 - - 382 31 - - Loans to participants - - - - - - - ---------- -------- ---------- ---------- ---------- -------- --------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $2,142,743 $656,677 $2,004,785 $1,767,909 $1,194,570 $318,861 $906,979 ========== ======== ========== ========== ========== ======== ======== Robertson Personal Twentieth Stephens Neuberger Choice Century Value + & Berman Retirement International Janus Growth Genesis Account Growth Participant Fund Fund Fund Fund Fund Loans Total --------- ----------- ---------- ---------- ---------- ---------- --------- December 31, 1998 (cont.) - ------------------------- ASSETS: Noninterest bearing cash deposit $ - $ - $ - $ 62 $ - $ - $ 62 Interest bearing cash deposits - - - 446,268 - - 2,588,496 Mutual funds 3,450,550 4,176,393 3,326,016 497,667 2,082,467 - 19,460,148 Common stocks and options - - - 967,089 - - 967,089 C-Cube Microsystems, Inc. common stock - - - - - - 906,979 Dividends receivable - - - - - - 15,334 Contributions receivable - 460 293 - 695 - 2,376 Loans to participants - - - - - 450,856 450,856 ---------- ---------- ---------- ---------- ---------- -------- ----------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $3,450,550 $4,176,853 $3,326,309 $1,911,086 $2,083,162 $450,856 $24,391,340 ========== ========== ========== ========== ========== ======== =========== C-Cube Benham Microsystems, Schwab Intermediate- Harbor Managers Managers Inc. Money Term Founders Capital Income Special Common Market Treasury Balanced Appreciation Equity Equity Stock Funds Fund Fund Fund Fund Fund Fund ---------- ---------- ---------- ----------- --------- --------- ----------- December 31, 1997 - ------------------ ASSETS: Interest bearing cash deposits $1,495,497 $ - $ - $ - $ - $ - $ - Mutual funds - 350,214 1,363,851 - 791,083 - - Common stocks and options - - - - - - - C-Cube Microsystems, Inc. common stock - - - - - - 419,345 Dividends receivable 9,746 1,713 - - - - - Loans to participants - - - - - - - ---------- ------- ---------- ---------- ---------- -------- -------- Total assets 1,505,243 351,927 1,363,851 - 791,083 - 419,345 LIABILITIES: Other liabilities - - - - (585) - - ---------- -------- ---------- ---------- ---------- -------- -------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $1,505,243 $351,927 $1,363,851 $ - $ 790,498 $ - $419,345 ========== ======== ========== ========== ========== ======== ======== Robertson Personal Twentieth Stephens Neuberger Choice Century Value + & Berman Retirement International Janus Growth Genesis Account Growth Participant Fund Fund Fund Fund Fund Loans Total ---------- ---------- ---------- --------- ----------- ---------- --------- December 31, 1997 - ------------------ ASSETS: Interest bearing cash deposits $ - $ - $ - $ 329,466 $ - $ - $ 1,824,963 Mutual funds 2,980,571 2,498,595 3,393,990 370,632 1,182,176 - 12,931,112 Common stocks and options - - - 305,211 - - 305,211 C-Cube Microsystems, Inc. common stock - - - - - - 419,345 Dividends receivable - - - - - - 11,459 Loans to participants - - - - - 383,362 383,362 ---------- ---------- ---------- ---------- ---------- -------- ----------- Total assets 2,980,571 2,498,595 3,393,990 1,005,309 1,182,176 383,362 15,875,452 LIABILITIES: Other liabilities - (965) (1,175) - (1,175) - (3,900) ---------- ---------- ---------- ---------- ---------- -------- ----------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $2,980,571 $2,497,630 $3,392,815 $1,005,309 $1,181,001 $383,362 $15,871,552 ========== ========== ========== ========== ========== ======== =========== See independent auditors' report and notes to financial statements. 2 C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS YEAR ENDED DECEMBER 31, 1998 C-Cube Benham Microsystems, Schwab Intermediate- Harbor Managers Managers Inc. Money Term Founders Capital Income Special Common Market Treasury Balanced Appreciation Equity Equity Stock Funds Fund Fund Fund Fund Fund Fund --------- ---------- ---------- ---------- ---------- --------- -------- ADDITIONS TO NET ASSETS ATTRIBUTED TO: Investment income: Realized gain (loss) on investments $ - $ 1,494 $ 24,231 $ 2,221 $ 2,795 $ (2,732) $ 85,665 Net unrealized gain (loss) on investments - 719 78,926 153,752 (38,120) 8,802 300,734 Dividend and interest income 95,115 36,605 111,795 94,227 136,343 239 - Participant loan interest 7,924 1,196 3,046 765 2,478 351 - Other income (loss) 14 - 15 - - - - ---------- -------- ---------- ---------- ---------- -------- -------- 103,053 40,014 218,013 250,965 103,496 6,660 386,399 Contributions: Participants 1,040,624 136,560 414,043 356,103 299,441 71,990 (1,364) Loan repayments 51,295 4,023 23,072 5,783 9,708 981 - Rollovers from other qualified plans 203,819 13,776 127,705 183,481 39,055 86,289 - ---------- -------- ---------- ---------- ---------- -------- -------- 1,295,738 154,359 564,820 545,367 348,204 159,260 (1,364) ---------- -------- ---------- ---------- ---------- -------- -------- TOTAL ADDITIONS 1,398,791 194,373 782,833 796,332 451,700 165,920 385,035 DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO: Benefits paid to participants (333,479) (21,180) (54,290) (12,553) (28,940) (18,617) (10,425) Plan expenses (1,655) (371) (1,498) (469) (932) (84) (594) Loans to participants (56,844) (2,910) (35,055) (9,411) (16,536) (8,452) (31,425) ---------- -------- ---------- ---------- ---------- -------- -------- TOTAL DEDUCTIONS (391,978) (24,461) (90,843) (22,433) (46,408) (27,153) (42,444) ---------- -------- ---------- ---------- ---------- -------- -------- Net increase prior to transfers 1,006,813 169,912 691,990 773,899 405,292 138,767 342,591 Transfers among investment options (369,313) 134,838 (51,056) 994,010 (1,220) 180,094 145,043 ---------- -------- ---------- ---------- ---------- -------- -------- NET INCREASE (DECREASE) 637,500 304,750 640,934 1,767,909 404,072 318,861 487,634 NET ASSETS AVAILABLE FOR PLAN BENEFITS: Beginning of year 1,505,243 351,927 1,363,851 - 790,498 - 419,345 ---------- -------- ---------- ---------- ---------- -------- -------- End of year $2,142,743 $656,677 $2,004,785 $1,767,909 $1,194,570 $318,861 $906,979 ========== ======== ========== ========== ========== ======== ======== Robertson Personal Twentieth Stephens Neuberger Choice Century Value + & Berman Retirement International Janus Growth Genesis Account Growth Participant Fund Fund Fund Fund Fund Loans Total --------- ---------- ---------- --------- ---------- ---------- ---------- ADDITIONS TO NET ASSETS ATTRIBUTED TO: Investment income: Realized gain (loss) on investments $ 48,535 $ 67,863 $ (39,114)$ - $ 8,158 $ - $ 199,116 Net unrealized gain (loss) on investments 872,142 282,174 (299,946) - 158,621 - 1,517,804 Dividend and interest income 91,387 491,623 102,509 - 34,026 - 1,193,869 Participant loan interest - 7,663 6,115 2,519 3,493 - 35,550 Other income (loss) (20) - 57 409,837 2 - 409,905 ---------- ---------- ---------- ---------- ---------- ---------- ----------- 1,012,044 849,323 (230,379) 412,356 204,300 - 3,356,244 Contributions: Participants 414 915,861 837,104 248,008 441,295 - 4,760,079 Loan repayments - 34,253 29,893 23,484 42,019 (224,511) - Rollovers from other qualified plans - 348,927 149,713 113,091 93,706 - 1,359,562 ---------- ---------- ---------- ---------- ---------- --------- ----------- 414 1,299,041 1,016,710 384,583 577,020 (224,511) 6,119,641 ---------- ---------- ---------- ---------- ---------- --------- ----------- TOTAL ADDITIONS 1,012,458 2,148,364 786,331 796,939 781,320 (224,511) 9,475,885 DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO: Benefits paid to participants (102,749) (129,696) (109,522) (16,152) (79,854) (17,324) (934,781) Plan expenses (2,550) (2,933) (2,781) (6,171) (1,278) - (21,316) Loans to participants (26,686) (58,835) (33,752) - (29,423) 309,329 - ---------- ---------- ---------- ---------- ---------- ---------- ---------- TOTAL DEDUCTIONS (131,985) (191,464) (146,055) (22,323) (110,555) 292,005 (956,097) ---------- ---------- ---------- ---------- ---------- --------- ----------- Net increase prior to transfers 880,473 1,956,900 640,276 774,616 670,765 67,494 8,519,788 Transfers among investment options (410,494) (277,677) (706,782) 131,161 231,396 - - ---------- ---------- ---------- ---------- ---------- --------- ----------- NET INCREASE (DECREASE) 469,979 1,679,223 (66,506) 905,777 902,161 67,494 8,519,788 NET ASSETS AVAILABLE FOR PLAN BENEFITS: Beginning of year 2,980,571 2,497,630 3,392,815 1,005,309 1,181,001 383,362 15,871,552 ---------- ---------- ---------- ---------- ---------- --------- ----------- End of year $3,450,550 $4,176,853 $3,326,309 $1,911,086 $2,083,162 $ 450,856 $24,391,340 ========== ========== ========== ========== ========== ========= =========== See independent auditors' report and notes to financial statements. 3 C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS YEAR ENDED DECEMBER 31, 1997 C-Cube Benham Microsystems, Schwab Intermediate- Managers Inc. Money Term Founders Income Common Fidelity Market Treasury Balanced Equity Stock Funds Funds Fund Fund Fund Fund ---------- ---------- ----------- ---------- ---------- ---------- ADDITIONS TO NET ASSETS ATTRIBUTED TO: Investment income: Realized gain (loss) on investments $ - $ - $ 381 $ 19,609 $ 18,260 $(25,861) Net unrealized gain (loss) on investments - - 7,290 26,639 (41,205) (239,120) Dividend and interest income - 100,420 14,208 118,254 151,978 - -------- ---------- -------- ---------- -------- --------- - 100,420 21,879 164,502 129,033 (264,981) Contributions: Participants - 374,728 91,889 404,407 199,234 (25) Loan repayments - 22,897 6,447 12,441 8,206 7,536 Rollovers from other qualified plans - 72,970 30,620 56,786 36,988 - -------- ---------- -------- ---------- -------- --------- - 470,595 128,956 473,634 244,428 7,511 -------- ---------- -------- ---------- -------- --------- TOTAL ADDITIONS - 571,015 150,835 638,136 373,461 (257,470) DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO: Benefits paid to participants - (423,772) (4,460) (38,554) (69,089) - Plan expenses - (974) (121) (556) (340) (248) Loans to participants - (98,900) (8,486) (11,666) (17,673) (6,894) -------- ---------- -------- ---------- -------- --------- TOTAL DEDUCTIONS - (523,646) (13,067) (50,776) (87,102) (7,142) -------- ---------- -------- ---------- -------- --------- Net increase (decrease) prior to transfers - 47,369 137,768 587,360 286,359 (264,612) Transfer of DiviCom, Inc. plan assets - 3,421,860 - - - - Transfers among investment options (52,169) (9,032,757) 214,159 776,491 504,139 683,957 -------- ----------- -------- ---------- -------- -------- NET INCREASE (DECREASE) (52,169) (5,563,528) 351,927 1,363,851 790,498 419,345 NET ASSETS AVAILABLE FOR PLAN BENEFITS: Beginning of year 52,169 7,068,771 - - - - -------- ----------- -------- ---------- -------- -------- End of year $ - $ 1,505,243 $351,927 $1,363,851 $790,498 $419,345 ======== =========== ======== ========== ======== ======== Robertson Personal Twentieth Stephens Neuberger Choice Century Value + & Berman Retirement International Janus Growth Genesis Account Growth Participant Fund Fund Fund Fund Fund Loans Total ---------- ----------- --------- ---------- ---------- ---------- ---------- ADDITIONS TO NET ASSETS ATTRIBUTED TO: Investment income: Realized gain (loss) on investments $ 101,018 $ 35,013 $ 55,807 $ 66,903 $ 27,618 $ - $ 298,748 Net unrealized gain (loss) on investments (124,344) (352,773) 596,701 (29,765) (62,546) - (219,123) Dividend and interest income 501,837 398,286 46,881 50,660 163,763 27,163 1,573,450 ---------- --------- ---------- ---------- ---------- -------- ---------- 478,511 80,526 699,389 87,798 128,835 27,163 1,653,075 Contributions: Participants 937,500 697,866 684,901 259,263 341,334 - 3,991,097 Loan repayments 42,117 29,196 23,682 14,554 6,770 (173,846) - Rollovers from other qualified plans 74,209 137,979 147,920 37,781 58,222 - 653,475 ---------- --------- ---------- ---------- ---------- -------- ---------- 1,053,826 865,041 856,503 311,598 406,326 (173,846) 4,644,572 ---------- --------- ---------- ---------- ---------- -------- ---------- TOTAL ADDITIONS 1,532,337 945,567 1,555,892 399,396 535,161 (146,683) 6,297,647 DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO: Benefits paid to participants (192,911) (131,627) (187,122) (108,668) (38,220) (21,204) (1,215,627) Plan expenses (1,323) (1,018) (1,126) (10,421) (481) - (16,608) Loans to participants (33,471) (45,732) (32,514) (16,672) (15,901) 287,909 - ---------- ---------- ---------- ---------- ---------- -------- ---------- TOTAL DEDUCTIONS (227,705) (178,377) (220,762) (135,761) (54,602) 266,705 (1,232,235) ---------- ---------- ---------- ---------- ---------- -------- ---------- Net increase (decrease) prior to transfers 1,304,632 767,190 1,335,130 263,635 480,559 120,022 5,065,412 Transfer of DiviCom, Inc. plan assets - - - - - 68,916 3,490,776 Transfers among investment options 1,675,939 1,730,440 2,057,685 741,674 700,442 - - ---------- ---------- ---------- ---------- ---------- -------- ----------- NET INCREASE (DECREASE) 2,980,571 2,497,630 3,392,815 1,005,309 1,181,001 188,938 8,556,188 NET ASSETS AVAILABLE FOR PLAN BENEFITS: Beginning of year - - - - - 194,424 7,315,364 ---------- ---------- ---------- ---------- ---------- -------- ----------- End of year $2,980,571 $2,497,630 $3,392,815 $1,005,309 $1,181,001 $383,362 $15,871,552 ========== ========== ========== ========== ========== ======== =========== See independent auditors' report and notes to financial statements. 4 C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1997 NOTE 1 - DESCRIPTION OF THE PLAN The following description of the C-Cube Microsystems Employee Savings and Investment Plan (the Plan) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan's provisions. In the event of any inconsistency between this general information and the Plan document, the Plan document shall control. GENERAL The Plan is a defined contribution plan covering substantially all employees of C-Cube Microsystems, Inc. (the Company). Eligible employees of the Company may elect to participate in the Plan commencing on the first day of the calendar quarter following the date of their employment. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), as amended. EMPLOYEE CONTRIBUTIONS Participants may elect to have the Company contribute up to 20% of their eligible pre-tax compensation, in one percent increments, up to the amount allowable under current income tax regulations. Participants who elect to have the Company contribute a portion of their eligible compensation to the Plan agree to accept an equivalent reduction in taxable compensation. Contributions withheld are invested in accordance with the participant's direction. Participants are also allowed to make rollover contributions of amounts received from other qualified employer-sponsored retirement plans. Such contributions are deposited in the appropriate investment funds in accordance with the participant's direction and the Plan's provision. EMPLOYER CONTRIBUTIONS The Company may make matching contributions, as defined in the Plan and as approved by the Board of Directors. No matching contributions were made in 1998 or 1997. VESTING Participants are immediately vested in their salary deferral and rollover contributions and related earnings. PARTICIPANT ACCOUNTS Each participant's account is credited with the participant's contribution plus earnings. BENEFIT PAYMENTS Upon termination, retirement, death or attaining age 59 1/2, the participant or beneficiary may receive the benefits in a lump sum amount equal to the value of the participant's vested interest in his or her account, as defined in the Plan. Benefit payments are recognized as an expense when paid. PARTICIPANT LOANS The Plan generally allows participants to borrow not less than $1,000 and up to the lesser of $50,000, reduced by the highest outstanding loan balance from the Plan during the previous 12 months, if any, or 50% of their vested account balance. The loans are secured by the participant's vested account balance up to an amount equal to the original loan. Such loans bear interest at a reasonable rate of interest as determined by the Plan and must be repaid within a five-year period, unless the loan is used to purchase a primary residence, in which case the maximum repayment period is 15 years. The specific terms and conditions of such loans are established by the administrative committee. 5 PLAN TERMINATION OR MODIFICATION The Company intends to continue the Plan indefinitely for the benefit of its employees; however, subject to the provisions of ERISA, it reserves the right to terminate or modify the Plan at any time, for any reason. Upon termination of the Plan, participant account balances become fully vested. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING AND PRESENTATION The financial statements of the Plan have been prepared on the accrual basis of accounting. INCOME TAXES Effective January 1, 1997 and in conjunction with the selection of The Charles Schwab Trust Company (Charles Schwab) as trustee for the Plan, the Company adopted Charles Schwab's nonstandardized 401(k) plan which has received a favorable opinion letter from the Internal Revenue Service exempting it from income taxes. The Company believes that the Plan, as designed and operated, is in material compliance with the applicable requirements of the Internal Revenue Code. ADMINISTRATIVE COSTS The Company paid substantially all administrative costs for 1998 and 1997. USE OF 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 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. CONCENTRATION OF CREDIT RISKS As more fully described in Note 3, the Plan offers a variety of investment options, each with a different level of risk that is commensurate with the investment option's investment strategy and targeted investment composition. Additionally, the quality of the securities in each investment option is affected by the expertise of the fund manager and/or investment advisors. Further diversification of investment risk is available to participants by investing in more than one investment option. NOTE 3 - INVESTMENTS Investments of the Plan are held by Charles Schwab at December 31, 1998 and 1997 and are invested based upon instructions received from participants. Mutual funds, common stocks, options, and the Company's common stock are valued at fair value as of the last day of the Plan year, as determined by quoted prices. Participant loans are stated at cost, which approximates fair value. Each participant may direct contributions to any of the following investment options: - Schwab Money Funds are comprised of the Schwab Institutional Advantage Money Market Fund and the Schwab U.S. Treasury Money Market Fund. These funds seek as high a level of income as is consistent with the preservation of capital and liquidity by investing in money market instruments. - Benham Intermediate-Term Treasury Fund seeks to provide interest income exempt from state income taxes by investing in U.S. Treasury securities. - Founders Balanced Fund seeks current income and capital appreciation through investing in dividend-paying stocks of established companies as well as government and corporate bonds. 6 - Harbor Capital Appreciation Fund seeks long-term growth of capital by investing primarily in a portfolio of equity securities of established companies with above average prospects for growth. - Managers Income Equity Fund seeks a high level of current income through investment primarily in income-producing equity securities. - Managers Special Equity Fund seeks capital appreciation through investing primarily in the securities of companies expected to have superior earning growth potential. - C-Cube Microsystems, Inc. Common Stock Fund seeks long-term capital appreciation through investing primarily in the common stock of the Plan sponsor. - Janus Fund seeks long-term capital growth of capital through investing in common stocks of large companies. - Robertson Stephens Value + Growth Fund seeks capital appreciation through investing in small- and medium-sized companies with favorable growth prospects and modest valuations based on earnings and assets. - Neuberger & Berman Genesis Fund seeks capital appreciation through investments in common stocks of companies with small market capitalization, considered to be undervalued based on current earnings. - Personal Choice Retirement Account Fund offers Plan participants the ability to invest in a variety of publicly traded equity and debt securities available through Charles Schwab. - Twentieth Century International Growth Fund seeks capital appreciation over time by investing primarily in common stocks of foreign companies that exhibit accelerating growth. NOTE 4 - PARTICIPANT LOANS Participant loans are collateralized by the respective participant's vested account balance. At December 31, 1998, the loans bear interest at rates ranging from 8.23% to 10.5% and are payable in varying installments. NOTE 5 - BENEFITS PAYABLE TO PARTICIPANTS There were no benefits payable to participants at December 31, 1998 and 1997. NOTE 6 - RECONCILIATION TO FORM 5500 The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500 for the year ended December 31, 1997: Benefits paid to participants per the financial statements $1,215,627 Benefits payable to participants at December 31, 1997 (432) ---------- Benefits paid to participants per the Form 5500 $1,215,195 ========== 7 NOTE 7 - TRANSFER OF DIVICOM, INC. 401(k) PLAN ASSETS The Company acquired DiviCom, Inc. (DiviCom) on May 28, 1996. At the time, DiviCom maintained the DiviCom, Inc. 401(k) Plan (the DiviCom Plan). The DiviCom Plan was merged with and into the C-Cube Microsystems Employee Savings and Investment Plan in 1997. 8 C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES DECEMBER 31, 1998 EMPLOYER IDENTIFICATION NUMBER: 77-0192108 PLAN NUMBER: 001 Market Value Market Description of Investment Per Unit Units Cost Value - --------------------------- ---------- ---------- --------- --------- Investments: Schwab Institutional Advantage Money Market Fund $ 1.00 2,142,131.930 $ 2,142,132 $ 2,142,132 Schwab U.S. Treasury Money Market Fund 1.00 96.490 96 96 Benham Intermediate-Term Treasury Fund 10.70 61,114.656 646,778 653,927 Founders Balanced Fund 12.19 163,429.143 1,873,283 1,992,201 Harbor Capital Appreciation Fund 37.99 46,526.115 1,613,963 1,767,527 Managers Income Equity Fund 30.67 38,948.111 1,256,421 1,194,539 Managers Special Equity Fund 61.22 5,208.446 309,591 318,861 C-Cube Microsystems, Inc. Common Stock 27.125 33,437.000 743,069 906,979 Janus Fund 33.65 102,542.333 2,665,598 3,450,550 Robertson Stephens Value + Growth Fund 25.92 161,126.282 4,143,596 4,176,393 Neuberger & Berman Genesis Fund 14.44 230,333.489 3,131,708 3,326,016 Personal Choice Retirement Account Fund Noninterest bearing cash deposit 1.00 62.00 62 62 Schwab Money Market Fund 1.00 446,268.23 446,268 446,268 Common stocks Alcatel Alsthom 24.4375 600.00 15,036 14,662 Altera Corp 60.875 100.00 3,700 6,088 America Online 155.125 80.00 7,210 12,410 Amgen Inc 104.5625 50.00 2,888 5,228 Applied Materials 42.6875 1,275.00 42,453 54,427 Ascend Communications 65.75 518.00 22,592 34,058 At Home Corp Cl A 74.25 300.00 20,060 22,275 Atmel Corp 15.3125 1,800.00 25,023 27,562 Barnes & Noble 42.50 60.00 2,154 2,550 Bebe Stores 35.375 1,000.00 13,655 35,375 Broadcom Corp 'A' 120.75 85.00 6,745 10,264 Cadence Design Sys 29.75 400.00 9,518 11,900 Cisco Systems 92.8125 1,050.00 57,347 97,453 Compaq Computer 42.00 658.00 23,424 27,636 Costco Cos 72.1875 50.00 2,317 3,609 Dell Computer Corp 73.1875 1,169.00 68,126 85,556 Dialogic Corp 19.6563 200.00 4,669 3,931 Ericsson (Lm) Tel'B'ADS 23.9375 82.00 2,444 1,963 Ess Technology 5.00 400.00 1,684 2,000 Excite Inc 42.0625 200.00 10,267 8,412 Fletcher Challenge Ltd 3.125 225.00 1,776 703 FPA Medical Mgmt .125 450.00 3,111 56 Galileo Technology 27.00 290.00 4,755 7,830 GAP Inc 56.125 225.00 10,765 12,628 Gillette Co 47.8125 15.00 657 717 Hewlett Packard Co 68.3125 60.619 3,200 4,141 Informix Corp 9.875 2,560.00 24,806 25,280 Infoseek Corp 49.375 500.00 6,893 24,687 Inktomi Corp 129.375 200.00 19,180 25,875 Intel Corp 118.5625 680.268 52,018 80,654 International Business Machines 184.375 10.542 1,410 1,944 International Network Services 66.50 700.00 29,651 46,550 Komag Inc 10.375 500.00 10,339 5,188 Leap Wireless International 7.25 77.00 - 558 Level One Communications 35.50 100.00 2,140 3,550 Level 3 Communications 43.125 60.00 2,212 2,588 LSI Logic 16.125 736.00 22,243 11,868 Lucent Technologies 109.9375 50.00 3,613 5,497 Maxim Integrated Prods 43.6875 500.00 15,967 21,844 Merck & Company 147.50 30.233 3,480 4,459 Micron Technology 50.5625 50.00 1,433 2,528 Microsoft Corp 138.6875 621.00 55,813 86,125 Motorola Inc 61.0625 15.00 810 916 Mylex Corp 12.00 1,000.00 4,655 12,000 Novell Inc 18.125 300.00 4,328 5,438 Oracle Corp 43.125 50.00 1,525 2,156 P-Com Inc 3.9844 590.00 1,652 2,351 Qualcomm Inc 51.8125 310.00 14,619 16,062 Quantum Corp 21.25 315.00 6,350 6,694 Realnetworks Inc 35.875 10.00 240 359 Schering-Plough Corp 55.25 200.00 15,805 11,050 SRS Labs 3.625 1,500.00 13,422 5,438 Taiwan Semiconductor Mfg ADS 14.1875 735.00 9,664 10,428 Time Warner Inc 62.0625 120.00 7,410 7,448 Valence Technology 7.25 500.00 4,235 3,625 Walt Disney Company 30.00 1,000.00 30,217 30,000 Westell Technologies 'A' 4.875 350.00 2,816 1,706 3COM Corp 44.8125 200.00 9,239 8,962 ---------- ---------- Total Common Stock 743,761 967,262 Options Alcatel calls expiring 6/19/99 @ $22.50 5.00 6.00 (2,494) (30) Cadence Design Sys calls expiring 2/20/99 @ $25.00 5.50 4.00 (1,112) (22) Walt Disney Company calls expiring 4/17/99 @ $30.00 2.75 10.00 (2,942) (27) Maxim Integrated Prods calls expiring 2/20/99 @ $25.00 18.75 5.00 (2,431) (94) ---------- ---------- Total Options (8,979) (173) Mutual Funds Baron Asset Fund 50.54 1263.406 47,072 63,853 DFA Emerging Markets Portfolio 8.30 473.464 3,848 3,930 DFA International High Book-To- Market Portfolio 13.79 1,547.259 19,296 21,337 DFA International Small Company Portfolio 7.67 955.136 6,968 7,326 DFA US 9-10 Small Company Portfolio 10.76 1,112.472 12,284 11,970 Fidelity Select Computers Portfolio 67.71 204.757 9,332 13,864 Fidelity Select Electronics Portfolio 46.56 245.190 9,249 11,416 Fidelity Select Home Finance 43.28 251.767 12,107 10,896 Fidelity Select Regional Banks Portfolio 42.87 330.461 11,749 14,167 Janus Twenty Fund 53.30 114.129 5,000 6,083 Janus Worldwide Fund 47.36 248.720 9,864 11,779 Montgomery Micro Cap Fund 20.70 957.550 19,273 19,821 Oakmark Select Fund 19.54 1,481.058 24,556 28,940 PBHG Growth Fund 25.54 675.288 16,660 17,247 Rainier Core Equity Portfolio 24.86 3,057.557 63,266 76,011 Rainier Small/Mid-Capital Equity 22.19 2,980.959 59,822 66,147 RWB/DFA High Book-To-Market Portfolio 13.61 1,858.168 23,330 25,290 Schwab Analytics Fund 16.22 394.464 5,744 6,398 Schwab S&P 500 Investors Shares 18.96 1,371.438 19,357 26,002 Scudder Pacific Opportunity Fund 8.86 92.427 1,002 819 Strong Schafer Value Fund 59.29 36.080 2,413 2,139 Vanguard Growth & Income Fund 30.76 169.860 5,000 5,225 Vanguard Health Care Fund 96.85 54.038 5,000 5,234 Vanguard Index Trust 500 Portfolio 113.95 141.998 15,116 16,181 Vanguard Index Trust Growth Fund 31.67 172.456 5,000 5,462 Vanguard World International Growth Portfolio 18.77 1,072.485 20,491 20,130 ----------- ----------- Total Mutual Funds 432,799 497,667 ----------- ----------- Total Personal Choice Retirement Account Fund 1,613,911 1,911,086 ----------- ----------- Twentieth Century International Growth Fund 9.58 217,376.490 1,949,806 2,082,467 ----------- ----------- $22,089,952 $23,922,774 =========== =========== Loans to participants $ 450,856 $ 450,856 =========== =========== 9-11 C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN ITEM 27d - SCHEDULE OF REPORTABLE PLAN TRANSACTIONS YEAR ENDED DECEMBER 31, 1998 EMPLOYER IDENTIFICATION NUMBER: 77-0192108 PLAN NUMBER: 001 Net Purchase Selling Cost of Gain Description of Investment Price Price Asset (Loss) - -------------------------------- ----------- ----------- ----------- ---------- SERIES OF TRANSACTIONS - ----------------------- Purchases: Schwab Institutional Advantage Money Market Fund $1,674,581 $ - $ - $ - Schwab U.S. Treasury Money Market Fund 398,576 - - - Founders Balanced Fund 1,001,794 - - - Harbor Capital Appreciation Fund 1,704,233 - - - Managers Income Equity Fund 711,375 - - - Robertson Stephens Value + Growth Fund 2,216,912 - - - Neuberger & Berman Genesis Fund 1,314,961 - - - Twentieth Century International Growth Fund 1,065,212 - - - Dispositions: Schwab Institutional Advantage Money Market Fund - 1,027,747 1,027,747 - Schwab U.S. Treasury Money Market Fund - 398,715 398,715 - Founders Balanced Fund - 476,601 464,431 12,170 Harbor Capital Appreciation Fund - 92,678 90,269 2,409 Managers Income Equity Fund - 272,594 283,297 (10,703) Robertson Stephens Value + Growth Fund - 889,150 912,332 (23,182) Neuberger & Berman Genesis Fund - 1,043,876 971,022 72,854 Twentieth Century International Growth Fund - 331,700 347,075 (15,375) 12 SIGNATURES THE PLAN. Pursuant to the requirements of the Securities and Exchange Act of 1934, the trustees (or other persons who administer the C-Cube Microsystems Employee Savings and Investment Plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. C-CUBE MICROSYSTEMS EMPLOYEE SAVINGS AND INVESTMENT PLAN ----------------------------------- (Name of plan) Date: July 14, 1999 By: /s/ Walt Walczykowski ---------------- ----------------------------------- (Signature) Name: Walt Walczykowski Title: Chief Financial Officer C-CUBE MICROSYSTEMS, INC. ON BEHALF OF THE PLAN ADMINISTRATOR OF THE C-CUBE MICROSYSTEMS EMPLOYEE 13 CONSENT OF ZAJAC & PERRONE, LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement number 333-19777 on Form S-8 filed with the Securities and Exchange Commission on January 14, 1997, pertaining to our report dated July 8, 1999 with respect to the financial statements and schedules of the C-Cube Microsystems Employee Savings and Investment Plan included in this Annual Report (Form 11-K) for the year ended December 31, 1998. /s/ Zajac & Perrone, LLP Morgan Hill, California July 14, 1999 14