<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO. 333-56911
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 3661 77-0328533
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR 2952 BUNKER HILL LANE
ORGANIZATION) SANTA CLARA, CA 95054
(408) 727-4400
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DR. ZAKI RAKIB
CHIEF EXECUTIVE OFFICER
TERAYON COMMUNICATION SYSTEMS, INC.
2952 BUNKER HILL LANE
SANTA CLARA, CA 95054
(408) 727-4400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
JAMES C. GAITHER NEIL WOLFF
KARYN R. SMITH YOICHIRO TAKU
PETER M. O. WONG NOGA DEVECSERI SPIRA
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARITIME PLAZA PROFESSIONAL CORPORATION
20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304
(415) 693-2000 (650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(3) FEE(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share........ 3,450,000 $15.00 $51,750,000 $15,267
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee.
(3) A registration fee of $14,750 was previously paid with the initial filing
of the Registration Statement on June 16, 1998.
---------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JULY 20, 1998
3,000,000 SHARES
[LOGO OF TERAYON COMMUNICATION SYSTEMS APPEARS HERE]
COMMON STOCK
--------
All of the shares of Common Stock of Terayon Communication Systems, Inc.
("Terayon" or the "Company") are being sold by the Company. Prior to this
offering, there has been no public market for the Common Stock. It is currently
estimated that the initial public offering price will be between $13.00 and
$15.00 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price. The Company has applied to have
the Common Stock approved for quotation on the Nasdaq National Market under the
symbol "TERN."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT 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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
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Total(3).................... $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $1,400,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public as
shown above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1998.
BT ALEX. BROWN
HAMBRECHT & QUIST
LEHMAN BROTHERS
SALOMON SMITH BARNEY
The date of this Prospectus is , 1998.
<PAGE>
Graphic consisting of a depiction of the following components of broadband
communications solutions:
S-CDMA Cable Modem System
Standards-Based Modem System
Technology Leadership
Set-Top Boxes
IP Circuit Telephony
TeraComm, TeraLink, TeraPro, TeraView and Terayon are trademarks of the
Company. All other trademarks or service marks appearing in this prospectus are
the property of their respective owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[Gatefold]
[graphic depicting the components of the TeraComm system and potential users of
the system]
Captions:
S-CDMA, CORE TECHNOLOGY.
Terayon's S-CDMA technology
allows cable operators to
provide reliable two-way
broadband communications,
utilizing more of the existing
upstream bandwidth than
alternative broadband access
technologies.
FLEXIBLE ARCHITECTURE. The
Company's system can be
deployed on any cable
infrastructure, from pure
coaxial systems to hybrid
fiber/coax ("HFC") upgraded
systems, providing cable
operators with a cost-
effective broadband access
solution.
ECONOMIC ADVANTAGE. The
Terayon system does not
require costly cable
infrastructure upgrades,
filters or new cable drops,
allowing cable operators to
provide broadband access
services with low start-up
costs.
RESIDENTIAL AND COMMERCIAL
SERVICES. Terayon's system
allows cable operators to
provide tiered levels of
service--from lower margin
residential Internet access to
higher margin commercial
services.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. Except as set forth in the consolidated
financial statements or as otherwise indicated herein, information in this
Prospectus (i) gives effect to the reincorporation of the Company from
California to Delaware in July 1998, (ii) gives effect to the conversion of all
of the Company's outstanding shares of Preferred Stock into shares of Common
Stock, which will occur automatically upon the closing of this offering and
(iii) assumes that the Underwriters' over-allotment option is not exercised.
See "Description of Capital Stock" and "Underwriting." This Prospectus contains
forward-looking statements that involve risks and uncertainties. Actual events
or results could differ materially from those expressed in or implied by these
forward-looking statements as a result of a number of factors, including those
set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Terayon develops, markets and sells cable modem systems that enable cable
operators to cost-effectively deploy reliable two-way broadband access
services. The Company's TeraComm system is designed to allow cable operators to
minimize time-consuming and costly network infrastructure upgrades, achieve
reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm system
are able to provide additional revenue-generating services to end users,
enabling cable operators to compete effectively in the emerging market for
broadband access services.
In recent years, the volume of bandwidth intensive data, voice and video
traffic across the Internet, corporate intranets and other public networks has
increased dramatically. International Data Corporation ("IDC") estimates that
the number of Internet users will increase from approximately 69 million at the
end of 1997 to approximately 320 million by the end of 2002. IDC also estimates
that the number of home office households will increase from approximately 35
million at the end of 1997 to approximately 50 million by the end of 2002.
Although various technologies have emerged to address the need for broadband
access, the existing cable infrastructure currently provides the highest
available two-way transmission speeds and "always-on" availability. In
addition, the existing cable infrastructure currently passes more than 95% of
homes in the U.S. and a large number of small businesses.
The Company's TeraComm system, comprised of the TeraPro cable modem, the
TeraLink 1000 Master Controller, the TeraLink Gateway and the TeraView Element
Management and Provisioning Software, is based on Terayon's Synchronous Code
Division Multiple Access ("S-CDMA") technology. S-CDMA enables reliable two-way
broadband communications over both pure coaxial and hybrid fiber/coax ("HFC")
cable infrastructure by maximizing resistance to noise that interferes with
data transmissions over previously unusable frequency spectrum. Cable operators
utilizing cable modems based on alternative technologies such as Time Division
Multiple Access must typically upgrade their networks to an HFC architecture.
The TeraComm system is designed to allow cable operators to minimize these
costly and time-consuming network upgrades.
Terayon's objective is to be the leading provider of cable modem systems to
cable operators seeking to provide broadband access services to residential and
commercial end users. Key elements of the Company's strategy are to supply
leading cable operators worldwide, establish relationships with industry
leaders, expand worldwide distribution channels, provide superior customer
service and support, adopt and advocate industry standards, and leverage its S-
CDMA technology.
Terayon sells its products to cable operators through direct sales forces in
North America, Latin America and Europe. The Company also distributes its
products via distributors and systems integrators. Companies currently using or
distributing the TeraComm system include Shaw Communications Inc., TCA Cable
TV, Inc., Cablevision Systems, Inc. and Crossbeam Networks Corporation, a
wholly owned subsidiary of Sumitomo Corporation.
Terayon was incorporated in California in January 1993 and reincorporated in
Delaware in July 1998. The Company's executive offices are located at 2952
Bunker Hill Lane, Santa Clara, California 95054 and its telephone number is
(408) 727-4400.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company........ 3,000,000 shares
Common Stock outstanding after the
offering.................................. 16,220,733 shares (1)
Use of proceeds............................ Working capital and other general
corporate purposes
Proposed Nasdaq National Market symbol..... TERN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------
1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ 140 $ -- $ -- $ 2,118 $ 93 $ 9,376
Cost of goods sold...... -- 676 -- 6,462 482 11,517
-------- -------- -------- -------- -------- ---------
Gross profit (loss)..... 140 (676) -- (4,344) (389) (2,141)
-------- -------- -------- -------- -------- ---------
Operating expenses
Research and develop-
ment.................. 235 2,028 8,020 11,319 5,886 4,923
Sales and marketing.... 17 205 1,141 4,468 1,523 2,969
General and administra-
tive.................. 84 825 1,789 2,546 1,105 1,282
-------- -------- -------- -------- -------- ---------
Total operating ex-
penses................ 336 3,058 10,950 18,333 8,514 9,174
-------- -------- -------- -------- -------- ---------
Loss from operations.... (196) (3,734) (10,950) (22,677) (8,903) (11,315)
Net interest income (ex-
pense)................. -- 68 253 128 123 (32)
-------- -------- -------- -------- -------- ---------
Net loss................ $ (196) $ (3,666) $(10,697) $(22,549) $ (8,780) $ (11,347)
======== ======== ======== ======== ======== =========
Pro forma basic and di-
luted net loss per
share(2)............... $ (2.07) $ (0.94)
======== =========
Shares used in pro forma
basic and diluted net
loss
per share(2)........... 10,873 12,132
======== =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED(3)
-------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 6,030 $ 43,690
Working capital........................................ 194 37,854
Total assets........................................... 16,634 54,294
Long-term debt (less current portion).................. 24 24
Accumulated deficit.................................... (48,510) (48,510)
Total stockholders' equity (net capital deficiency).... $ (3,858) $ 41,302
</TABLE>
- --------
(1) Based on number of shares outstanding on June 30, 1998. Excludes (i)
2,483,292 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $2.50 per share, (ii) 3,088,462 shares
issuable upon exercise of outstanding warrants with a weighted average
exercise price of $6.64 per share, (iii) 2,453,937 shares reserved for
future grants under the Company's stock option plans, and (iv) 700,000
shares reserved for issuance pursuant to the Company's 1998 Employee Stock
Purchase Plan. See "Management--Employee Benefit Plans" and Note 8 of Notes
to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute
per share amounts.
(3) As adjusted to reflect (i) the sale of 3,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $14.00 per share and the application of the estimated net proceeds
therefrom and (ii) the conversion of all outstanding shares of Preferred
Stock into shares of Common Stock upon the closing of this offering. See
"Use of Proceeds."
4
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk. The following risk
factors should be considered carefully in addition to the other information in
this Prospectus before purchasing the shares of Common Stock offered hereby.
The discussion in this Prospectus contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Prospectus should be read as being applicable to all related foward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include those discussed
below as well as those discussed elsewhere herein. See "Information Regarding
Forward-Looking Statements."
Early Stage of Development; History of Losses. The Company was incorporated
in January 1993, began shipping products commercially in June 1997 and has
only been shipping products in volume since the first quarter of 1998. Most
commercial shipments of the Company's products through December 1997 were in
limited quantities to customers deploying cable modems in pre-commercial
trials. Accordingly, the Company has a very limited operating history, which
makes the prediction of future operating results difficult. The Company has
incurred significant losses since inception, including losses of $3.7 million,
$10.7 million, $22.5 million and $11.3 million for 1995, 1996, 1997 and for
the six months ended June 30, 1998, respectively. At June 30, 1998, the
Company had an accumulated deficit of $48.5 million. The Company believes that
it will continue to experience net losses for the foreseeable future. Because
a majority of the Company's expenses are fixed in advance, the Company
generally is unable to reduce its expenses significantly in the short term to
compensate for any unexpected delay or decrease in anticipated revenues. As
the Company increases its commercialization activities, it expects to increase
expense levels in each of the next several quarters primarily to support
increased sales and marketing and technical support costs. Accordingly, any
significant delay in the Company's anticipated revenues or commercialization
of new products would have an immediate adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
has had negative gross margins since inception, and there can be no assurance
that any growth in revenues will result in positive gross margins or operating
profits.
The revenue and profit potential of the Company's business and industry are
unproven, and the Company's limited operating history makes its future
operating results difficult to predict. The Company has had limited experience
selling its products to cable operators and only a limited number of cable
operators have purchased the Company's products for commercial deployment. The
market for the Company's products has only recently begun to develop, is
rapidly changing and is characterized by an increasing number of competitors
and competing technologies, as well as evolving industry standards. See "--
Market Acceptance of Cable Modems; Competing Technologies," "--Dependence on
Small Number of Customers," "--Ability to Market Effectively to Cable
Operators," "--Highly Competitive Industry; Established Competitors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fluctuations in Operating Results. The Company's quarterly revenues will be
difficult to predict due to a number of factors and the Company expects to
experience significant fluctuations in its operating results on a quarterly
and an annual basis for the foreseeable future. Revenues will vary depending
on the timing of orders and shipments. Orders by the same customer can vary in
size over time, depending on whether the Company's products are intended for
trial or commercial deployment purposes, and depending on the geographic area
covered by the customer's deployment. Customers that have forecast deployment
plans and product orders may delay orders for many customer-specific reasons,
such as changes in customer marketing plans, delays in completing any
infrastructure or billing system upgrades required to offer new services,
variations in capital spending budgets and delays in
5
<PAGE>
obtaining regulatory approval for commercial deployment. Customers also may
delay orders for industry-wide reasons such as the adoption of new
technologies by cable operators, telephone or wireless telecommunications
companies, or changes in U.S. and international regulations. For example, the
Company's product shipments to date to a customer in Brazil have been
significantly lower than anticipated due to delays in certain regulatory
approvals in Brazil. There can be no assurance that similar delays will not
occur in other countries in which the Company is marketing or planning to
market its products. Any such delays would have a material adverse effect on
the Company's operating results for a particular period. In addition, cable
operators in certain parts of Asia are required to obtain licenses prior to
deploying data services over cable, and delays in obtaining such licenses by
the Company's customers could have an adverse impact on the Company's
operating results for a particular period. Competitive factors may affect both
Company revenues and profitability. Customers may delay orders due to new
product announcements by the Company or its competitors. The Company's average
selling prices for its products may be lower than expected as a result of
competitive pricing pressures, the Company's promotional programs and
customers who negotiate price reductions in exchange for longer term purchase
commitments. The Company's expenses generally will vary from quarter to
quarter depending on the level of actual and anticipated business activities.
Research and development expenses will vary as the Company commences
development of new products and as development programs move to wafer
fabrication, which results in higher engineering expenses.
The timing and volume of customer orders are difficult to forecast because
cable operators require a long sales cycle before placing orders. In addition,
cable operators typically require delivery of products within 90 days.
Accordingly, the Company has a limited backlog of orders, and net sales for
any future quarter are difficult to predict. Supply, manufacturing or testing
constraints could result in delays in the delivery of the Company's products.
Further, sales generally are made pursuant to purchase orders, which can be
rescheduled, reduced or cancelled with little or no penalty. Any delay in the
product deployment schedule of one or more of the cable operators targeted by
the Company would have an adverse effect on the Company's operating results
for a particular period. In addition, due to the relatively large dollar size
of the Company's typical transaction, any delay in the closing of a
transaction could have a significant impact on the Company's operating results
for a particular period. See "--Limited Manufacturing Experience and
Dependence on Contract Manufacturer" and "--Lengthy Sales Cycle."
A variety of factors affect the Company's gross margin, including average
selling prices ("ASPs") of the Company's products, the sales mix of products,
type of distribution channel, the volume of products manufactured and cost
reduction measures. Historically, ASPs in the data communications industry
have decreased over the life of individual products and technologies. The
Company anticipates that unit ASPs of its products will decline in the future,
which could cause a decrease in the gross margins for these products. The
Company's gross margin also is affected by the sales mix of TeraLink 1000
Master Controllers, TeraLink Gateways and TeraPro cable modems, as the TeraPro
cable modems have significantly lower margins than the TeraLink 1000 Master
Controller and TeraLink Gateway headend products. The Company expects to
achieve only nominal margins on the TeraPro cable modems and expects that
sales of TeraPro cable modems will continue to constitute a significant
portion of its revenues for the foreseeable future. See "--Erosion of Average
Selling Prices" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
Market Acceptance of Cable Modems; Competing Technologies. The Company's
future success, operating results and financial condition will be
substantially dependent upon whether cable modems gain widespread commercial
acceptance by cable operators and end users of broadband access services.
Because cable operators have only recently begun to deploy broadband access
services based on cable modem technology, the market for services based on
such technology has not yet developed and the Company cannot accurately
predict the future growth rate, if any, or the ultimate size of the cable
modem market. Critical issues concerning the use of cable modems, including
security, reliability, cost,
6
<PAGE>
ease of deployment and administration, and Quality of Service, remain largely
unresolved and may adversely affect the Company's growth and the market
acceptance of its products. The market for cable modems may be affected by the
development of other technologies that enable the provisioning of broadband
access services. Examples of such technologies include technologies that
increase the efficiency of digital transmission over telephone companies'
existing copper infrastructure, such as various Digital Subscriber Line
technologies ("xDSL"), as well as Integrated Service Digital Network ("ISDN").
Similarly, broadband access services may be deployed over a number of other
media, including fiber optic cable, direct broadcast satellite ("DBS"), Local
Multipoint Distribution Service ("LMDS"), Multichannel Multipoint Distribution
Service ("MMDS") and other wireless technologies. Broadband access services
based on some of these competing technologies are already available and could
materially limit acceptance of cable modem-based services. The Company also
anticipates competition from all-digital systems, which may be offered from
telecommunication or other service providers, such as the recently announced
Integrated On-Demand Network from Sprint Corporation. The Company is unable to
predict the effect of all-digital networks on competition among service
providers who are introducing broadband access, and therefore the effect on
the Company. The failure of broadband access services based on cable modem
technology to gain widespread commercial acceptance by cable operators and end
users of broadband access services would have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Industry Background."
Evolving Market; Rapid Technological Change; Market Acceptance of S-
CDMA. The markets for the Company's products are characterized by rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements, all of
which are outside the control of the Company. The Company believes that its
future success will depend upon its ability to enhance its existing products
and to develop and introduce new products that meet a wide range of evolving
cable operator and end-user needs and achieve market acceptance. There can be
no assurance that the Company's potential customers, specifically cable
operators, will not adopt alternative technologies or deploy alternative
services that are incompatible with the Company's products, which would have a
material adverse affect on the Company's business, operating results and
financial condition.
The demand for broadband access services has resulted in the development of
several competing modulation techniques. The Company's products utilize a
proprietary modulation technique known as Synchronous Code Division Multiple
Access ("S-CDMA"), while several of the Company's competitors utilize
modulation technologies known as Time Division Multiple Access ("TDMA") and
Frequency Division Multiple Access ("FDMA"). The Company's headend equipment
and cable modem products currently are not interoperable with the headend
equipment and modems of other suppliers of broadband access products. As a
result, potential customers who wish to purchase broadband access products
from multiple suppliers may be reluctant to purchase the Company's products.
While the Company believes that S-CDMA offers superior capabilities over TDMA
and FDMA, there can be no assurance that major cable operators will adopt the
Company's proprietary modulation technology. If major cable operators do not
adopt products or technologies based on S-CDMA at all, or in the time frame
anticipated by the Company, or if they adopt technologies based on competing
modulation technologies rather than the Company's S-CDMA technology, the
Company's business, operating results and financial condition would be
materially adversely affected. Further, to the extent that competitors using
TDMA or FDMA modulation technologies can incorporate functionality and
capabilities currently found in S-CDMA, the value of the Company's proprietary
S-CDMA technology would be diminished. See "Business--Industry Background."
Ability to Achieve Cost Reductions. Certain of the Company's competitors
currently offer cable modems at prices lower than those of the Company's cable
modems. Market acceptance of the Company's products, and the Company's future
success, will depend in part on reductions in the unit
7
<PAGE>
cost of the Company's products. The Company expects that as headend equipment
becomes more widely deployed, the price of cable modems and other products
will decline. In particular, Company believes that the adoption of industry
standards such as Data Over Cable Service Interface Specifications ("DOCSIS")
will cause increased price competition for cable modems. However, there can be
no assurance that the Company will be able to reduce the cost of its modems
sufficiently to enable it to compete with other cable modem suppliers. While
the Company has initiated cost reduction programs to offset pricing pressures
on its products, there can be no assurance that these cost reduction efforts
will keep pace with competitive pricing pressures or lead to improved gross
margins. If the Company is unable to obtain cost reductions, its gross margin
and profitability will be adversely affected. Many of the Company's
competitors are larger and manufacture products in significantly greater
quantities than the Company intends to for the foreseeable future.
Consequently, such competitors are likely to have more leverage in obtaining
favorable pricing from suppliers and manufacturers. In order to remain
competitive, the Company expects that it will have to significantly reduce the
cost of manufacturing its cable modems through design and engineering changes.
Reductions in such manufacturing costs will require the Company to utilize
more highly integrated components in future products and may require the
Company to enter into high volume or long-term purchase or manufacturing
agreements. For example, the Company has developed and intends to introduce a
single-board modem by the end of 1998, which the Company anticipates will
provide cost savings over its current dual-board modem. There can be no
assurance that the Company will be successful in redesigning its products,
that any such redesign will be made on a timely basis and without introducing
significant errors and product defects, or that any such redesign, including
the single-board modem, would result in sufficient cost reductions to allow
the Company to significantly reduce the list price of its products or improve
its gross margin. Moreover, there can be no assurance that volume purchase or
manufacturing agreements will be available on terms that the Company considers
acceptable. To the extent that the Company enters into a high volume or long-
term purchase or manufacturing agreement and then decides that it cannot use
the products or services offered by such agreement, the Company's business,
operating results or financial condition could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
Limited Manufacturing Experience and Dependence on Contract Manufacturer. In
the first quarter of 1998, the Company commenced volume shipments of its
products and transitioned its manufacturing operations from CMC California,
Inc. ("CMC") to Solectron Corporation ("Solectron"). The Company recorded a
charge of $1.3 million for that quarter, relating to the write-off of obsolete
inventory and the transition of manufacturing operations to Solectron. Any
interruption in Solectron's operations could adversely affect the Company's
ability to meet its scheduled product deliveries to customers. The Company has
had only limited experience manufacturing its products to date, and there can
be no assurance that the Company, Solectron or any other manufacturer of the
Company's products will be successful in increasing the volume of its
manufacturing efforts. In addition, given the Company's lack of manufacturing
experience, together with the complexity of the manufacturing process, there
can be no assurance that the Company will not encounter difficulty in
manufacturing its products in volume. The Company's limited operating history
and the early stage of the cable modem market make it difficult for the
Company to accurately forecast demand for its products. The Company's
inability to accurately forecast the actual demand for its products could
result in supply, manufacturing or testing capacity constraints. Such
constraints could result in delays in the delivery of the Company's products
or the loss of existing or potential customers, either of which could have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business--Manufacturing."
Dependence on Component Availability and Key Suppliers. The Company
manufactures all of its products using components or subassemblies procured
from third-party suppliers. Certain of these components are available from a
single source and others are available from limited sources. In addition, some
of the components are custom parts produced to the Company's specifications.
For example, the Company currently relies on VLSI Technology, Inc. ("VLSI") to
supply a custom ASIC that is used in its
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products. Other components, such as the radio frequency ("RF") tuner and some
surface acoustic wave filters are procured from sole source suppliers. Any
interruption in the operations of vendors of sole sourced parts could
adversely affect the Company's ability to meet its scheduled product
deliveries to customers. There can be no assurance that delays in key
component or product deliveries will not occur in the future due to shortages
resulting from a limited number of suppliers, the financial or other
difficulties of such suppliers or the possible limitation in component product
availability due to significant worldwide demand for such components. For
example, in the second half of 1997, the Company did not receive the full
shipment of cable modems anticipated from its subcontract manufacturer because
of problems experienced with one component that was not functioning according
to its specifications. There can be no assurance that the Company will not
experience similar supply problems in the future. In addition, all of the
Company's sales are from products containing one or more components that are
available from single supply sources. The Company also is dependent on
semiconductor manufacturers and is affected by worldwide conditions in the
semiconductor market. If the Company were unable to obtain a sufficient supply
of components from its current sources, it could experience difficulties in
obtaining alternative sources or in altering product designs to use
alternative components. Resulting delays or reductions in product shipments
could damage customer relationships and could adversely affect the Company's
business, operating results or financial condition. Further, a significant
increase in the price of one or more of these components could have a material
adverse effect on the Company's gross margin or operating results. See
"Business--Manufacturing."
Transition to New Manufacturing Process Technologies. The Company's future
success will depend in part upon its ability to develop products that utilize
new manufacturing process technologies. Manufacturing process technologies are
subject to rapid change and require significant expenditures for research and
development. The Company continuously evaluates the benefits of redesigning
its integrated circuits using smaller geometry process technologies in order
to improve performance and reduce costs. The Company believes that the
transition of its products to integrated circuits with increasingly smaller
geometries will be important to its competitive position. Other companies have
experienced difficulty in migrating to new manufacturing processes and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels. Moreover, the Company is dependent on its
relationships with its third-party manufacturers to migrate to smaller
geometry processes successfully. There can be no assurance that the Company
will be able to migrate to new manufacturing process technologies successfully
or on a timely basis. Any such failure by the Company could have a material
adverse effect on its business, operating results or financial condition.
Dependence on Contract Manufacturer for Assembly and Testing. Substantially
all of the Company's products are assembled and tested by Solectron using
testing equipment produced by the Company. As a result of its dependence on
Solectron for assembly and testing of its products, the Company does not
directly control product delivery schedules or product quality. Any product
shortages or quality assurance problems could increase the costs of
manufacture, assembly or testing of the Company's products and could have a
material adverse effect on the Company's business, financial condition or
results of operation. In addition, as manufacturing volume increases, the
Company will need to procure and assemble additional testing equipment and
provide it to Solectron. Due to the amount of time typically required to
produce and assemble the testing equipment, the Company could experience
significant delays in the shipment of its products if it is unable to provide
such testing equipment to Solectron in a timely manner. Any delays in delivery
of the Company's products could have a material adverse effect on the
Company's business, operating results or financial condition. See "Business--
Manufacturing."
Evolving Industry Standards. Market acceptance of the Company's products may
be affected by the emergence and evolution of industry standards. Standards
efforts currently under way include those of the Digital Audio Video
Interactive Council ("DAVIC") in Europe and, in the United States, the
Institute of Electrical and Electronics Engineers, Inc. ("IEEE") 802.14
Committee and the Multimedia
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Cable Network System ("MCNS") consortium. MCNS, a consortium of top cable
operators in the U.S. and Canada, has been dominant in establishing cable
modem standards. MCNS has created a cable modem standard based on TDMA
technology contributed by multiple vendors to a royalty-free intellectual
property pool. This standard, known as DOCSIS, was completed in mid-1997 and
was adopted as an international standard by the International
Telecommunications Union in March 1998. While no company currently is offering
DOCSIS-compliant products, current estimates from the industry and vendors
predict that products based on the DOCSIS standard will begin to appear in
mid-1998. The Company is developing a next-generation product, the Universal
Cable Modem ("UCM"), to be compliant with the DOCSIS standard. There can be no
assurance that the Company will develop an DOCSIS-compliant product at all or
in a timely manner. The Company believes that the broad adoption of DOCSIS
will cause increased competition in the North American market, which is likely
to negatively affect the Company's gross margin. There can be no assurance
that competitors will not develop DOCSIS-compliant products more quickly than
the Company. Current customers of the Company that move to the DOCSIS platform
could choose alternative cable modem suppliers or choose to purchase DOCSIS-
compliant cable modems from multiple suppliers. Further, there can be no
assurance that the DOCSIS standard will gain industry-wide acceptance. If the
Company fails to deliver a DOCSIS-compliant product by the time DOCSIS gains
industry-wide acceptance or if DOCSIS does not gain industry-wide acceptance,
the Company's business operating results or financial condition could be
adversely affected.
In addition to the current DOCSIS standard, the MCNS consortium has begun
work on DOCSIS 2.0, a next-generation standard that is intended to enhance the
current standard to include functionality already found in S-CDMA. The Company
is actively working with MCNS, and other standards committees such as the IEEE
802.14 Committee, to advocate the inclusion of S-CDMA as the platform for
DOCSIS 2.0. There can be no assurance that the Company will be successful in
advocating S-CDMA's use in the next-generation standard. If the next-
generation standard emerges without S-CDMA as its platform, and if the
standard emerges based on competing modulation technologies, S-CDMA could be
isolated as a proprietary technology and the Company's business, operating
results and financial condition would be materially adversely affected.
Dependence on Small Number of Customers. The Company's sales are highly
concentrated, with three customers accounting for approximately 73% of the
Company's revenues in 1997 and three customers accounting for approximately
64% of the Company's revenues in the first six months of 1998. In 1997, sales
to Telegate Ltd. ("Telegate"), Sumitomo Corporation ("Sumitomo") and NET
Brasil S.A. ("NET Brasil") represented approximately 30%, 29% and 14%,
respectively, of the Company's total revenues. In the first six months of
1998, sales to Shaw Communications Inc. ("Shaw"), Sumitomo and Cablevision
Systems, Inc. ("Cablevision") represented approximately 40%, 14% and 10%,
respectively, of the Company's total revenues. The Company believes that a
substantial majority of its revenues will continue to be derived from sales to
a relatively small number of customers for the foreseeable future. In
addition, the Company believes that sales to these customers will be focused
on a small number of projects. Ten cable operators in the United States own
and operate facilities passing approximately 74% of total homes passed in
1997. Due to the concentration of the Company's market, any reduction, delay
or loss of orders from a significant customer or customers would have a
material adverse effect on the Company's business, operating results and
financial condition. Major customers also are likely to have significant
negotiating leverage and may attempt to change the terms, including pricing,
upon which the Company and such customers do business. In addition, these
customers may require longer payment terms than the Company has anticipated,
which could require the Company to raise additional capital to meet its
working capital requirements. There can be no assurance that any such capital
would be available to the Company as required on reasonable terms or at all.
The Company markets its products to cable operators in the United States and
internationally. Due to the consolidation affecting the cable industry, with a
limited number of cable operators controlling an increasing number of cable
systems, the Company believes that its sales will be largely dependent upon
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product acceptance by leading cable operators. If the Company's products are
not widely deployed, its business, operating results and financial condition
will be materially adversely affected. The Company's ability to increase its
revenues in the future will also depend in part upon its ability to make sales
to new customers. In the event that such sales do not occur, or if one or more
of the Company's customers elect to purchase and market competing technologies
or products, the Company's business, operating results and financial condition
would be adversely affected.
Dependence on Cable Operators and Other Service Providers. The Company
depends on cable operators to purchase its cable modem systems and to provide
its cable modems to end users. Cable operators have a limited amount of
available bandwidth over which they can offer robust data services, and there
can be no assurance that they will choose to provide Internet access. If cable
operators choose to provide such services, the Company will also be dependent
on them to market such services to cable customers, to install the Company's
equipment and to provide support to end-users. In addition, the Company will
be highly dependent on cable operators to continue to maintain their cable
infrastructure in such a manner that the Company will be able to provide
consistently high performance and reliable services. The Company's success
will also be dependent upon the acceptance of its products by other providers
of services to the cable industry, such as At Home Corporation ("@Home") and
Time Warner Cable's Road Runner ("Road Runner"). If cable operators and other
cable system service providers are unable to provide robust, high performance
and reliable services, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business--Industry
Background" and "--Customers."
Dependence on the Cable Industry to Upgrade to Two-Way Cable
Infrastructure. Demand for the Company's products will depend to a significant
degree upon the magnitude and timing of capital spending by cable operators
for implementation of access systems for data transmission over cable
networks. This involves the enabling of two-way transmission over existing
coaxial cable networks and the eventual upgrade to HFC in areas of higher
penetration of data services. In addition, few businesses in the United States
currently have cable access. There can be no assurance that cable operators
will choose to upgrade existing residential cable systems or install new cable
systems to serve business locations. The success and future growth of the
Company's business will also be subject to economic and other factors
affecting the cable television industry generally, particularly its ability to
finance substantial capital expenditures. The capital spending patterns of
cable operators are dependent on a variety of factors, including availability
of financing, cable operators' annual budget cycles, the status of federal,
local and foreign government regulation and deregulation, overall demand for
cable services, competitive pressures (including the availability of
alternative data transmission and access technologies), discretionary consumer
spending patterns and general economic conditions. The failure of cable
operators to complete these upgrades in a timely and satisfactory manner, or
at all, would limit the market for the Company's products and would have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, cable spending can be subject to the effects
of seasonality, with fewer upgrade projects typically occurring in the winter
months. Capital spending levels in the cable industry in the United States
have fluctuated significantly in the past, and the Company believes that such
fluctuations will occur in the future. In recent periods, the United States
cable market has been characterized by the acquisition of smaller and
independent cable operators by large cable operators. The Company is unable to
predict the effect, if any, that consolidation in the United States cable
industry will have on overall capital spending patterns by cable operators.
The effect on the Company of further industry consolidation also is uncertain.
See "Business--Industry Background."
Ability to Market Effectively to Cable Operators. The Company believes that
its growth and future success will be substantially dependent upon its ability
to convince cable operators to adopt the Company's technologies, purchase the
Company's products and effectively market the Company's products to end users.
Cable operators are likely to prefer purchasing products from established
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manufacturing companies that can demonstrate the capability to supply large
volumes of products on short notice. In addition, many cable operators may be
reluctant to adopt technologies that have not gained acceptance among other
cable operators, and such reluctance could result in lengthy product testing
and acceptance cycles for the Company's products. Consequently, the impediments
to the Company's initial sales may be even greater than those to later sales,
if any. No established distribution network in the cable modem industry exists
that would provide easy access by the Company to smaller or geographically
diverse cable operators. Therefore, the Company's initial sales to larger, more
established cable operators are critical to the Company's business. Although
the Company intends to establish strategic relationships with leading
distributors worldwide, there can be no assurance that Company will be
successful in establishing such relationships or that such distributors will be
successful in marketing the Company's products to cable operators. Some
competitors of the Company have already established relationships with certain
cable operators, such as Motorola Inc.'s ("Motorola") relationships with Tele-
Communications, Inc. ("TCI"), Time Warner Cable, Comcast Corporation and Cox
Communications, Inc., which may further limit the Company's ability to sell
products to such cable operators. It is likely that any such sales to cable
operators will not be based on long-term contracts and that such customers will
be able to terminate their relationships with the Company at any time. If the
Company is unable to market and sell its products to a significant number of
cable operators, or if one or more of the Company's current customers should
cancel any relationship with the Company, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Business--Strategy," "--Customers" and "--Sales and Marketing."
Dependence on Products Under Development. The Company's future success will
depend in part on its ability to develop, introduce and market new products or
enhancements to existing products in a timely manner and to respond to
competitive pressures, evolving industry standards or technological advances.
For example, in November 1997, the Company announced the planned development of
its next-generation product, the UCM. The UCM is in the early stages of design
and development, and the Company does not anticipate shipment until 1999. The
current design of the UCM requires ASIC fabrication at 0.2 micron line widths,
which has only recently been used by wafer fabrication facilities for
commercial production, increasing the risk that the Company's semiconductor
device will require a time-consuming redesign at a larger geometry. The failure
of the UCM or other future products to perform acceptably in testing and
development could result in major engineering changes, increased development
costs and significant delays in market introduction. In addition, it is
possible that customers may delay purchasing the Company's current products in
favor of next-generation products, which would have an adverse impact on the
Company's operating results in the near term. There can be no assurance that
the Company's engineering and product design efforts will be successful or that
the Company will be successful in developing new products or commercializing
its current or any future products. Any failure to release new products or to
upgrade or redesign products on a timely basis could have a material adverse
effect on the Company's business, operating results or financial condition. See
"--Transition to New Manufacturing Process Technologies" and "Business--
Products."
Erosion of Average Selling Prices. The cable equipment systems industry has
been characterized, and is likely to continue to be characterized by, erosion
of average selling prices due to a number of factors, including competition,
rapid technological change and price performance enhancements. The Company
anticipates that ASPs and gross margins for its products will decrease over
product life cycles, due to competitive pressures and volume pricing
agreements. Decreasing ASPs could cause the Company to experience decreased
revenue even though the number of units sold could increase. As a result, the
Company may experience substantial period-to-period fluctuations in future
operating results due to ASP erosion. Therefore, the Company must continue to
develop and introduce on a timely basis next-generation products with enhanced
functionalities that could be sold at higher gross margins. Failure to achieve
the foregoing could cause the Company's revenues and gross margin to decline,
which would have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
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Ability to Provide Customer Support. The Company's ability to achieve its
planned sales growth and retain current and future customers will depend in
part upon the quality of its customer support operations. The Company's
customers generally require significant support and training with respect to
the Company's TeraComm system, particularly in the initial deployment and
implementation stage. To date, the Company has sold a limited number of
products, and such sales have been concentrated in a small number of
customers. The Company does not have any experience with widespread deployment
of its products to a diverse customer base, and there can be no assurance that
it will have adequate personnel to provide the levels of support that its
customers may require during initial product deployment or on an ongoing
basis. An inability to provide sufficient support to its customers could delay
or prevent the successful deployment of the Company's products. In addition,
failure to provide adequate support could have an adverse impact on the
Company's reputation and relationship with its customers, could prevent the
Company from gaining new customers and could have a material adverse effect on
the Company's business, operating results or financial condition. See
"Business--Customer Service and Technical Support."
Need to Develop Additional Distribution Channels. The Company presently
markets its products to cable operators and systems integrators. The Company
believes that much of the North American cable modem market may shift to a
retail distribution model. Accordingly, the Company anticipates that it may
need to redirect its marketing efforts in the future to sell its cable modems
directly to retail distributors and end users, which would require the
establishment of new distribution channels for its products. There can be no
assurance that the Company will be able to establish such additional
distribution channels or that, if the Company does establish additional
channels, it will have the capital required or the ability to hire the
additional personnel necessary to foster and enhance such distribution
channels. In addition, if the cable modem market shifts to a retail
distribution model, there can be no assurance that the Company will
successfully establish a retail distribution presence. Failure by the Company
to establish such distribution channels could have a material adverse affect
on the Company's business, operating results or financial condition. To the
extent that large consumer electronics companies enter the cable modem market,
their well established retail distribution capabilities would provide them
with a significant competitive advantage.
Lengthy Sales Cycle. The sales cycle associated with the Company's products
is typically lengthy, often lasting six months to a year. The Company's
customers typically conduct significant technical evaluations of competing
technologies prior to the commitment of capital and other resources. In
addition, customers' internal procedures required to approve large capital
expenditures and test, accept and deploy new technologies often delay
purchasing decisions. Sales also generally are subject to customer trials,
which typically last three months. Because of the lengthy sales cycle and the
large size of customers' orders, if orders forecasted for a specific customer
for a particular quarter do not occur in that quarter, the Company's operating
results for that quarter could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
Highly Competitive Industry; Established Competitors. The market for
broadband access systems is extremely competitive and is characterized by
rapid technological change. The Company's direct competitors in the cable
modem arena include Bay Networks, Inc. ("Bay Networks"), Com21, Inc.
("Com21"), Hayes Microcomputer Products, Inc. ("Hayes"), Hybrid Networks, Inc.
("Hybrid"), Matsushita Electric Industrial Co., Ltd. (which markets products
under the brand name "Panasonic") ("Matsushita"), Motorola, Phasecom Inc.
("Phasecom"), Thomson Consumer Electronics, Inc. (which markets products under
the brand name "RCA"), Samsung Corporation ("Samsung"), Scientific-Atlanta,
Inc. ("Scientific-Atlanta"), Sony Corporation ("Sony"), 3Com Corporation
("3Com"), Toshiba Corporation ("Toshiba") and Zenith Electronics Corporation
("Zenith"), and there are many other potential market entrants. In addition,
Bay Networks, Com21, Hybrid and Motorola introduced cable modems prior to the
Company, and have established relationships and have worked with customers for
a longer period of time than the Company. The principal competitive factors in
this market include: product performance, features and
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reliability; price; size and stability of operations; breadth of product line;
sales and distribution capability; technical support and service;
relationships with cable operators; standards compliance; and general industry
and economic conditions. Certain of these factors are outside of the Company's
control. The existing conditions in the broadband access market could change
rapidly and significantly as a result of technological changes, and the
development and market acceptance of alternative technologies could decrease
the demand for the Company's products or render them obsolete. There can be no
assurance that these companies and other competitors will not introduce
broadband access products that will be less costly, provide superior
performance or achieve greater market acceptance than the Company's products.
The Company sells products that also compete with existing data access and
transmission systems utilizing the telecommunications networks, such as those
of 3Com. Additionally, the Company's controller and headend system products
face intense competition from well-established companies such as Bay Networks,
Cisco Systems, Inc. ("Cisco") and 3Com. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers than the Company. The
anticipated widespread adoption of DOCSIS is likely to cause increased price
competition in the North American market. Further, such adoption could result
in lower sales of headend products by the Company in the North American
market. Any such increased price competition or reduction in sales of headend
products would result in downward pressure on the Company's gross margin,
which could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
have a material adverse effect on its business, operating results and
financial condition. See "--Market Acceptance of Cable Modems; Competing
Technologies."
Dependence on Effective Management of Growth. The growth in the Company's
business has placed, and is expected to continue to place, a significant
strain on the Company's limited personnel, management and other resources.
There can be no assurance that the Company's management, personnel, systems,
procedures and controls will be adequate to support the Company's existing and
future operations. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate, manage and retain
employees successfully, to integrate new employees into its overall operations
and to continue to improve its operational, financial and management systems.
The Company has hired certain key employees and officers only recently,
including its Chief Financial Officer and Vice President, Manufacturing
Operations, and the Company filled the position of Chief Operating Officer in
February 1998. As a result, the Company's entire management team has worked
together for a brief time. The failure to manage its growth effectively could
have a material adverse effect on the Company's business, operating results or
financial condition. See "Business--Employees" and "Management."
Dependence on the Internet and Internet Infrastructure Development. The
commercial market for products designed for the Internet has only recently
begun to develop, and the Company's success will depend in large part on
increased use of the Internet to increase the need for high speed broadband
access networks. Critical issues concerning the commercial use of the
Internet, including security, reliability, cost, ease of access and Quality of
Service, remain unresolved and are likely to affect the development of the
market for the Company's products. The adoption of the Internet for commerce
and communications, particularly by enterprises that have historically relied
upon alternative means of commerce and communications, generally requires the
acceptance of a new method of conducting business and exchanging information.
In addition, the Company is dependent on the growth of the use of the Internet
by businesses, particularly for applications that utilize multimedia content
and thus require high bandwidth. The recent growth in the use of the Internet
has caused frequent periods of performance degradation, requiring the upgrade
of routers, telecommunications links and other
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components forming the infrastructure of the Internet by Internet service
providers and other organizations with links to the Internet. Any perceived
degradation in the performance of the Internet as a whole could undermine the
benefits of the Company's products. Potentially increased performance provided
by the products of the Company and others is ultimately limited by and reliant
upon the speed and reliability of the Internet backbone itself. Consequently,
the emergence and growth of the market for the Company's products will be
dependent on improvements being made to the entire Internet infrastructure to
alleviate overloading and congestion. If the Internet as a commercial or
business medium fails to develop or develops more slowly than expected, the
Company's business, operating results and financial condition could be
materially adversely affected. See "Business--Industry Background."
Risks of Product Returns, Product Liability and Product Defects. Products as
complex as those offered by the Company frequently contain undetected errors or
failures, especially when first introduced or when new versions are released.
There can be no assurance that, despite testing by the Company, errors will not
occur. The occurrence of such errors could result in product returns and other
losses to the Company or its customers. Such occurrence could also result in
the loss of or delay in market acceptance of the Company's products, which
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's products generally carry a one-
year warranty that includes factory and on-site repair services as needed for
replacement of parts. Due to the recent introduction of the Company's products,
the Company has limited experience with the problems that could arise with this
generation of products. The Company's purchase agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims, however, it is possible that the limitation
of liability provision contained in the Company's purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries.
Although the Company has not experienced any product liability claims to date,
the sale and support of the Company's products entails the risk of such claims.
In addition, any failure by the Company's products to properly perform could
result in claims against the Company by its customers. The Company maintains
insurance to protect against certain claims associated with the use of its
products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company that is in excess of, or excluded from, its
insurance coverage, could have a material adverse effect on the Company's
business, operating results or financial condition. In addition, even claims
that ultimately are unsuccessful could result in the Company's expenditure of
funds in litigation and management time and resources. There can be no
assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of its
insurance coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the
future at commercially reasonable rates.
Dependence on Proprietary Technology; Protection of Intellectual Property
Rights. The Company relies on a combination of patent, trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. There can be no assurance that the
Company's patent applications will be granted or, if granted, that the claims
covered by the patents will not be reduced from those included in the Company's
applications. Any patent might be subject to challenge in court and, whether or
not challenged, might not be sufficiently broad to prevent third parties from
developing equivalent technologies or products. The Company has entered into
confidentiality and invention assignment agreements with its employees, and
enters into non-disclosure agreements with certain of its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will prove sufficient to prevent misappropriation
of the Company's technology or to deter independent third-party development of
similar technologies. In addition, the laws of certain foreign countries might
not protect the Company's products or intellectual property rights to the same
extent as do the laws of
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the United States, and protection of such intellectual property might not be
available in every country in which the Company's products might be
manufactured, marketed or sold.
The Company expects that developers of cable modems will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows. The Company has received a letter from
an individual claiming that the Company's technology infringes a patent held
by such individual. The Company has reviewed the allegations made by such
individual and, after consulting with its patent counsel, does not believe
that the Company's technology infringes any valid claim of such individual's
patent. There can be no assurance that, if the issue were to be submitted to a
court, such a court would not find that the Company's products infringe the
patent, nor that the individual will not continue to assert infringement. If
the Company is found to have infringed such individual's patent, the Company
could be subject to substantial damages and/or an injunction preventing it
from conducting its proposed business. In addition, there can be no assurance
that other third parties will not assert infringement claims against the
Company in the future. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition. Litigation may
also be necessary to enforce the Company's intellectual property rights. Any
infringement claim or other litigation against or by the Company could have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business--Technology" and "--Intellectual Property."
Risks of Doing Business in International Markets. Sales to customers outside
of the United States accounted for approximately 88% and 79% of revenues in
1997 and the first six months of 1998, respectively, and the Company expects
sales to customers outside of the United States to continue to represent a
significant percentage of the Company's revenues for the foreseeable future.
International sales are subject to a number of risks, including changes in
foreign government regulations and communications standards, export license
requirements, tariffs and taxes, other trade barriers, difficulty in
collecting accounts receivable, difficulty in managing foreign operations and
political and economic instability. To the extent the Company's customers may
be impacted by currency devaluations or general economic crises such as the
economic crisis currently affecting many Asian and Latin American economies,
the ability of such customers to purchase the Company's products could be
materially adversely affected. Payment cycles for international customers are
typically longer than those for customers in the United States. There also can
be no assurance that foreign markets for the Company's products will not
develop more slowly than currently anticipated. Foreign countries may decide
not to construct cable infrastructure, place moratoria on building cable
plants or terminate or delay construction of such facilities for a variety of
reasons, including environmental issues, economic downturns, the availability
of favorable pricing for other communications services or the availability and
cost of related equipment. Any such action by foreign countries would reduce
the market for the Company's products, which would materially adverse affect
the Company's business, operating results and financial condition.
The Company anticipates that its foreign sales generally will be invoiced in
U.S. dollars and, accordingly, the Company currently does not plan to engage
in foreign currency hedging transactions. However, as the Company commences
and expands its international operations, it may be paid in foreign currencies
and exposure to losses in foreign currency transactions may increase. The
Company may choose to limit such exposure by the purchase of forward foreign
exchange contracts or through similar hedging strategies. There can be no
assurance that any currency hedging strategy would be successful in avoiding
exchange-related losses. In addition, if the relative value of the U.S. dollar
in comparison to the currency of the Company's foreign customers should
increase, the resulting effective price increase of the Company's products to
such foreign customers could result in decreased sales, which could have a
material adverse impact on the Company's business, operating results or
financial condition. See "Business--Customers."
16
<PAGE>
Dependence on Key Personnel; Competitive Market for Personnel. Due to the
specialized nature of the Company's business, the Company is highly dependent
on the continued service of, and on the ability to attract and retain,
qualified engineering, sales, marketing and senior management personnel,
particularly the Company's Chairman, President and Chief Technical Officer,
Shlomo Rakib, and its Chief Executive Officer, Zaki Rakib. The competition for
such personnel is intense and the loss of any such persons would have a
material adverse effect on the Company's business and operating results. In
addition, an inability to hire additional qualified personnel as needed could
impair the Company's ability to adequately manage and complete its existing
sales commitments and to bid for and execute additional sales. Further, the
Company must train and manage its growing employee base, which is likely to
require increased levels of responsibility for both existing and new
management personnel. There can be no assurance that the management personnel
and systems currently in place will be adequate or that the Company will be
able to assimilate new employees successfully. Highly skilled employees with
the education and training required by the Company, especially employees with
significant experience and expertise in both data networking and radio
frequency design, are in high demand. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The Company does not have "key
person" insurance coverage for the loss of any of its employees. Any officer
or employee of the Company can terminate his or her relationship with the
Company at any time. See "Business--Employees" and "Management."
Significant Future Capital Requirements. The Company will require
substantial capital resources to continue to develop, manufacture and market
its products, to expand its product line and to fund its future operations.
The Company's future capital requirements will depend on many factors,
including, but not limited to, the evolution of the market for broadband
access systems, the market acceptance of the Company's products, competitive
pressure on the price of the Company's products, the levels at which the
Company maintains inventory, the levels of promotion and marketing required to
launch such products and attain a competitive position in the marketplace, the
extent to which the Company invests in new technology and improvements on its
existing technology, and the response of competitors to the Company's
products. The Company also may require additional capital resources to enter
into corporate partnerships, strategic alliances or joint ventures. There can
be no assurance that such financing will be available when needed, if at all,
or on terms favorable to the Company. Any additional equity financings will be
dilutive to stockholders, and debt financings, if available, will affect
operating results and may require the Company to agree to restrictive
covenants. Failure to generate or raise sufficient funds may require the
Company to delay or abandon some or all of its planned future expansion or
expenditure, which could have a material adverse effect on the Company's
business, operating results or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Regulation of the Communications Industry. The Company and its customers are
subject to varying degrees of federal, state and local regulation. The
jurisdiction of the Federal Communications Commission ("FCC") extends to the
communications industry, including broadband access products such as those of
the Company. The FCC has promulgated regulations that, among other things, set
installation and equipment standards for communications systems. Although FCC
regulations and other governmental regulations have not materially restricted
the Company's operations, there can be no assurance that future regulations
adopted by the FCC or other regulatory bodies will not have a material adverse
effect on the Company. Further, regulation of the Company's customers may
adversely impact the Company's business, operating results and financial
condition. For example, FCC regulatory policies affecting the availability of
cable services and other terms on which cable companies conduct their
business, may impede the Company's penetration of certain markets. In
addition, regulation of cable television rates may affect the speed at which
cable operators upgrade their cable infrastructures to two-way HFC. Changes
in, or the failure by the Company to comply with, applicable domestic and
international regulations could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
the increasing demand for communications systems has
17
<PAGE>
exerted pressure on regulatory bodies worldwide to adopt new standards for
such products and services, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in this
governmental approval process have in the past, and may in the future, cause
the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of products by the Company to such
customers.
If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which the Company's products do
not comply, the Company will be unable to offer products in those countries
until its products comply with such standards or specifications and the
Company may have to incur substantial costs in order to comply with such
standards or specifications. For instance, should the DAVIC standards for ATM-
based digital video be established internationally, the Company will be
required to conform its cable modems in order to compete. Further, many
countries do not have regulations for installation of cable modem systems or
for upgrading existing cable network systems to accommodate the Company's
products. Whether the Company currently operates in such a country or enters
into the market in a country where no such regulations exist, there can be no
assurance that such regulations will not be proposed at any time, and if
imposed, that they would not place limitations on the country's cable
operators' ability to upgrade to support the Company's products. There can be
no assurance that the cable operators in such countries would be able to
comply with such regulations or that compliance with such regulations would
not require a long, costly process.
For example, the Company experienced delays in product shipments to a
customer in Brazil due to delays in certain regulatory approvals in Brazil,
and there can be no assurance that similar delays will not occur in other
countries in which the Company markets or plans to market its products. In
addition, the Company's customers in certain parts of Asia, such as Japan, are
required to obtain licenses prior to selling the Company's products, and
delays in obtaining such licenses could have an adverse impact on the
Company's operating results. See "Business--Regulation."
Other Regulatory Approvals or Certifications. In the United States, in
addition to complying with FCC regulations, the Company's products will be
required to meet certain safety requirements. For example, the Company will be
required to have its products certified by Underwriters Laboratory ("UL") in
order to meet federal requirements relating to electrical appliances to be
used inside the home. Outside of the United States, the Company's products
will be subject to the regulatory requirements of each country in which the
products are manufactured or sold. These requirements are likely to vary
widely, and there can be no assurance that the Company will be able to obtain
on a timely basis or at all such regulatory approvals as may be required for
the manufacture, marketing and sale of its products. In addition to regulatory
compliance, some cable industry participants may require certification of
compatibility. Any delay in or failure to obtain such approvals or
certifications could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Regulation."
Year 2000 Compliance. Many existing computer systems and applications and
other control devices use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
As a result, in less than two years, computer systems and applications used by
many companies may need to be upgraded to comply with Year 2000 requirements.
Significant uncertainty exists in the computer industry concerning the
potential effects associated with such compliance. The Company relies on
computer systems in operating and monitoring many significant aspects of its
business, including financial systems (such as general ledger, accounts
payable, accounts receivable, inventory and order management), customer
services, infrastructure and network and telecommunications equipment. The
Company also relies directly and indirectly on the systems of external
business enterprises such as customers, suppliers, creditors, financial
organizations and domestic and international governments. The Company
currently estimates that its costs associated with Year 2000 compliance,
including any costs associated with the consequences of incomplete or untimely
resolution
18
<PAGE>
of Year 2000 compliance issues, will not have a material adverse effect on the
Company's business, financial condition or results of operations in any given
year. However, the Company has not extensively investigated and does not
believe that it has fully identified the impact of Year 2000 compliance and
has not concluded that it can resolve any issues that may arise in connection
with Year 2000 compliance without disruption of its business or without
incurring significant expense. In addition, even if the Company's internal
systems are not materially affected by Year 2000 compliance issues, the
Company could be affected through disruption in the operation of the
enterprises with which the Company interacts. There can be no assurance that
the Company's products will be Year 2000 compliant, that third-party products
with which the Company's products interface will be Year 2000 compliant or
that any changes to third-party products made in response to Year 2000
compliance issues will not render the Company's products incompatible with
such third-party products.
Control by Existing Stockholders and Management. Following the closing of
this offering, the Company's directors, officers and their respective
affiliates will beneficially own approximately 51.1% of the Company's
outstanding Common Stock (49.7% if the Underwriters' over-allotment option is
exercised in full). As a result, the Company's directors, officers and their
respective affiliates, if they voted together, would be able to exercise
significant influence over the election of members of the Company's Board of
Directors and other corporate actions requiring stockholder approval have a
significant impact on the management and direction of the Company. See
"Principal Stockholders."
Management's Broad Discretion Over Use Of Proceeds of the Offering. The
Company currently has no specific plans for a significant portion of the net
proceeds of this offering. Consequently, the Company's management will have
the discretion to allocate the net proceeds to uses that stockholders may not
deem desirable, and there can be no assurance that the net proceeds can or
will be invested to yield a significant return. Substantially all of the
proceeds of the offering will be invested in short-term, interest-bearing,
investment grade securities for an indefinite period of time. See "Use of
Proceeds."
Absence of Prior Trading Market; Potential Volatility of Stock Price. Prior
to this offering, there has been no public market for the Common Stock. There
can be no assurance that an active trading market will develop or, if one
develops, that it will be maintained. The initial public offering price of the
Common Stock will be established by negotiation among the Company and the
Underwriters. See "Underwriting" for factors to be considered in determining
the initial public offering price. The market price of the shares of Common
Stock could be subject to significant fluctuations in response to the
Company's operating results and other factors, including general economic and
market conditions. In addition, the stock market in recent years has
experienced and continues to experience extreme price and volume fluctuations,
which have affected the market price of the stock of many companies and which
have often been unrelated or disproportionate to the operating performance of
these companies. These fluctuations, as well as a shortfall in sales or
earnings compared to securities analysts' expectations, changes in analysts'
recommendations or projections or general economic and market conditions, may
adversely affect the market price of the Common Stock. In the past, securities
class action litigation has often been instituted following periods of
volatility in the market price for a company's securities. Such litigation
could result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Anti-Takeover Provisions. The Company's Certificate of Incorporation (the
"Certificate") authorizes the Board of Directors to issue up to five million
shares of Preferred Stock and to determine the powers, designations,
preferences, rights, qualifications, limitations and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The Certificate and Bylaws, among
other things, provide for a classified Board of Directors, require that
stockholder actions occur at duly called meetings of the stockholders, limit
who may call special meetings of stockholders and require advance notice of
19
<PAGE>
stockholder proposals and director nominations. These and other provisions
could have the effect of making it more difficult for a third party to acquire
a majority of the outstanding voting stock of the Company, discourage a
hostile bid or delay, prevent or deter a merger, acquisition or tender offer
in which the Company's stockholders could receive a premium for their shares,
or a proxy contest for control of the Company or other change in the Company's
management. See "Management" and "Description of Capital Stock."
Shares Eligible for Future Sale. The sale of a substantial number of shares
of Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. Upon the closing of this
offering, the Company will have outstanding an aggregate of 16,220,733 shares
of Common Stock, assuming no exercise of outstanding options and warrants. The
3,000,000 shares of Common Stock sold in this offering will be freely tradable
without restriction under the Securities Act of 1933, as amended (the
"Securities Act").
The remaining 13,220,733 shares of Common Stock are "Restricted Shares" and
are subject to restrictions under the Securities Act. All of these Restricted
Shares are subject to lock-up agreements pursuant to which the holders have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days after the date of this Prospectus without the prior written consent
of BT Alex. Brown Incorporated or, in certain instances, the Company. All or a
portion of such shares may be released at any time and without notice. The
Company has agreed with BT Alex. Brown Incorporated not to release any
stockholder from any lock-up agreement between the Company and the stockholder
without the prior written consent of BT Alex. Brown Incorporated.
Approximately 12,150,105 Restricted Shares subject to lock-up agreements will
become available for sale in the public market immediately following
expiration of the 180-day lock-up period, subject to the volume and other
limitations of Rule 144 and Rule 701 under the Securities Act, and the
remaining Restricted Shares subject to lock-up agreements and other
contractual restrictions will become eligible for sale at various times
thereafter following the expiration of their respective one-year holding
periods under Rule 144. In addition, certain stockholders of the Company have
the right to register shares of Common Stock for sale in the public market,
and the Company intends to register shares of Common Stock authorized for
issuance under the Company's equity incentive plans shortly following the
closing of this offering. See "Shares Eligible for Future Sale" and
"Description of Capital Stock--Registration Rights."
Dilution; Absence of Cash Dividends. Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
net tangible book value of their investment from the initial public offering
price. Additional dilution will occur upon exercise of outstanding options and
warrants. See "Dilution" and "Shares Eligible for Future Sale." The Company
has never paid any dividends and does not anticipate paying dividends in the
foreseeable future. See "Dividend Policy."
20
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include but are not limited to statements
under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus as to the timing of availability of products under
development; the Company's ability to commercialize new products; the
acceptance and performance of the Company's products; demand for broadband
access services; the ability of the Company to achieve cost reductions; the
compliance of future products with various industry standards; the Company's
ability to make sales to new customers; the Company's ability to develop,
introduce and market new products in a timely manner; the Company's ability to
provide sufficient customer support; the adequacy of capital resources; future
fluctuations in operating expenses; future capital expenditures; the
sufficiency of existing and potential cash resources and the use of the
proceeds of this offering are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company assumes no obligation to update such forward-looking statements or to
update the reasons actual results could differ materially from those
anticipated in such forward-looking statements.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company, at an assumed initial public offering
price of $14.00 per share, are estimated to be approximately $37,660,000
($43,519,000 if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company expects to use the net proceeds
for general corporate purposes, including working capital. The amounts and
timing of the Company's actual expenditures will depend upon numerous factors,
including the status of the Company's product development and commercialization
efforts, the amount of cash generated by the Company's operations, competition
and sales and marketing activities. Pending application of the net proceeds as
described above, the Company intends to invest the net proceeds of the offering
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. The
Company currently anticipates that it will retain earnings to support
operations and to finance the growth and development of the Company's business
and does not anticipate paying cash dividends for the foreseeable future. In
addition, the Company's credit agreement prohibits the payment of cash
dividends without the lender's written consent.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, (i) on an actual basis and (ii) as adjusted to reflect the
conversion of all outstanding shares of Preferred Stock into Common Stock and
the sale of 3,000,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $14.00 per share and the receipt
of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------
ACTUAL(1) AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................ $ 2,137 $ 2,137
======== =======
Long-term debt, less current portion..................... $ 24 24
Redeemable convertible preferred stock, $.001 par value;
authorized shares included in convertible preferred
stock authorized actual, no shares authorized as
adjusted; 576,924 shares issued and outstanding actual;
no shares issued and outstanding as adjusted............ 7,500 --
Stockholders' equity (net capital deficiency) (2):
Preferred Stock, $.001 par value; 4,600,903 shares
authorized actual and 5,000,000 shares authorized as
adjusted; no shares issued and outstanding actual and
as adjusted............................................ -- --
Convertible Preferred Stock, $.001 par value; 10,399,097
shares authorized actual; no shares authorized as
adjusted; 7,783,711 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted.. 8 --
Common Stock, $.001 par value; 30,000,000 shares
authorized actual; 35,000,000 shares authorized as
adjusted; 4,860,098 shares issued and outstanding
actual; 16,220,733 shares issued and outstanding as
adjusted............................................... 5 16
Additional paid in capital............................... 46,620 91,777
Accumulated deficit...................................... (48,510) (48,510)
Deferred compensation.................................... (1,959) (1,959)
Stockholders' notes receivable........................... (22) (22)
-------- -------
Total stockholders' equity (net capital deficiency).... (3,858) 41,302
-------- -------
Total capitalization................................... $ 3,666 $41,326
======== =======
</TABLE>
- --------
(1) Reflects the Company's reincorporation in Delaware in July 1998.
(2) Excludes (i) approximately 2,483,292 shares issuable upon exercise of
options outstanding at a weighted average exercise price of $2.50 per
share, (ii) 3,088,462 shares issuable upon exercise of outstanding
warrants with a weighted average exercise price of $6.64 per share, (iii)
approximately 2,453,937 shares reserved for future grants under the
Company's stock option plans and (iv) 700,000 shares reserved for issuance
pursuant to the Company's 1998 Employee Stock Purchase Plan. See
"Management--Employee Benefit Plans" and Note 8 of Notes to Consolidated
Financial Statements.
23
<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1998 was
approximately $3,642,000 or $0.28 per share. Pro forma net tangible book value
per share is determined by dividing the Company's tangible net worth (tangible
assets less liabilities) by the number of shares of Common Stock outstanding,
after giving effect to the conversion of Preferred Stock upon completion of
this offering. After giving effect to the sale by the Company of the 3,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $14.00 per share, after deducting estimated underwriting discounts
and commissions and offering expenses, the pro forma net tangible book value
of the Company as of June 30, 1998 would have been $41,302,000, or $2.55 per
share. This represents an immediate increase in net tangible book value of
$2.27 per share to existing stockholders and an immediate dilution in net
tangible book value of $11.45 per share to new investors purchasing shares at
the assumed initial public offering price. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $14.00
------
Pro forma net tangible book value per share as of June 30,
1998...................................................... $0.28
Increase per share attributable to this offering........... 2.27
-----
Pro forma net tangible book value per share after offering... 2.55
------
Dilution per share to new investors.......................... $11.45
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the new investors (at an assumed initial
public offering price of $14.00 per share for shares purchased in this
offering, before deducting estimated underwriting discounts and commissions
and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 13,220,733 81.5% $53,047,000 55.8% $ 4.01
New investors........... 3,000,000 18.5 42,000,000 44.2 14.00
------------ ------- ----------- -----
Total................. 16,220,733 100.0% $95,047,000 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) The foregoing computations assume no exercise of outstanding stock
options. As of June 30, 1998, options were outstanding to purchase
2,483,292 shares at a weighted average exercise price of $2.50 per share
and warrants were outstanding to purchase 3,088,462 shares at a weighted
average exercise price of $6.64 per share. To the extent that outstanding
options and warrants are exercised, there will be further dilution to new
investors. See "Management--Employee Benefit Plans" and Note 8 of Notes to
Financial Statements.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the years ended December
31, 1995, 1996 and 1997 and the consolidated balance sheet data as of December
31, 1996 and 1997, have been derived from the audited consolidated financial
statements of the Company included elsewhere in this Prospectus that have been
audited by Ernst & Young LLP, independent auditors. The consolidated statement
of operations data for the year ended December 31, 1994 and the consolidated
balance sheet data as of December 31, 1994 and 1995 have been derived from the
audited consolidated financial statements of the Company not included herein.
The consolidated statement of operations data for the period from January 20,
1993 (inception) to December 31, 1993 and the consolidated balance sheet data
at December 31, 1993 have been derived from unaudited financial statements of
the Company not included herein. The consolidated statement of operations data
for the six months ended June 30, 1997 and 1998 and the consolidated balance
sheet data at June 30, 1998 are derived from unaudited financial statements
included elsewhere in this Prospectus and contain all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the
financial position and results of operations for such periods. The results of
operations for the six months ended June 30, 1998 are not necessarily
indicative of results to be expected for the full fiscal year. The data set
forth below should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
JANUARY 20, ENDED
1993 (INCEPTION) YEARS ENDED DECEMBER 31, JUNE 30,
TO DECEMBER 31, -------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
---------------- -------- -------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $128 $ 140 $ -- $ -- $ 2,118 $ 93 $ 9,376
Cost of goods sold...... -- -- 676 -- 6,462 482 11,517
---- -------- -------- -------- -------- ------- --------
Gross profit (loss)..... 128 140 (676) -- (4,344) (389) (2,141)
---- -------- -------- -------- -------- ------- --------
Operating expenses:
Research and develop-
ment.................. 157 235 2,028 8,020 11,319 5,886 4,923
Sales and marketing.... -- 17 205 1,141 4,468 1,523 2,969
General and administra-
tive.................. 26 84 825 1,789 2,546 1,105 1,282
---- -------- -------- -------- -------- ------- --------
Total operating ex-
penses................ 183 336 3,058 10,950 18,333 8,514 9,174
---- -------- -------- -------- -------- ------- --------
Loss from operations.... (55) (196) (3,734) (10,950) (22,677) (8,903) (11,315)
Net interest income (ex-
pense)................. -- -- 68 253 128 123 (32)
---- -------- -------- -------- -------- ------- --------
Net loss................ $(55) $ (196) $ (3,666) $(10,697) $(22,549) $(8,780) $(11,347)
==== ======== ======== ======== ======== ======= ========
Pro forma basic and di-
luted net loss per
share(1)............... $ (2.07) $ (0.94)
======== ========
Shares used in pro forma
basic and diluted net
loss per share(1)...... 10,873 12,132
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ JUNE 30,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments.................. $ -- $ 27 $ 8,620 $ 12,864 $ 1,987 $ 6,030
Working capital (defi-
cit)................... 3 (492) 6,934 9,971 (4,847) 194
Total assets............ 3 435 10,202 15,978 8,778 16,634
Long-term debt (less
current portion)....... -- 98 439 1,255 44 24
Accumulated deficit..... (55) (251) (3,917) (14,614) (37,163) (48,510)
Total stockholders' eq-
uity (net capital defi-
ciency)................ $ (6) $ (201) $ 7,955 $ 11,405 $ (1,174) $ (3,858)
</TABLE>
- --------
(1)See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes included elsewhere in this Prospectus. The
discussion in this Prospectus contains forward-looking statements that involve
risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in
this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include those discussed in "Risk
Factors," as well as those discussed elsewhere herein. See "Risk Factors" and
"Information Regarding Forward-Looking Statements."
OVERVIEW
Terayon develops, markets and sells cable modem systems based upon its S-
CDMA technology. Since its inception in January 1993, the Company has focused
on the development of its S-CDMA technology, as well as certain other core
technologies, to enable broadband transmission of data over cable networks.
The Company commenced the specifications and design of its first ASIC in
October 1994 and produced the first version of this ASIC in June 1996. The
Company concurrently developed an end-to-end broadband access system, the
TeraComm system, around the ASIC. During late 1996 and through 1997, the
Company commenced limited field trials of the TeraComm system with several
cable operators. In the first quarter of 1998, the Company commenced volume
shipments to a small number of cable operators. The Company recognized
revenues of $2.1 million in the year ended December 31, 1997 and $9.4 million
for the six months ended June 30, 1998. The Company generally recognizes
product revenues upon shipment of products to customers. Future agreements
with certain distribution partners may contain price protection provisions and
certain return rights. The Company's existing agreements currently do not
contain such provisions.
The Company sells its products both in the United States and internationally
and markets its products primarily to cable operators and distributors. To
date, a small number of customers has accounted for all of the Company's
sales. In 1997, sales to Telegate, Sumitomo and NET Brasil represented
approximately 30%, 29% and 14%, respectively, of the Company's revenues. In
the first six months of 1998, sales to Shaw, Sumitomo and Cablevision
represented approximately 40%, 14% and 10%, respectively, of the Company's
revenues. The Company expects that sales to a limited number of customers will
continue to account for a substantial portion of the Company's sales for the
foreseeable future. If orders from significant customers are delayed,
cancelled or otherwise fail to occur in any particular period, or if any
significant customer delays payment or fails to pay, the Company could
experience significant operating losses in such period. As a result, the
Company expects to experience significant fluctuations in its operating
results on a quarterly and annual basis. See "Risk Factors--Dependence on
Small Number of Customers," "--Dependence on Cable Industry to Upgrade to Two-
Way Cable Infrastructure" and "--Ability to Market Effectively to Cable
Operators."
The market for broadband access products and services is intensely
competitive and is characterized by rapid technological change, new product
development and product obsolescence, evolving industry standards and
significant price erosion of products over time. The Company has experienced
and expects to continue to experience downward pressure on its unit ASPs. The
Company has had negative gross margins since inception. While the Company has
initiated cost reduction programs to offset pricing pressures on its products,
there can be no assurance that these cost reduction efforts will continue to
keep pace with competitive price pressures or lead to improved gross margin.
If the Company is unable to reduce costs efficiently, its gross margin and
profitability will continue to be adversely affected. The Company's gross
margin also is affected by the sales mix of TeraLink 1000 Master Controllers,
TeraLink
26
<PAGE>
Gateways and TeraPro cable modems, as the TeraPro modems have significantly
lower margins than the TeraLink 1000 Master Controllers and TeraLink Gateway
headend products. For the foreseeable future, the Company expects to achieve
negative or nominal margins on TeraPro cable modems and expects that sales of
TeraPro cable modems will continue to constitute a significant portion of its
revenues. As a result of these factors, the Company's gross margins and
operating results are likely to be adversely affected in the near term. See
"Risk Factors--Market Acceptance of Cable Modems; Competing Technologies," "--
Ability to Achieve Cost Reductions," "--Limited Manufacturing Experience and
Dependence on Contract Manufacturer," "--Erosion of Average Selling Prices"
and "--Highly Competitive Industry; Established Competitors."
The Company's ability to generate revenues also depends on guaranteeing the
availability of supplies from its sole sources, increasing the manufacturing
and testing capacity of its products by a contractor while ensuring product
quality, and continuing deployment of its products by existing and new
customers. In the first quarter of 1998, the Company transitioned its
manufacturing operations from CMC to Solectron. The Company recorded a charge
of $1.3 million in the first quarter of 1998 relating to the write-off of
obsolete inventory and the transition of manufacturing operations to
Solectron. The Company currently tests and assembles the TeraLink 1000 Master
Controller and the TeraLink Gateway headend equipment at its Santa Clara
facility. Finished TeraPro cable modems are drop shipped by Solectron to
Terayon customers. See "Risk Factors--Limited Manufacturing Experience and
Dependence on Contract Manufacturer."
The Company sustained net losses of $3.7 million, $10.7 million, $22.5
million and $11.3 million for the years ended December 31, 1995, 1996 and 1997
and for the six months ended June 30, 1998, respectively. As a result, the
Company had an accumulated deficit of $48.5 million as of June 30, 1998. The
Company's operating expenses are based in part on its expectations of future
sales, and the Company expects that a significant portion of its expenses will
be committed in advance of sales. As a result, net income may be adversely
affected by a reduction in sales if the Company is unable to adjust expenses
quickly in response to any decrease in sales. The Company expects to increase
significantly expenditures in technical development, sales and marketing and
manufacturing as it engages in activities related to product enhancement, cost
reduction and commercialization of new products. Additionally, the Company
expects to increase capital expenditures and other operating expenses in order
to support and expand the Company's operations. As a result, the Company
expects to continue to incur losses for the foreseeable future. There can be
no assurance that the Company will achieve or sustain profitability in the
future. See "Risk Factors--Early Stage of Development; History of Losses," "--
Fluctuations in Operating Results" and "--Lengthy Sales Cycle."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Revenues. The Company had revenues of $93,000 for the six months ended June
30, 1997, as the Company did not commence selling its products until June
1997. For the six months ended June 30, 1998, the Company had revenues of $9.4
million, primarily due to sales of headend controllers, cable modems and, to a
lesser extent, telephony modules.
Cost of Goods Sold. Cost of goods sold consists of direct product costs as
well as the cost of the Company's manufacturing operations group, which cost
consists of assembly, test and quality assurance for products, warranty costs
and associated costs of personnel and equipment. For the six months ended June
30, 1997, the Company incurred $482,000 in cost of goods sold primarily
related to the costs of the manufacturing operations group as it prepared for
commercialization of the Company's products. The Company incurred $11.5
million in cost of goods sold for the six months ended June 30, 1998, which
included a charge of $1.3 million relating to the write-off of obsolete
inventory and the transition of manufacturing operations to Solectron.
27
<PAGE>
Gross Profit (Loss). The Company incurred a gross loss of $389,000 for the
six months ended June 30, 1997 due to costs associated with the Company's
manufacturing operations group. The Company incurred a gross loss of $2.1
million for the six months ended June 30, 1998, primarily due to manufacturing
costs spread over low volumes of products sold, together with a charge of $1.3
million relating to the write-off of obsolete inventory and the transition of
manufacturing operations to Solectron.
Research and Development. Research and development expenses consist
primarily of personnel costs, as well as design expenditures, equipment and
supplies required to develop and enhance the Company's products. Research and
development expenses decreased from $5.9 million in the six months ended June
30, 1997 to $4.9 million in the six months ended June 30, 1998 as a result of
timing of the Company's development projects. The Company intends to continue
to increase investment in research and development programs in future periods
for the purpose of enhancing current products, reducing the cost of current
products and developing new products.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries for sales, marketing and support personnel, and costs related to
tradeshows, consulting and travel. Sales and marketing expenses increased from
$1.5 million in the six months ended June 30, 1997 to $3.0 million in the six
months ended June 30, 1998, primarily due to increased payroll costs related
to additional sales and support personnel for commercial trials and deployment
of the Company's products. The Company expects sales and marketing expenses to
increase in the future as the Company expands its customer base.
General and Administrative. General and administrative expenses primarily
consist of salary and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General and
administrative expenses increased from $1.1 million in the six months ended
June 30, 1997 to $1.3 million in the six months ended June 30, 1998. The
Company expects that general and administrative expenses will increase as a
result of the additional reporting requirements imposed on the Company as a
public company and increased infrastructure to support expanded activities of
the Company.
Net Interest Income (Expense). Net interest income was $123,000 in the six
months ended June 30, 1997 compared to net interest expense of $32,000 in the
six months ended June 30, 1998. The decrease primarily was a result of lower
interest income on lower average cash balances and higher interest expense on
term debt in the six months ended June 30, 1998.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenues. The Company did not recognize any revenues from product sales in
1995 or 1996, as the Company did not commence selling its products until June
1997. The Company recognized product revenues of $1.6 million in 1997,
primarily due to sales of headend controllers and cable modems. A majority of
the products shipped during 1997 were for customer trial purposes. During
1997, the Company also recognized $480,000 of technology development revenues
pursuant to a technology development agreement (the "Development Agreement")
to provide telephony modules to a telecommunications systems manufacturer. The
Company does not expect significant revenues to be recognized pursuant to the
Development Agreement in the future.
Cost of Goods Sold. In 1995, the Company incurred $676,000 in cost of goods
sold as a result of technology development costs incurred pursuant to the
Development Agreement. The Company did not incur any cost of goods sold in
1996. The Company incurred $6.5 million in cost of goods sold in 1997,
reflecting the costs of the Company's manufacturing operations group for the
full year and direct product costs related to sales that occurred primarily in
the last six months of 1997.
28
<PAGE>
Gross Profit (Loss). The Company incurred a gross loss of $676,000 in 1995
due to technology development costs incurred pursuant to the Development
Agreement. The Company did not realize any gross profit or loss in 1996. The
Company incurred a gross loss of $4.3 million in 1997, primarily due to
manufacturing costs for the full year spread against revenues recognized
primarily in the last six months of 1997. The manufacturing costs incurred in
the first six months of 1997 consisted of pre-production activities related to
preparation for commercialization of the Company's products.
Research and Development. Research and development expenses increased from
$2.0 million in 1995 to $8.0 million in 1996, primarily due to increased
number of personnel and related labor costs and approximately $1.5 million of
prototype and non-recurring engineering costs related to the development of
the Company's initial products. Research and development expenses increased
from $8.0 million in 1996 to $11.3 million in 1997 due to increased staffing
and associated engineering costs related to new and existing product
development.
Sales and Marketing. Sales and marketing expenses increased from $205,000 in
1995 to $1.1 million in 1996, primarily as a result of increased number of
personnel and related labor costs and costs related to promotional activities
and early trials of the Company's products. Sales and marketing expenses
increased from $1.1 million in 1996 to $4.5 million in 1997, primarily due to
increased payroll costs related to additional sales and support personnel for
commercial and market trials and the commercial launch of the Company's
products.
General and Administrative. General and administrative expenses increased
from $825,000 in 1995 to $1.8 million in 1996, primarily due to increased
hiring and higher legal and travel expenses related to preparations for the
commercial release of the Company's products. General and administrative
expenses increased from $1.8 million in 1996 to $2.5 million in 1997, due to
increased number of personnel and related payroll costs and higher legal and
executive travel expenses.
Net Interest Income (Expense). Net interest income increased from $68,000 in
1995 to $253,000 in 1996, as a result of increased cash balances during 1996
resulting from the Company's financing activities during those periods. Net
interest income decreased from $253,000 in 1996 to $128,000 in 1997, primarily
as a result of higher interest expense due to larger loan balances.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited consolidated statement of
operations data for each of the three-month periods in the six quarters ended
June 30, 1998. The data set forth below have been derived from unaudited
consolidated financial statements of the Company and have been prepared on the
same basis as the audited consolidated financial statements contained in this
Prospectus, and in the opinion of management, include all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of such information for the periods presented. Such consolidated statement of
operations data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Results of
operations in any period should not be considered indicative of the results to
be expected in any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 93 $ 662 $ 1,363 $ 2,444 $ 6,932
Cost of goods sold...... 178 304 1,761 4,219 4,134 7,383
------- ------- ------- ------- ------- -------
Gross profit (loss)... (178) (211) (1,099) (2,856) (1,690) (451)
------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 2,580 3,306 2,695 2,738 2,305 2,618
Sales and marketing... 529 994 1,192 1,753 1,140 1,829
General and
administrative....... 461 644 610 831 505 777
------- ------- ------- ------- ------- -------
Total operating
expenses........... 3,570 4,944 4,497 5,322 3,950 5,224
------- ------- ------- ------- ------- -------
Loss from operations.... (3,748) (5,155) (5,596) (8,178) (5,640) (5,675)
Net interest income (ex-
pense)................. 91 32 7 (2) (64) 32
------- ------- ------- ------- ------- -------
Net loss................ $(3,657) $(5,123) $(5,589) $(8,180) $(5,704) $(5,643)
======= ======= ======= ======= ======= =======
</TABLE>
Revenues increased in each of the consecutive three month periods due to
commencement of commercial shipment of the Company's products in June 1997. The
Company incurred increasing gross losses and declining gross margin in the
second half of 1997 as the Company commenced sales of cable modems which, due
to low volume production quantities and resulting high manufacturing costs and
per-unit overhead allocations, were sold at negative margins. Revenues for the
fourth quarter of 1997 include $480,000 of product development revenues related
to the Company's development of a telephony module for a telecommunications
system manufacturer. Gross margin improved in the first and second quarters of
1998 as unit volume sales increased and unit manufacturing costs declined.
Gross margin also improved in the period due to a change in product mix, with a
higher ratio of higher margin headend products sold relative to lower margin
cable modems. Operating expenses varied in the last four quarters ended June
30, 1998 due to the timing of research and development projects and due to
significant trade shows in the fourth quarter of 1997 and the second quarter of
1998.
The Company has experienced, and expects to continue to experience,
fluctuations in its operating results on a quarterly and an annual basis.
Historically, the Company's quarterly revenues have been unpredictable due to a
number of factors. Factors that have influenced and will continue to influence
the Company's operating results include: a long sales cycle for the Company's
products; competitive pricing pressures; the effects of extended payment terms,
promotional pricing, service, marketing or other terms offered to customers;
accuracy of customer forecasts of end user demand; personnel changes; quality
control of products sold; and regulatory changes or delays in obtaining
required regulatory approvals. For example, the Company's product shipments to
date to a customer in Brazil have been significantly lower than anticipated,
due to delays in certain regulatory approvals in Brazil. There can be no
assurance that similar delays will not occur in other countries in which the
Company
30
<PAGE>
is marketing or plans to market its products. Any such delays would have an
adverse effect on the Company's operating results for a particular period.
Factors that may influence the Company's operating results in the future
include: the size and timing of customer orders and subsequent shipments;
customer order deferrals in anticipation of new products or technologies;
timing of product introductions or enhancements by the Company or its
competitors; market acceptance of new products; technological changes in the
cable, wireless and telecommunications industries; changes in the Company's
operating expenses; customers' capital spending; delays of orders by customers;
customers' delay in or failure to pay accounts receivable; and general economic
conditions. See "Risk Factors--Fluctuations in Operating Results."
INCOME TAXES
The Company has not generated any net income to date and therefore has not
accrued any income taxes since its inception. The Company accounts for income
taxes under Statement of Financial Accounting Standards No. 109. Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances in amounts
equal to the net deferred tax assets as of December 31, 1997 and 1996 have been
established to reflect these uncertainties.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of $31.0 million and $15.0 million, respectively, and federal and
state tax credit carryforwards of $1.7 million and $1.2 million, respectively,
that will expire at various dates beginning in 1999 through 2012, if not
utilized. Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating loss and tax credit carryforwards before full utilization.
STOCK-BASED COMPENSATION
With respect to certain stock option grants in 1997 and the first six months
of 1998, the Company had recorded deferred compensation of $2.1 million as of
June 30, 1998. The Company amortized approximately $12,000 of the deferred
compensation in 1997 and $106,000 in the first six months of 1998, and will
amortize the remainder over the related vesting period of the stock options.
The future compensation charges are subject to reduction for any employee who
terminates employment prior to the expiration of such employee's vesting
period. See Note 8 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through June 30, 1998 the Company met its liquidity needs
primarily through private sales of preferred stock for aggregate proceeds of
$52.7 million, before deduction of issuance costs.
Since its inception, the Company has used cash in operating activities of
$41.0 million through June 30, 1998. Cash used in operating activities in 1995,
1996, 1997 and the first six months of 1998 was $2.3 million, $9.4 million,
$20.8 million and $8.5 million, respectively. In 1995, 1996 and the first six
months of 1998, cash used in investing activities was $1.3 million, $6.5
million and $309,000, respectively. Investment activities in 1995 and the first
six months of 1998 consisted primarily of the purchase of hardware, software
and test equipment and in 1996 consisted primarily of the purchase of short-
term investments. Cash provided by investing activities, primarily from the
sales of short-term investments, was $1.5 million in 1997.
At June 30, 1998 the Company had approximately $6.0 million in cash and cash
equivalents and a $10.0 million revolving line of credit. At June 30, 1998, the
Company was in violation of certain covenants under its line of credit.
31
<PAGE>
The Company believes that its cash balances and funds available under the
bank line of credit, together with the proceeds of this offering, will be
sufficient to satisfy its cash requirements for at least the next 12 months.
There can be no assurance, however, that the Company will not require
additional financing prior to such time to fund its operations and it may seek
to raise such additional funds through the sale of public or private equity or
debt financing or from other sources. The sale of additional equity or debt
securities may result in additional dilution to the Company's stockholders.
There can be no assurance that any additional financing will be available to
the Company on acceptable terms, or at all, when required by the Company. See
"Risk Factors--Significant Future Capital Requirements."
YEAR 2000
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, in less than
two years, computer systems and applications used by many companies may need
to be upgraded to comply with Year 2000 requirements. Significant uncertainty
exists in the computer industry concerning the potential effects associated
with such compliance. The Company relies on computer systems in operating and
monitoring many significant aspects of its business, including financial
systems (such as general ledger, accounts payable, accounts receivable,
inventory and order management), customer services, infrastructure and network
and telecommunications equipment. The Company also relies directly and
indirectly on the systems of external enterprises such as customers,
suppliers, creditors, financial organizations and domestic and international
governments. The Company currently estimates that its costs associated with
Year 2000 compliance, including any costs associated with the consequences of
incomplete or untimely resolution of Year 2000 compliance issues, will not
have a material adverse effect on the Company's business, financial condition
or results of operations in any given year. However, the Company has not
extensively investigated and does not believe that it has fully identified the
impact of Year 2000 compliance and has not concluded that it can resolve any
issues that may arise in connection with Year 2000 compliance without
disruption of its business or without incurring significant expense. In
addition, even if the Company's internal systems are not materially affected
by Year 2000 compliance issues, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts. There can be no assurance that the Company's products will be Year
2000 compliant, that third-party products with which the Company's products
interface will be Year 2000 compliant or that any changes to third-party
products made in response to Year 2000 compliance issues will not render the
Company's products incompatible with such third-party products.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income. This statement requires
that all items that are to be required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997, and will be adopted by the Company for the year ended
December 31, 1998.
In June 1997, FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement replaces Statement No.
14, Financial Reporting for Segments of a Business Enterprise, and changes the
way public companies report segment information. This statement is effective
for fiscal years beginning after December 15, 1997 and will be adopted by the
Company for the year ended December 31, 1998.
32
<PAGE>
BUSINESS
OVERVIEW
Terayon develops, markets and sells cable modem systems that enable cable
operators to cost-effectively deploy reliable two-way broadband access
services. The Company's TeraComm system is designed to allow cable operators to
minimize time-consuming and costly network infrastructure upgrades, achieve
reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm system
are able to provide additional revenue-generating services to end users,
enabling cable operators to compete effectively in the emerging market for
broadband access services.
The Company's TeraComm system, comprised of the TeraPro cable modem, the
TeraLink 1000 Master Controller, the TeraLink Gateway and the TeraView Element
Management and Provisioning Software, is based on Terayon's S-CDMA technology.
S-CDMA enables reliable two-way broadband communications over both pure coaxial
and HFC cable infrastructure by maximizing resistance to noise that interferes
with data transmissions over previously unusable frequency spectrum.
INDUSTRY BACKGROUND
DEMAND FOR BROADBAND ACCESS
In recent years, the volume of bandwidth intensive data, voice and video
traffic across the Internet, corporate intranets and other public networks has
increased dramatically. This demand has been driven by the proliferation of
residential and commercial computer users that are accessing networks in a
variety of applications, including communications via the Internet, electronic
commerce and telecommuting. These applications often require the transmission
of large, multimedia-intensive files. IDC estimates that the number of Internet
users will increase from approximately 69 million at the end of 1997 to
approximately 320 million by the end of 2002. IDC also estimates that the
number of home office households will increase from approximately 35 million at
the end of 1997 to approximately 50 million by the end of 2002.
Despite significant advances in the performance of computer processors and
data backbone networks, high speed data transmission has been limited by the
existing local access network infrastructure (the local loop), which is not
optimized for distribution of data-intensive multimedia content. Users of dial-
up analog modems with maximum data rates of only 28.8 Kbps to 56 Kbps often
experience frustration, as they encounter frequent and lengthy delays or
complete failures in transmission. In response to the growing demand for
increased bandwidth, the communications industry has begun to deploy new
broadband access technologies that can deliver megabit per second ("Mbps") or
better performance to end users.
ADVANTAGES OF CABLE MODEMS OVER ALTERNATIVE BROADBAND ACCESS TECHNOLOGIES
As residential and commercial demand for faster Internet access continues to
grow, particularly for applications such as streaming audio and video, IP
telephony and interactive two-way video, service providers are investing in
enabling infrastructure and technologies. Various technologies have emerged to
address the need for broadband access. The leading technologies include ISDN,
ADSL and xDSL technologies being marketed by telecommunications companies, and
cable infrastructure technologies such as cable modems being marketed by cable
operators. These digital technologies offer substantial performance increases
over traditional analog 56 Kbps dial-up modem technologies.
33
<PAGE>
The following chart depicts the maximum available throughput of various
broadband access technologies:
COMPARISON OF ALTERNATIVE BROADBAND TECHNOLOGIES
<TABLE>
<CAPTION>
MAXIMUM
AVAILABLE THROUGHPUT
------------------------
TECHNOLOGY DESCRIPTION DOWNSTREAM UPSTREAM
- ----------------------------------------------------------------------------
<C> <S> <C> <C>
Cable Modems High speed digital technology over 27.0 to 36.0 2.0 to 14.0
HFC and pure coaxial systems Mbps Mbps
- ----------------------------------------------------------------------------
ADSL High speed digital technology over 1.5 to 6.1 640 Kbps
existing copper wire Mbps
- ----------------------------------------------------------------------------
ISDN High speed digital technology over 128 Kbps 128 Kbps
existing copper wire
- ----------------------------------------------------------------------------
Dial-up Digital-to-analog conversion 56 Kbps 33 Kbps
Analog Access utilizing existing copper wire
- ----------------------------------------------------------------------------
</TABLE>
Of the digital technologies, cable modems currently provide the highest
available two-way transmission speeds and their "always on" availability
eliminates the tedious and unreliable dial-up process of other technologies.
The existing cable infrastructure offers other important advantages over
alternative broadband architectures. Currently, the cable infrastructure passes
over 95% of homes in the United States and a large number of small businesses.
In addition, the cable infrastructure has the capacity to offer a wide range of
broadband services, such as digital TV, Internet access and IP telephony. Many
cable operators have recognized the need to expand beyond broadcast and video
TV services to diversify their business and remain competitive. A growing
number of cable operators have already expanded their business to include data-
over-cable services through affiliations with service providers such as @Home
and Road Runner, and several cable operators are exploring voice-over-cable
services as well. Kinetic Strategies Inc. estimates that over 200,000 North
American homes currently have data-over-cable services.
LIMITATIONS OF EXISTING CABLE INFRASTRUCTURE
Most cable networks were designed to provide one-way video broadcast from the
cable headend to subscribers. Data-over-cable and other two-way services
require cable operators to provide an upstream return path from subscribers to
the headend. Noise interferes with upstream signal transmissions, potentially
resulting in corrupted information or service outages. Common noise problems
are (i) "ingress noise," a relatively constant level of interference resulting
from home appliances and consumer electronics leaking noise into the cable
system through imperfections in the cable plant, such as faulty connections or
cracked cable shielding and (ii) "impulse noise," which is transient,
unpredictable interference that results from home appliances switching on and
off. Noise is a particular problem in the upstream return path because each
home's noise is aggregated into the headend. In addition, the 5 to 42 MHz
frequency spectrum reserved for subscriber-to-headend transmissions is highly
susceptible to ingress and impulse noise.
CABLE OPERATOR OBJECTIVES IN DEPLOYING BROADBAND ACCESS SERVICES
In order to successfully exploit the opportunities offered by the increasing
demand for broadband access, cable operators face a number of challenges.
Cost-effectively manage system noise. Cable modems based on current-
generation TDMA technologies typically require a Signal-to-Noise Ratio ("SNR")
of 20dB or better for reliable operation. To respond to ingress noise, cable
operators using cable modems based on TDMA often must upgrade their networks to
an HFC architecture. An upgrade to an HFC system includes replacing a
substantial portion
34
<PAGE>
of the existing coaxial network with optical fiber, replacing the headend
transmission equipment with optical transmission systems and providing
additional interface layers between the optical fiber and the coaxial
connection into the home.
To further address ingress noise and attempt to prevent impulse noise
interference, cable operators must often completely rebuild their HFC network.
This entails dividing the network into smaller segments, to isolate noise and
therefore limit the aggregate noise arriving at the headend, as well as
replacing coaxial drops in the homes of subscribers for data services and
placing filters on non-subscriber homes. In addition, many TDMA-based systems
employ a frequency-agile scheme where the transmission system will shift
transmission to a pre-reserved backup channel if the primary channel is
affected by a noise event. Despite these expenditures, cable operators using
TDMA may still be required to increase routine maintenance procedures in order
to provide reliable service and to restrict two-way services to a limited
portion of the 5 to 42 MHz frequency spectrum where noise events are less
likely to occur. To reduce these costs and improve the quality of their
service, cable operators require new upstream transmission technologies that
address both ingress and impulse noise.
Minimize network capital equipment costs. Noise levels are directly related
to the number of homes passed by a network, regardless of the number of
subscribers on such network. As a result, the number of homes that can be
supported by a single TDMA-based cable modem headend is limited, even in the
early phase of deployment, when the number of subscribers may be very small.
Cable operators using TDMA technology are often required to deploy a large
number of headends to create a large service area "footprint." Minimizing
initial investments and attaining "pay-as-you-go" capability that allows
revenues to support incremental investment are vital to the ability of cable
operators to enter the broadband access market.
Time to market. As telecommunications operators move quickly to offer
broadband services, the Company believes that a cable operator's success in a
particular geographic market will be determined by being first to market with
broadband access services. Therefore, the Company believes that cable
operators will need the ability to accelerate cable modem deployments in order
to enhance their competitive position.
Ability to offer tiered services. The Company believes that cable operators
can benefit from having a network capable of offering tiered services that
allow them to maximize revenue from bandwidth allocated to those services. For
example, a residential end user who only utilizes e-mail or Internet access
may only be willing to pay a small premium over the cost of a dial-up
connection, while commercial end users may be willing to pay a substantial
premium for guaranteed bandwidth. In order to offer multiple tiers of service
with varied access speeds and priority connections, cable operators need the
ability to assign a portion of shared bandwidth to individual end users.
To meet these challenges, cable operators require a highly reliable
broadband access solution that can be deployed rapidly at low initial costs,
that enables cable operators to maximize revenues from available bandwidth
capacity, and that scales as the number of broadband access subscribers
increases.
THE TERAYON SOLUTION
The Company's TeraComm system is designed to enable cable operators to
minimize time-consuming and costly network infrastructure upgrades, achieve
reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm
system are able to provide additional revenue-generating services to end
users, enabling cable operators to compete effectively in the emerging market
for broadband access services. The Company's system is based on its spread-
spectrum technology, S-CDMA, which offers cable operators the following
advantages:
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Minimize cable infrastructure upgrades. Terayon's S-CDMA technology operates
at extremely low SNRs, which enables Terayon's cable modems to be deployed on
pure coaxial or HFC-upgraded systems, with minimal system upgrades. TDMA-based
systems, which demand higher SNRs for operation, often require costly system
upgrades or complete rebuilds to high quality HFC in order to support
comparable broadband access services.
Reduce time to market. Activating two-way transmission by installing the
TeraComm system does not require the time-consuming network upgrades or
rebuilds usually required to support TDMA-based transmission equipment. As a
result, cable operators can accelerate cable modem deployment and reduce their
time to market with broadband access services, thereby enhancing their
competitive position.
Minimize initial headend capital equipment costs. By deploying the TeraComm
system, cable operators can minimize the initial capital expense for headend
equipment. The noise-resistant properties of S-CDMA allow more cable segments
to be aggregated to form a single shared upstream channel. These properties
provide cable operators with a cost-effective solution during initial stages
of deployment even with a limited number of users. As the number of users
increases, additional Terayon equipment can be installed for a smooth
transition to a larger-scale network. For large deployments, the routed
architecture of Terayon's system will support a large number of headends,
enabling cable operators to effectively manage thousands of subscribers as a
single IP network with multiple logical sub-networks. In contrast, TDMA-based
systems only support a smaller number of homes passed per headend due to
susceptibility to noise-related service problems.
Increase signal transmission reliability. Cable operators who plan to offer
broadband access services must demonstrate the ability to provide reliable and
continuous service. S-CDMA enables cable operators to maintain signal
transmission even in high noise environments. Further, S-CDMA's rate-adaptive
response to sudden changes in plant conditions prevents even short service
outages, unlike alternative systems that utilize a frequency-agile scheme,
which can result in a loss of service.
Maximize spectrum usage. The TeraComm system is designed to operate
effectively in the lowest frequency ranges of the upstream spectrum, where
noise is too severe to allow the operation of TDMA-based systems. As a result,
cable operators who employ the TeraComm system can utilize more of the
existing upstream bandwidth than alternative broadband access technologies.
Generate additional revenue through tiered services. The high capacity and
dynamic bandwidth management capabilities of the TeraComm system are designed
to enable cable operators to offer a wide range of services at tiered prices.
Cable operators can emulate high margin commercial-service offerings such as
T-1, frame-relay and leased lines in the same network as lower margin,
residential, Internet access.
Reduce ongoing cable infrastructure maintenance costs. Cable operators
utilizing the TeraComm system can capitalize on S-CDMA's noise-resistant
properties, which enable cable operators to operate plants in a wide range of
conditions, thus reducing on-going maintenance costs and minimizing service
problems. For example, while all cable operators monitor their networks on a
regular basis, cable operators using TDMA-based systems are generally required
to take more frequent corrective action than cable operators using S-CDMA-
based systems to prevent normal "wear and tear" on the cable system from
impacting service.
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STRATEGY
The Company's objective is to be the leading provider of cable modem systems
to cable operators seeking to provide broadband access services to residential
and commercial end users. Key elements of the Company's strategy are as
follows:
Supply leading cable operators worldwide. The Company's initial target
market is the ten largest cable companies in each major geographic area. In
most markets, a small number of large cable operators often provide services
to a majority of subscribers in a specific region and thus influence the
purchase decisions of smaller cable operators. In the United States, ten cable
operators together own and operate facilities passing approximately 74% of
total homes passed. To date, three of the largest North American cable
operators are deploying the TeraComm system commercially.
Establish relationships with industry leaders. The Company seeks to provide
cable operators with a complete broadband access solution by establishing
relationships with networking companies, systems integrators and other
industry leaders. For example, the Company has a co-development agreement with
Cisco to create an integrated headend solution. Additionally, the Company and
@Home have integrated the Company's products with @Home's service. The Company
will continue to pursue strategic relationships to expand the capabilities of
its system.
Expand worldwide distribution channels. The Company intends to continue to
increase its direct sales efforts and to establish strategic relationships
with leading distributors worldwide. The Company's distribution strategy is to
customize its sales and distribution efforts to address the specific needs of
each market. For example, the Company has an agreement with Sumitomo, through
its subsidiary Crossbeam Networks Corporation ("Crossbeam"), to distribute the
Company's products in Japan. In Latin America, Europe and other parts of Asia
the Company has appointed local distributors with expertise in their specific
geographic regions. In the United States, the Company has begun to establish
distribution relationships to provide broadband access solutions to smaller
cable operators.
Provide superior customer service and support. The Company believes that its
ability to provide consistent high quality service and support will be a key
factor in attracting and retaining customers. In addition to assigning a field
applications engineer to each customer account, the Company provides its
customers with technical support and training through customer support
representatives and representatives of distributors. The Company provides
service and support to its customers 24 hours a day, 7 days a week.
Adopt and advocate industry standards. The rapidly evolving market in which
the Company participates has recently adopted DOCSIS for cable modem
standards, and the industry has commenced discussion of a next-generation
cable modem standard, DOCSIS 2.0. The Company is developing a next-generation
product, known as the UCM, which is intended to offer a mode of operation
compliant with DOCSIS. The Company is actively participating in industry
standard-setting efforts and intends to work with the MCNS consortium to
incorporate S-CDMA into the DOCSIS 2.0 standard.
Leverage S-CDMA technology. The Company believes that its S-CDMA technology
provides significant advantages over alternative broadband access
technologies. The Company's team of engineers has extensive experience in many
areas of broadband access system design, including communication systems,
ASICs, data networking, RF, software and hardware. The Company intends to
leverage these engineering capabilities to expand the features and
functionality of its S-CDMA technology, and to apply S-CDMA to additional
applications such as IP telephony, wireless communications and LMDS.
TECHNOLOGY
Terayon's products are based on the Company's S-CDMA technology. S-CDMA is
integrated into a single ASIC chip, which implements the physical ("PHY")
layer and media access control ("MAC") layer
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communication protocols in the TeraComm system. S-CDMA is the primary
differentiator between Terayon's cable modems and those of competitors who use
TDMA-based technology for the PHY and MAC layer protocols. S-CDMA is designed
to maximize resistance to noise, optimize use of network capacity and provide
cable operators with multiple revenue streams through the ability to offer
multiple Quality of Service levels.
Maximum noise resistance through spread spectrum and rate adaptive
technologies. S-CDMA, like asynchronous Code Division Multiple Access ("CDMA")
commonly used in mobile communications, is a form of spread spectrum
technology. Spread spectrum technology was originally designed for use by the
military to provide reliable and secure communications in harsh RF
environments. The RF environment is subject to a variety of noise sources that
can interfere with the transmission of data. In spread spectrum systems, data
is transmitted by spreading the information across a range of frequencies and
across a period of time, allowing sufficient information reception for the
data to be reconstructed by the receiver. Data is encoded by transmitters in
unique spreading codes that allow multiple data streams to be received and
decoded by the receiver simultaneously. Therefore, noise events that are
typically specific to a particular frequency or a period of time do not
significantly interfere with transmission
In addition to spread spectrum, S-CDMA incorporates other techniques,
including forward error correction and interleaving, that further enhance the
ability of S-CDMA to resist impulse and ingress noise. In extremely harsh
noise environments, S-CDMA incorporates a rate adaptive mode of operation that
changes modulation schemes, reducing capacity, but allowing continued reliable
transmission. This combination of techniques enables S-CDMA-based systems to
operate in SNR environments as low as 13dB at full capacity, and as low as -
13dB in rate adaptive mode.
Optimal capacity utilization through synchronization. In asynchronous CDMA
systems, codes arriving at the receiver are unaligned. This causes mutual
interference between the codes, which forces the use of lower order modulation
schemes resulting in significantly reduced data capacity. S-CDMA minimizes
mutual interference by ensuring that codes are synchronized with each other
through ranging, power management and adaptive equalization. The process of
ranging guarantees time alignment by ensuring all codes arrive at the receiver
at the same time. Power management and adaptive equalization compensate for
variables such as temperature and changes in network topology. These
techniques allow S-CDMA to utilize higher order modulation schemes providing a
capacity of 14 Mbps in a 5 MHz channel in both the upstream and downstream
paths. This 14 Mbps capacity is divided into 144 data streams, each of which
is represented by a unique S-CDMA spreading code.
Efficient bandwidth management for multiple levels of Quality of
Service. The TeraComm system segments each 14 Mbps upstream and downstream
channel into 128 user data streams and 16 management and control data streams.
Separating user data from management and control ensures high channel
efficiency under heavy channel loading. Each of the 128 user data streams has
a continuous data payload capacity of 64 Kbps. The bandwidth manager software
residing in the system headend allocates data streams to cable modems
individually or in groups. Data streams can also be assigned on a permanent
basis, or can be multiplexed among multiple modems based on a fairness
algorithm in the bandwidth manager. This capability allows the TeraComm system
to provide a variety of Quality of Service levels. Constant Bit Rate ("CBR")
services can be provisioned in increments of 64 Kbps by continuous assignment
of data streams to a TeraPro cable modem. As a result, services such as leased
lines and T-1 circuits can be emulated. Unspecified Bit Rate ("UBR") services
can be supported by allowing modems to contend for data streams on an "as
requested" basis. Because all access requests and grants are communicated
through management streams, the impact on channel efficiency is minimized as
more modems contend for bandwidth. Both CBR and UBR services can co-exist on a
single channel enabling a cable operator to create multiple service levels and
maximize revenue from the available bandwidth capacity.
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PRODUCTS
CURRENT PRODUCTS
The Company's TeraComm system enables cable operators to cost-effectively
deploy reliable two-way broadband access services. The TeraComm system is
comprised of the TeraPro cable modem, the TeraLink 1000 Master Controller, the
TeraLink Gateway and the TeraView Element Management and Provisioning
Software.
The following diagram illustrates the TeraComm system:
[Diagram of the components of the TeraComm system]
THE TERACOMM SYSTEM
TeraPro Cable Modem. The TeraPro cable modem is a data communications device
installed in a subscriber's home or business. The TeraPro cable modem connects
to the subscriber's PC via a standard 10BaseT Ethernet connector and to the
cable network via a standard coaxial cable connector. The TeraPro cable modem
automatically configures itself without user intervention, thus minimizing
modem installation time. In addition, the configuration software for the
TeraPro cable modem is downloaded remotely, allowing centralized software
upgrades directly from the headend management system.
The TeraPro cable modem delivers full two-way communication over the cable
network, with data rates of up to 14 Mbps per 5 MHz channel in both the
upstream and the downstream direction. The TeraPro cable modem operates at
full capacity at an SNR as low as 13 dB, and gradually adjusts throughput to
provide transmission at an SNR as low as -13 dB. This feature will permit the
TeraPro cable modem to operate across any portion of the 5 to 42 MHz upstream
RF spectrum.
TeraLink 1000 Master Controller. The TeraLink 1000 Master Controller is a
data channel controller and multiplexer located at the cable headend system or
distribution hub. The TeraLink 1000 Master Controller provides control,
management and data transport functions for TeraPro cable modems connected to
the cable network. It offers dynamic bandwidth management, high-speed traffic
concentration, access control to data networking resources, and data service
quality and integrity.
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The TeraLink 1000 Master Controller is a single channel, rack-mountable
controller that supports up to 2,000 cable modems per channel. Additional
TeraLink 1000 Master Controllers can be added to scale service as performance
and subscriber needs grow. The TeraLink 1000 Master Controller, with the
TeraLink Gateway, provides a 100 BaseT interface for direct connectivity to a
private backbone or any vendor's router or switch. Alternatively, the TeraLink
1000 Master Controller, with its built-in ATM OC-3 interface, can be connected
via an ATM switch, or directly to Cisco's 7500 series routers.
TeraLink Gateway. The TeraLink Gateway is a rack-mountable edge concentrator
providing end-user clients with broadband access to a remote IP backbone
(e.g., Internet) as well as efficient communication between modems. The
TeraLink Gateway includes an ATM OC-3 interface for connectivity to up to two
TeraLink 1000 Master Controllers or an ATM switch. It also provides a 10/100
BaseT Ethernet/Fast Ethernet auto-sense interface to a headend backbone or any
IP router including the Cisco Universal Broadband Router. The TeraLink Gateway
also includes a separate 10 BaseT interface, which may be connected to a
separate management network or the headend network. The TeraLink Gateway
supports up to 2,000 cable modems per RF channel when connected to a TeraLink
1000 Master Controller. When used with the TeraLink Gateway, the TeraPro cable
modems behave as an extension of the TeraLink Gateway, providing maximum
bandwidth and privacy.
TeraView Element Management and Provisioning Software. The TeraView Element
Management and Provisioning Software is a Windows 95 and Windows NT standards-
based software application installed at the headend system or the network
operations center. The TeraView software allows cable operators to configure,
control, monitor and maintain multiple channels of the TeraComm system.
PRODUCTS UNDER DEVELOPMENT
Universal Cable Modem and TeraLink 2000 Master Controller. The Company
currently is designing and developing a next-generation system, which includes
the UCM and an accompanying headend controller, the TeraLink 2000 Master
Controller. The UCM and the TeraLink 2000 Master Controller will be designed
to be fully compliant with DOCSIS standards, while also offering additional
features and performance enabled by the use of the S-CDMA technology. The UCM
and the TeraLink 2000 Master Controller are in the early stages of development
and the Company does not anticipate commercial deployment of these products
until 1999.
The UCM will be designed to operate in any of three modes: (i) as an
existing TeraPro cable modem to ensure backward compatibility for existing
TeraComm system users; (ii) as a DOCSIS-compliant modem that will be
compatible with multiple vendors' DOCSIS-compliant systems; and (iii) as an
advanced system. In the advanced mode the UCM will be designed to offer
DOCSIS-compliant 64/256 QAM modulation downstream channels, coupled with an
advanced S-CDMA upstream channel, offering up to 40 Mbps downstream channel
capacity and 30 Mbps upstream channel capacity.
CUSTOMERS
The Company markets its products to cable operators that seek to provide
broadband access services to both residential and commercial end users. The
Company's initial target market consists of the ten largest cable companies in
each major geographic area. In most markets, a small number of large cable
operators often provide services to a majority of subscribers in a specific
region and thus influence the purchasing decisions of smaller cable operators.
In the United States, ten cable operators together own and operate facilities
passing approximately 74% of total homes passed. The Company commenced volume
shipments of its products in the first quarter of 1998. To date, three of the
largest North American cable operators are deploying the TeraComm system
commercially.
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Selected examples of the range of customers and applications for which the
TeraComm system is being commercially deployed are as follows:
Cablevision. Cablevision is the fifth largest cable operator in the United
States, with cable infrastructure passing approximately 5.1 million homes,
primarily located in New York, New Jersey, Connecticut, Ohio and
Massachusetts. Cablevision is currently deploying Terayon's products in
systems located in Long Island, New York and areas of Connecticut for its
optimum high speed data service.
Shaw Cable. Shaw is the third largest cable operator in Canada, with cable
infrastructure passing approximately 2.0 million homes. Shaw currently has the
largest cable modem deployment in Canada, with over 35,000 cable modem users.
Shaw has selected Terayon to supply cable modem systems for Shaw's @Home
service deployments in Victoria, British Columbia, Edmonton, Alberta and parts
of metropolitan Toronto, Ontario.
Sumitomo. The Company has a distribution agreement with Sumitomo under which
Crossbeam is distributing the TeraComm system to three of Japan's leading
cable operators. The TeraComm system's noise resistant properties are designed
to enable two-way broadband access over pure coaxial networks, which comprise
the majority of Japan's cable infrastructure.
TCA Cable TV, Inc. TCA is the 16th largest cable operator in the United
States, with cable infrastructure passing approximately 1.2 million homes,
primarily in Texas, Arkansas and Louisiana. TCA has deployed the TeraComm
system in Bryan/College Station, Texas and Amarillo, Texas. TCA provides a
tiered service offering, with prices ranging from $49.95 per month for
residential Internet access to $175 per month for commercial Internet access.
TCA has announced that it intends to leverage the noise resistant properties
of Terayon's products to deploy broadband access services on a pure coaxial
network in Tyler, Texas.
Three customers accounted for approximately 73% of the Company's revenues in
1997 and for approximately 64% of the Company's revenues in the first six
months of 1998. In 1997, sales to Telegate, Sumitomo and NET Brasil
represented approximately 30%, 29% and 14%, respectively, of the Company's
revenues. In the first six months of 1998, sales to Shaw, Sumitomo and
Cablevision represented approximately 40%, 14% and 10%, respectively, of the
Company's revenues. The Company believes that a substantial majority of its
revenues will continue to be derived from sales to a relatively small number
of customers for the foreseeable future. In addition, the Company believes
that sales to these customers will be focused on a small number of projects.
See "Risk Factors--Dependence on Small Number of Customers."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability to
enhance its existing products and to develop and introduce new products that
meet a wide range of evolving cable operator and end user needs. In addition,
to address competitive and pricing pressures, the Company expects that it will
have to reduce the unit cost of manufacturing its cable modems through design
and engineering changes. For example, the Company has developed and intends to
introduce a single-board modem by the end of 1998, which the Company
anticipates will provide cost savings over its current dual-board modem. There
can be no assurance that the Company will be successful in redesigning its
products, that any such redesign will be made on a timely basis and without
introducing significant errors and product defects, or that any such redesign,
including the single-board modem, would result in sufficient cost reductions
to allow the Company to significantly reduce the list price of its products or
improve its gross margin.
The Company also currently is designing and developing a next-generation
system, which includes the UCM and an accompanying headend controller, the
TeraLink 2000 Master Controller. The UCM and the TeraLink 2000 Master
Controller will be designed to be fully compliant with emerging DOCSIS
standards, while also offering additional features and performance enabled by
the use of the S-CDMA technology. The UCM and the TeraLink 2000 Master
Controller are in the early stages of development and the
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Company does not anticipate commercial deployment of these products until 1999.
See "Risk Factors--Evolving Market; Rapid Technological Change; Market
Acceptance of S-CDMA," "--Ability to Achieve Cost Reductions," "--Evolving
Industry Standards" and "--Dependence on Products Under Development."
As of June 30, 1998, the Company had 51 employees engaged in research and
development. The Company's total research and development expenses for 1995,
1996 and 1997 and the first six months of 1998 were $2.0 million, $8.0 million,
$11.3 million and $4.9 million, respectively.
SALES AND MARKETING
Terayon has direct sales forces in North America, Latin America and Europe.
The Company also distributes its products via distributors and systems
integrators. Terayon has signed a distribution agreement with Sumitomo under
which Crossbeam is distributing the TeraComm system to three of Japan's leading
cable operators.
The Company markets its products directly to cable operators through its
sales force, key distribution and technology partners, as well as other
marketing vehicles such as industry press, trade shows and the World Wide Web.
Through its marketing efforts, the Company strives to educate cable operators
on the technological and business benefits of its system solution, as well as
the Company's ability to provide quality support and service to the customer.
Terayon participates in the major trade shows and industry events for the cable
industry in the United States and is expanding its presence in other markets
through joint participation at local events with its international sales and
marketing partners. Industry referrals and reference accounts are significant
marketing tools developed and utilized by the Company.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that its ability to consistently provide high quality
service and support will be a key factor in attracting and retaining customers.
The Technical Services and Support ("TSS") organization provides support 24
hours a day, seven days per week. Prior to deployment of the Company's systems,
each cable operator's needs are assessed and proactive solutions are
implemented, including various levels of training, periodic management and
coordination meetings, and problem escalation procedures. Terayon places a
strong emphasis on technical training, both for cable operators and systems
integrators. Initial training is offered to cable operators and systems
integrators at no cost, both in Terayon's headquarters in Santa Clara and on a
cable operator's or system integrator's premises. At June 30, 1998, the TSS
organization consisted of 13 employees located in North America, Europe, Latin
America and Asia.
In addition, Terayon has developed sophisticated tools for remote diagnosis
and monitoring of the TeraComm systems deployed by cable operators. Such tools
enable the Company to monitor cable operators' installations of the TeraLink
1000 Master Controller and to proactively suggest solutions before problems
become noticeable to end users. The Company is developing a Web-based knowledge
system to provide cable operators with access to the latest technical support
information.
MANUFACTURING
The Company outsources the materials procurement, printed circuit board
assembly, and product assembly and testing to turnkey contract manufacturers.
Currently, the Company contracts with Solectron, located in Milpitas,
California, for the manufacture of the majority of its products. CMC, located
in Santa Clara, California, also manufactures certain of the Company's
products. The Company has a limited in-house manufacturing capability at its
headquarters in Santa Clara. This facility is currently used for the assembly
and final testing of TeraLink 1000 Master Controller and TeraLink Gateways,
pilot production of new modem designs, sample testing of products received from
volume modem manufacturers, developing the manufacturing process and
documentation for new products in preparation for outsourcing. The Company also
repairs products returned from customers with its in-house manufacturing
resources.
The Company's future success will depend in significant part on its ability
to obtain high volume manufacturing at low costs. As volume increases, the
Company plans to engage additional contract
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manufacturers, to procure additional manufacturing facilities and equipment,
to modify existing inventory procedures, to substantially increase its
personnel and to revise its quality assurance and testing practices. There can
be no assurance that any of these efforts will be successful. The Company
anticipates that the need to reduce the manufacturing costs of its cable modem
and will continue to evaluate the use of low cost third-party suppliers and
manufacturers. See "Risk Factors--Ability to Achieve Cost Reductions" and "--
Limited Manufacturing Experience and Dependence on Contract Manufacturer."
Subcontractors supply the Company's contract manufacturers with both
standard components and subassemblies manufactured to the Company's
specifications. The Company is dependent upon certain key suppliers for a
number of the components for its products. For example, the Company currently
relies on VLSI for the Company's S-CDMA ASIC, which is used in the Company's
headend and cable modem products. In addition, all of the Company's products
contain one or more components that are currently only available from a single
source.
COMPETITION
The market for broadband access systems is extremely competitive and is
characterized by rapid technological change. The Company's direct competitors
in the cable modem arena include Bay Networks, Com21, Hayes, Hybrid,
Matsushita, Motorola, Phasecom, RCA, Samsung, Scientific-Atlanta, Sony, 3Com,
Toshiba and Zenith and there are many other potential market entrants. In
addition, Bay Networks, Com21, Hybrid and Motorola introduced cable modems
prior to the Company, and have established relationships and have worked with
customers for a longer period of time than the Company. The principal
competitive factors in this market include: product performance, features and
reliability; price; size and stability of operations; breadth of product line;
sales and distribution capability; technical support and service;
relationships with cable operators; standards compliance; and general industry
and economic conditions. Certain of these factors are outside of the Company's
control. The existing conditions in the broadband access market could change
rapidly and significantly as a result of technological changes, and the
development and market acceptance of alternative technologies could decrease
the demand for the Company's products or render them obsolete. There can be no
assurance that these companies and other competitors will not introduce
broadband access products that will be less costly or provide superior
performance or achieve greater market acceptance than the Company's products.
The Company sells products that also compete with existing data access and
transmission systems utilizing the telecommunications networks, such as those
of 3Com. Additionally, the Company's controller and headend system products
face intense competition from well-established companies such as Bay Networks,
Cisco and 3Com. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing, distribution, customer
support and other resources, as well as greater name recognition and access to
customers than the Company. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that the
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
The market for cable modems may be impacted by the development of other
technologies that enable the provisioning of broadband access services.
Examples of such technologies include technologies that increase the
efficiency of digital transmission over telephone companies' existing copper
infrastructure, such as various xDSL, as well as ISDN. Similarly, broadband
access services may be deployed over a number of other media, including fiber
optic cable, DBS and other wireless technologies. Broadband access services
based on some of these competing technologies are already available and could
materially limit acceptance of cable modem-based services. The failure of
broadband access services based on cable modem technology to gain widespread
commercial acceptance by cable operators and end users of broadband access
services would have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- Highly
Competitive Industry; Established Competitors."
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REGULATION
The Company and its customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the FCC extends to the
communications industry, including broadband access products such as those of
the Company. The FCC has promulgated regulations that, among other things, set
installation and equipment standards for communications systems. Although FCC
regulations and other governmental regulations have not materially restricted
the Company's operations, there can be no assurance that future regulations
adopted by the FCC or other regulatory bodies will not have a material adverse
effect on the Company. Further, regulation of the Company's customers may
adversely impact the Company's business, operating results and financial
condition. For example, FCC regulatory policies affecting the availability of
cable services and other terms on which cable companies conduct their business,
may impede the Company's penetration of certain markets. In addition,
regulation of cable television rates may affect the speed at which cable
operators upgrade their cable infrastructures to two-way HFC. Changes in, or
the failure by the Company to comply with, applicable domestic and
international regulations could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the
increasing demand for communications systems has exerted pressure on regulatory
bodies worldwide to adopt new standards for such products and services,
generally following extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past, and may in the future, cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers. For example, the Company experienced
delays in product shipments to a customer in Brazil due to delays in certain
regulatory approvals in Brazil, and there can be no assurance that similar
delays will not occur in other countries in which the Company markets or plans
to market its products. In addition, the Company's customers in certain parts
of Asia, such as Japan, are required to obtain licenses prior to selling the
Company's products, and delays in obtaining such licenses could have an adverse
impact on the Company's operating results. See "Risk Factors -- Regulation of
the Communications Industry."
In the United States, in addition to complying with FCC regulations, the
Company's products will be required to meet certain safety requirements. For
example, the Company will be required to have its products certified by UL in
order to meet federal requirements relating to electrical appliances to be used
inside the home. Outside of the United States, the Company's products will be
subject the regulatory requirements of each country in which the products are
manufactured or sold. These requirements are likely to vary widely, and there
can be no assurance that the Company will be able to obtain on a timely basis
or at all such regulatory approvals as may be required for the manufacture,
marketing or sale of its products. Any delay in or failure to obtain such
approvals or meet such requirements could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors -- Other Regulatory Approvals or Certifications."
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The Company has two issued patents and five
patent applications pending in the United States. The Company has seven patent
applications pending internationally. There can be no assurance that the
Company's patent applications will be granted or, if granted, that the claims
covered by the patents will not be reduced from those included in the Company's
applications. Any patent might be subject to challenge in court and, whether or
not challenged, might not be sufficiently broad to prevent third parties from
developing equivalent technologies or products. The Company has entered into
confidentiality and invention assignment agreements with its employees, and
enters into non-disclosure agreements with certain of its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will prove
44
<PAGE>
sufficient to prevent misappropriation of the Company's technology or to deter
independent third-party development of similar technologies.
The Company pursues the registration of its trademarks in the United States
and has applications pending to register several of its trademarks. However,
since the laws of certain foreign countries might not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States, effective trademark, copyright, trade secret and patent
protection might not be available in every country in which the Company's
products might be manufactured, marketed or sold.
The Company expects that developers of cable modems will increasingly be
subject to infringement claims as the number of products and competitors in the
Company's industry segment grows. The Company has received a letter from an
individual claiming that the Company's technology infringes a patent held by
such individual. The Company has reviewed the allegations made by such
individual and, after consulting with its patent counsel, does not believe that
the Company's technology infringes any valid claim of such individual's patent.
There can be no assurance that, if the issue were to be submitted to a court,
such a court would not find that the Company's products infringe the patent,
nor that the individual will not continue to assert infringement. If the
Company is found to have infringed such individual's patent, the Company could
be subject to substantial damages and/or an injunction preventing it from
conducting its proposed business, and the Company's business could be
materially and adversely affected. In addition, there can be no assurance that
other third parties will not assert infringement claims against the Company in
the future. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements may not be available on terms acceptable to the Company
or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition. Litigation also may be
necessary to enforce the Company's intellectual property rights. Any
infringement claim or other litigation against or by the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
EMPLOYEES
As of June 30, 1998, Terayon had 106 employees, of which 51 were in the
engineering group, 27 were in marketing, sales and customer support, 15 were in
operations and 13 were in general and administrative functions. None of the
Company's employees is represented by a union. The Company believes that its
relations with its employees are good.
PROPERTIES
The Company leases an approximately 30,000 square foot facility located in
Santa Clara, California and has an option to lease approximately 10,000
additional square feet in August 1998. The current lease for the Santa Clara
facility expires in March 2002. The Company has sales offices in Denver,
Colorado; Atlanta, Georgia; Sao Paulo, Brazil; and Brussels, Belgium. The
Company believes that its existing facilities are adequate to meet its needs
for the immediate future and that future growth can be accommodated by leasing
additional or alternative space near its current facilities.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
45
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Certain information regarding the Company's directors, executive officers and
key employees as of July 15, 1998 is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
EXECUTIVE OFFICERS AND DIRECTORS
Dr. Zaki Rakib(1)............... 39 Chief Executive Officer and Director
Shlomo Rakib.................... 41 Chairman of the Board, President and
Chief Technical Officer
Ray M. Fritz.................... 52 Chief Financial Officer
Dennis J. Picker................ 50 Chief Operating Officer
Michael D'Avella................ 39 Director
Christopher J. Schaepe(1)(2).... 34 Director
Lewis Solomon(2)................ 64 Director
Mark A. Stevens(1).............. 38 Director
KEY EMPLOYEES
Brian Bentley................... 36 Vice President, Worldwide Sales
Vice President, Marketing and Business
Gary W. Law..................... 42 Development
Linda R. Palmor................. 43 Vice President, Finance
Gershon Schatzberg.............. 43 Vice President, Customer Satisfaction
W. Lee Stalcup.................. 57 Vice President, Manufacturing Operations
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Zaki Rakib co-founded Terayon in 1993 and has served as Chief Executive
Officer since January 1993 and as a director since February 1995. From January
1993 to July 1998, Dr. Rakib also served as Chief Financial Officer of the
Company. Prior to co-founding the Company, Dr. Rakib served as Director of
Engineering for Cadence Design Systems, an electronic design automation
software company, from 1990 to 1994. Prior to joining Cadence, Dr. Rakib was
Vice President of Engineering at Helios Software, which was acquired by Cadence
in 1990. Dr. Rakib holds B.S., M.S. and Ph.D. degrees in engineering from Ben-
Gurion University in Israel. Dr. Rakib is the brother of Shlomo Rakib, the
Company's Chairman of the Board, President and Chief Technical Officer.
Shlomo Rakib co-founded Terayon in 1993 and has served as Chairman of the
Board and President since January 1993 and as Chief Technical Officer since
February 1995. Prior to co-founding the Company, Mr. Rakib served as Chief
Engineer at PhaseCom, Inc., a communications products company, from 1981 to
1993, where he pioneered the development of data and telephony applications
over cable. Mr. Rakib is the inventor of several patented technologies in the
area of data and telephony applications over cable. Mr. Rakib holds a B.S.E.E.
degree from Technion University in Israel. Mr. Rakib is the brother of Zaki
Rakib, the Chief Executive Officer and a director of the Company.
Ray M. Fritz has served as the Company's Chief Financial Officer since July
1998. Prior to joining the Company, Mr. Fritz was Vice President of Finance and
Operations and Chief Financial Officer of GigaLabs Inc., a provider of high-
performance input/output switching solutions, from December 1997 to July 1998.
From August 1994 until August 1997, Mr. Fritz was with Clarify, Inc., a
provider of front office automation systems, as its Vice President, Finance and
Operations and Chief Financial Officer. From May 1990 to August 1994, he served
as Director, Finance of Synopsys, Inc., an electronic design automation
company, and from April 1986 to May 1990, Mr. Fritz served as Vice President
and Controller of LSI Logic Corporation, a semiconductor company. Prior to
that, he held a variety of finance positions with Xerox Corporation, The Singer
Company and Shell Oil Company. Mr. Fritz holds a B.S. degree in
finance/business administration from Benedictine College, an M.B.A. degree from
Atlanta University and an M.S. degree in tax from Golden Gate University.
46
<PAGE>
Dennis J. Picker has served as Chief Operating Officer since February 1998
and served as Vice President, Standards from October 1997 to February 1998 and
Vice President, Engineering from May 1996 to October 1997. From 1994 to April
1996, Mr. Picker was Director of the Cable Data Products Business Unit of
Motorola, Inc., an electronics company, and from 1992 to 1994, he was Senior
Director of Data Networking Products at Motorola. Mr. Picker holds a B.S.
degree in electrical engineering from the University of Pennsylvania and an
M.S. degree in electrical engineering from Northwestern University.
Michael D'Avella has served as a director of the Company since April 1998.
Mr. D'Avella is the Senior Vice President, Planning for Shaw Communications
Inc. ("Shaw"), a diversified communications company and a leading cable
operator in Canada. Mr. D'Avella has held a variety of senior management
positions at Shaw since 1991. Prior to that, he held positions with the
Canadian Cable Television Association and Telesat Canada. He is a director of
several privately held companies. Mr. D'Avella holds a B.A. degree in
economics and planning from the University of Toronto in Canada.
Christopher J. Schaepe has served as a director of the Company since March
1995. Mr. Schaepe is a General Partner of Weiss, Peck & Greer Venture
Partners, L.P., a technology-focused venture capital firm, which he joined in
1991. Previously, Mr. Schaepe served in corporate finance and capital markets
roles for three years at Goldman, Sachs & Company after his employment as a
software engineer at IBM Corporation. He is a director of Galileo Technology
Ltd., a communications semiconductor company, as well as several privately
held companies. Mr. Schaepe holds B.S. and M.S. degrees in computer science
from the Massachusetts Institute of Technology and an M.B.A. degree from
Stanford Business School.
Lewis Solomon has served as a director of the Company since March 1995. Mr.
Solomon has been a principal of G&L Investments, a consulting firm, since 1989
and currently serves as the Chairman of the Board of ICTV, Inc. From 1983 to
1988, he served as Executive Vice President at Alan Patricof Associates, a
venture capital firm focused on high technology, biotechnology and
communications industries. Prior to that, Mr. Solomon served in various
capacities with General Instrument Corp., most recently as Senior Vice
President. From April 1986 to January 1997, he served as Chairman of the Board
of Cybernetic Services, Inc., an LED systems manufacturer, which commenced a
Chapter 7 bankruptcy proceeding in April 1997. Mr. Solomon serves on the
boards of Anadigics, Inc., a manufacturer of integrated circuits; Anacomp,
Inc., a manufacturer of data storage systems; Artesyn Technologies, Inc., a
power supply and power converter supply company; and Microelectronic
Packaging, Inc., an integrated circuit packaging manufacturer. Mr. Solomon
also serves on the boards of several privately held companies.
Mark A. Stevens has served as a director of the Company since March 1995.
Mr. Stevens has been a General Partner of Sequoia Capital, a venture capital
investment fund, since March 1993. Mr. Stevens currently serves on the Board
of Directors of Aspect Development, Inc., a client/server applications
software company, and several privately held companies. Prior to joining
Sequoia in 1989, he held technical sales and marketing positions at Intel
Corporation. Mr. Stevens holds a B.S.E.E. degree, a B.A. degree in economics
and an M.S. degree in computer engineering from the University of Southern
California and an M.B.A. degree from Harvard Business School.
Brian Bentley has served as Vice President, Worldwide Sales since February
1997. From 1995 to February 1997, he served as Director of TCI Sales for
Scientific-Atlanta, Inc., a satellite manufacturer. Prior to that, Mr. Bentley
served as Vice President of MSO Sales for the Multimedia Group of Motorola
from January 1995 to November 1995, and as Vice President and General Manager
for the Optical Media Group of Antec Corporation, a fiber-optic equipment
manufacturer company, from 1992 to 1995. He holds a B.S. degree in economics
from Arizona State University.
Gary W. Law has served as Vice President, Marketing and Business Development
since March 1997. From August 1995 to March 1997, he was Vice President of
Marketing for the Networking Products Group of Adaptec, Inc., a hardware and
software manufacturer company. Prior to that, Mr. Law served
47
<PAGE>
as Director of Market Development for Bay Networks, Inc. from 1989 to 1995 and
held sales and marketing management positions with Hewlett-Packard Company, an
electronics company and Ungermann-Bass Inc. between 1978 and 1988. He holds a
B.S. degree in engineering from the University of Texas.
Linda R. Palmor has served as Vice President, Finance since May 1997 and
served as Corporate Controller from February 1996 to May 1997. Prior to
joining the Company, Ms. Palmor served as the Corporate Controller of
Electronic Arts Inc., a multimedia software company, from 1995 to 1996 and
held financial positions with The Walt Disney Company, a media conglomerate,
from 1991 to 1995. Ms. Palmor is a certified public accountant and holds a
B.Sc. degree in biochemistry from Manchester University in the United Kingdom.
Gershon Schatzberg has served as the Company's Vice President, Customer
Satisfaction since April 1998 and served as Group Director of Technical
Support Services from August 1997 to April 1998. Prior to joining the Company,
he served as Director of Network Consulting for 3Com Corporation, a networking
hardware manufacturer company, running North American sales support operations
from 1996 to 1997. From 1989 to 1996, Mr. Schatzberg served as the President
and Vice President of Engineering for RAD Network Devices, Inc., a networking
and router manufacturer company. Prior to that, he held engineering positions
with various companies. Mr. Schatzberg holds a B.S.E.E. degree from Technion
University in Israel.
W. Lee Stalcup has served as the Company's Vice President, Manufacturing
Operations since May 1998. Prior to joining the Company, Mr. Stalcup was Vice
President of Operations for Magellan Systems Corporation, a global positioning
systems manufacturer, from October 1996 to May 1998. From May 1994 to October
1994, he served as Director of Operations at AST Research, Inc., a computer
and network server manufacturer, and from October 1994 to October 1996 he
served as its Vice President of Worldwide Materials. From 1990 to 1993, Mr.
Stalcup was Executive Vice President and Chief Operating Officer of Vitalrel
Microelectronics, a multi-chip module company.
The Company's Board of Directors (the "Board") currently is comprised of six
directors. Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Pursuant to a voting
agreement, Messrs. Rakib, who together own 4,000,000 shares of the Company's
stock, have agreed to vote to elect a nominee of Shaw to the Company's Board
("Shaw Nominee"), currently Mr. D'Avella, until such time as Shaw own less
than 384,615 shares of the Company's stock. The Company also has agreed with
Shaw to use its best efforts to nominate a Shaw Nominee to the Board until the
earlier of December 31, 2000 or the date upon which Shaw no longer holds at
least 384,615 shares of the Company's stock. The Company's Certificate of
Incorporation, which will become effective upon the completion of this
offering, provides that the Board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms.
The Class I directors, initially Messrs. Solomon and Stevens, will stand for
reelection or election at the 1999 annual meeting of stockholders. The Class
II directors, initially Mr. D'Avella and Shlomo Rakib, will stand for
reelection or election at the 2000 annual meeting of stockholders. The Class
III directors, initially Mr. Schaepe and Zaki Rakib, will stand for reelection
or election at the 2001 annual meeting of stockholders.
ADVISORY BOARD
In early 1997, the Company established an Advisory Board, which consists of
representatives from the United States and international cable industries. The
Advisory Board currently consists of nine members: Steven Craddock, the Vice
President of New Media for Comcast Corporation; Michael D'Avella, the Senior
Vice President of Planning for Shaw and a member of the Company's Board of
Directors; David Fellows, the former Vice President of Technology for
MediaOne; George Harte, the Director of
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<PAGE>
Telecom Technology for Rogers Communications Inc.; Wilt Hildebrand, the Vice
President of Technology for Cablevision Systems Corporation; Isao Momota, the
President of Crossbeam Networks; Richard Rexroat, the Vice President,
Engineering of TCI International; J.C. Sparkman, a former Executive Vice
President of TCI; and Arthur Steiner, the Director of Business Development for
NET Brasil.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to February 1998, the Company did not have a Compensation Committee of
the Board of Directors, and the entire Board participated in all compensation
decisions, except that Messrs. Rakib did not participate in decisions relating
to their respective compensation. In February 1998, the Board formed the
Company's Compensation Committee to review and recommend to the Board
compensation and benefits for the Company's executive officers and administer
the Company's stock purchase and stock option plans. Each of the Company's
directors, or an affiliated entity, holds securities of the Company. See
"Certain Transactions" and "Principal Stockholders."
BOARD COMMITTEES
The Audit Committee of the Board of Directors, currently consisting of
Messrs. Schaepe and Solomon, reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent auditors. The Compensation Committee of the Board of Directors
currently consists of Dr. Rakib and Messrs. Schaepe and Stevens. The
Compensation Committee reviews and recommends to the Board the compensation and
benefits for the Company's executive officers, except that Dr. Rakib does not
participate in decisions relating to his compensation. The Compensation
Committee also administers the issuance of stock options and other awards under
the Company's 1995 Stock Option Plan, 1997 Equity Incentive Plan, 1998 Employee
Stock Purchase Plan and 1998 Non-Employee Directors' Stock Option Plan. See "--
Employee Benefit Plans."
DIRECTOR COMPENSATION
Lewis Solomon receives $2,000 per month for his service as a member of the
Board. No other director of the Company receives cash for services provided as
a director. From time to time, certain directors who are not employees of the
Company have received grants of options to purchase shares of the Company's
Common Stock. In July 1997, Mr. Stevens was granted an option to purchase
30,000 shares of Common Stock at an exercise price of $1.25 per share and
entities affiliated with Weiss, Peck & Greer L.L.C. ("WPG") were granted
options to purchase an aggregate of 30,000 shares of Common Stock at an
exercise price of $1.25 per share. Mr. Schaepe is a partner of WPG. In May
1998, Mr. D'Avella was granted an option to purchase 30,000 shares of Common
Stock at an exercise price of $6.50 per share.
In June 1998, the Board adopted the 1998 Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") to provide for the automatic grant of options to
purchase shares of Common Stock to non-employee directors of the Company who
are not employees of or consultants to the Company or of any affiliate of the
Company (a "Non-Employee Director"). The Directors' Plan is administered by the
Board, unless the Board delegates administration to a Committee comprised of
members of the Board. See "--Employee Benefit Plans--1998 Non-Employee
Directors' Stock Option Plan."
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law,
49
<PAGE>
(iii) to the fullest extent permitted by the Delaware General Corporation Law,
the Company is required to advance all expenses incurred by its directors and
executive officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive, (v) the
Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents and (vi) the Company may not
retroactively amend the Bylaws provisions relating to indemnity. The Company
intends to enter into agreements to indemnify its officers and directors. A
copy of the form of such indemnification has been filed as an exhibit to the
Registration Statement.
EXECUTIVE COMPENSATION
The following table sets forth the annualized compensation awarded or paid by
the Company during the fiscal year ended December 31, 1997 to the Company's
Chief Executive Officer and four other most highly compensated officers whose
annual salary and bonus exceeded $100,000 in fiscal 1997 (hereinafter, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS (#)
------------------ ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Dr. Zaki Rakib............ 1997 150,000 12,500 -- --
Chief Executive Officer
and Chief Financial
Officer
Shlomo Rakib.............. 1997 150,000 12,500 -- --
President and Chief
Technical Officer
Gary Law.................. 1997 108,333 -- -- 115,000
Vice President, Marketing
and Business Development
Linda Palmor.............. 1997 108,306 10,000 -- 35,000
Vice President, Finance
Dennis Picker............. 1997 129,000 31,800 75,166(2) --
Vice President,
Standards(1)
</TABLE>
- --------
(1) Mr. Picker has served as Chief Operating Officer since February 1998.
(2) Consists of reimbursement to Mr. Picker for travel costs of which $35,140
was attributable to tax gross-up payments made by the Company.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PRICE APPRECIATION FOR
NUMBER OF SECURITIES EMPLOYEES IN OPTION TERM (4)
UNDERLYING OPTIONS FISCAL YEAR EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED (#) (1) (%) (2) ($/SH) (3) DATE 5% ($) 10% ($)
---- -------------------- ------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dr. Zaki Rakib.......... -- -- -- -- -- --
Shlomo Rakib............ -- -- -- -- -- --
Gary Law................ 115,000 8.82% $1.25 03/25/07 $234,154 372,850
Linda Palmor............ 35,000 2.68% $1.25 05/05/07 $ 71,264 113,476
Dennis Picker........... -- -- -- -- -- --
</TABLE>
- --------
(1) Options generally vest at a rate 20% on the first anniversary of the
vesting commencement date and 1/48th each month thereafter. The term of
each option granted is generally the earlier of (i) ten years or (ii) 90
days after termination of the optionee's services to the Company. Options
are immediately exercisable; however, the unvested shares purchasable
under such options are subject to repurchase by the Company at the
original exercise price paid per share upon the optionee's cessation of
service prior to the vesting of such shares.
(2) Based on an aggregate of 1,304,050 options granted to employees,
consultants and directors, including the Named Executive Officers, of the
Company during the fiscal year ended December 31, 1997.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND DECEMBER 31, 1997 OPTION VALUES
There were no exercises of options by any Named Executive Officer in the
fiscal year ended December 31, 1997.
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. The Company's 1997 Equity Incentive Plan (the
"1997 Plan") was adopted in March 1997 and amended in December 1997 and June
1998. An aggregate of 3,300,000 shares of Common Stock currently are
authorized for issuance under the 1997 Plan. However, each year on January 1,
starting with January 1, 1999, the aggregate number of shares of Common Stock
that are available for issuance under the 1997 Plan will automatically be
increased to that number of shares of Common Stock that is equal to 5% of the
Company's outstanding shares of Common Stock on such date.
The 1997 Plan provides for the grant of incentive stock options, as defined
under the Internal Revenue Code of 1986, as amended (the "Code"), to employees
(including officers and employee directors) and non-statutory stock options,
restricted stock purchase awards and stock bonuses to employees (including
officers and employee directors), directors and consultants of the Company and
its affiliates. The 1997 Plan is administered by the Compensation Committee,
which determines the recipients and types of awards to be granted, including
the exercise price, number of shares subject to the award and the
exercisability thereof.
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<PAGE>
The terms of options granted under the 1997 Plan may not exceed 10 years. The
Compensation Committee determines the exercise price of options granted under
the 1997 Plan. However, the exercise price for an incentive stock option cannot
be less than 100% of the fair market value of the Common Stock on the date of
the option grant, and the exercise price for a non-statutory stock option
cannot be less than 85% of the fair market value of the Common Stock on the
date of the option grant. Options granted under the 1997 Plan vest at the rate
specified in the option agreement. Generally, the right to exercise 20% of the
total number of shares granted vest 12 months after the date of option grant,
with the reminder vesting monthly over four years thereafter, such that an
option is fully vested on the fifth anniversary of the date of the option
grant. Generally, the optionee may not transfer a stock option other than by
will or the laws of descent or distribution. However, an optionee may designate
a beneficiary who may exercise the option in the event of the optionee's death
or disability. Unless the terms of an optionee's option agreement provide for
an earlier termination, in the event of the optionee's cessation of his or her
relationship with the Company due to death or disability, the optionee's
beneficiary may exercise any vested options up to 18 months and 12 months,
respectively, after the date of such cessation. If such optionee's relationship
with the Company ceases for any reason other than the optionee's death or
disability, the optionee may exercise any vested options during the 30 days
following such cessation.
No incentive stock option (and, prior to the Company's stock being publicly
traded, no non-statutory stock option) may be granted to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at lease 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of the grant. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under the 1997 Plan and
all other stock plans of the Company and its affiliates) may not exceed
$100,000.
When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the Incentive Plan
covering more than 500,000 shares of Common Stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1997 Plan. The Compensation Committee has the authority to
reprice outstanding options or to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. Both the original and new options will count toward the Code Section
162(m) limitations set forth above.
Restricted stock purchase awards granted under the 1997 Plan may be granted
pursuant to a repurchase option in favor of the Company in accordance with a
vesting schedule and at a price determined by the Compensation Committee. Stock
bonuses may be awarded in consideration of past services without a purchase
payment. Rights under a stock bonus or restricted stock bonus agreement
generally may not be transferred other than by will or the laws of descent and
distribution during such period as the stock awarded pursuant to such an
agreement remains subject to the agreement.
If there is any sale of all or substantially all of the Company's assets, any
merger or any consolidation in which the Company is not the surviving
corporation or a like transaction involving the Company, all outstanding awards
under the 1997 Plan either will be assumed or substituted for by any surviving
entity. If the surviving entity determines not to assume or substitute for such
awards, the vesting of stock awards held by persons still serving the Company
or its affiliate will be accelerated and such awards will terminate if not
exercised prior to the sale of assets, merger or consolidation.
52
<PAGE>
As of June 30, 1998, 39,250 shares of Common Stock had been issued upon the
exercise of options granted under the 1997 Plan, options to purchase 1,010,560
shares of Common Stock were outstanding and 2,250,190 shares remained
available for future grant. The 1997 Plan will terminate in March 2007 unless
terminated by the Board before then. As of June 30, 1998, no stock awards or
restricted stock had been granted under the 1997 Plan.
1995 Stock Option Plan. The Company also has a 1995 Stock Option Plan (the
"1995 Plan"). The 1995 Plan is administered by the Board, unless the Board
delegates administration to a committee comprised of members of the Board.
Under the 1995 Plan, stock options and awards may be granted to employees,
directors and consultants. Only employees may receive incentive stock options;
employees, directors and consultants may receive non-statutory stock options
and stock awards other than incentive stock options. The exercise price of
incentive stock options granted under the 1995 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant, while the
exercise price of nonstatutory options must equal at least 85% of such market
value. Generally, the right to exercise 20% of the total number of shares
granted vest 12 months after the date of option grant, with the reminder
vesting monthly over four years thereafter, such that an option is fully
vested on the fifth anniversary of the date of the option grant. Options and
awards granted under the Plan must be exercised within ten years of the date
of grant. The other terms of the 1995 Plan are substantially similar to the
terms of the 1997 Plan.
As of June 30, 1998, 778,268 shares had been issued upon the exercise of
options under the 1995 Plan, 1,332,732 shares of Common Stock were subject to
outstanding options and 3,747 shares remained available for future grant. The
1995 Plan will terminate in March 2005 unless terminated by the Board of
Directors before then.
1998 Non-Employee Directors' Stock Option Plan. In June 1998, the Board
adopted the Directors' Plan to provide for the automatic grant of options to
purchase shares of Common Stock to non-employee directors of the Company who
are not employees of or consultants to the Company or of any affiliate of the
Company (a "Non-Employee Director"). The Directors' Plan is administered by
the Board, unless the Board delegates administration to a Committee comprised
of members of the Board.
The aggregate number of shares of Common Stock that may be issued pursuant
to options granted under the Directors' Plan is 200,000 shares. Pursuant to
the terms of the Directors' Plan, after the effective date of the initial
public offering of the Company's Common Stock, each person who is elected or
appointed for the first time to be a Non-Employee Director automatically
shall, upon the date of his or her initial election or appointment to be a
Non-Employee Director by the Board or stockholders of the Company, be granted
an option to purchase 30,000 shares of Common Stock. In addition, on the day
following each Annual Meeting of Stockholders of the Company ("Annual
Meeting"), commencing with the Annual Meeting in 1999, each person who is then
serving as a Non-Employee Director automatically shall be granted an option to
purchase 12,500 shares of Common Stock, which amount shall be prorated for any
Non-Employee Director who has not continuously served as a Non-Employee
Director for the 12-month period prior to the date of such Annual Meeting. In
addition, on the day following each Annual Meeting, commencing with the Annual
Meeting in 1999, each Non-Employee Director who is then serving as a member of
a committee of the Board of Directors automatically shall be granted, for each
such committee, an option to purchase 3,000 shares of Common Stock of the
Company, which amount shall be prorated for any Non-Employee Director who has
not continuously served as a member of such committee for the 12-month period
prior to the date of such Annual Meeting.
The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock on the date of grant. No
option granted under the Directors' Plan may be exercised after the expiration
of 10 years from the date it was granted. Options granted under the Directors'
Plan vest and become exercisable as to 33% of the shares on the first
anniversary of the date
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<PAGE>
of grant and 1/36th of the shares monthly thereafter. Options granted under
the Directors' Plan generally are non-transferable. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with the Company or any
affiliate (whether as a Non-Employee Director of the Company or subsequently
as an employee, director or consultant of either the Company or an affiliate)
ceases for any reason may exercise vested options for the term provided in the
option agreement (3 months generally, 12 months in the event of disability,
and 18 months in the event of death).
In the event of certain changes in control of the Company, all outstanding
awards under the Directors' Plan either will be assumed or substituted for by
any surviving entity. If the surviving entity determines not to assume or
substitute for such awards, the vesting and time during which such options may
be exercised shall be accelerated prior to such event and the options will
terminate if not exercised after such acceleration and at or prior to such
event. Unless terminated sooner by the Board of Directors, the Directors' Plan
will terminate in June 2008.
1998 Employee Stock Purchase Plan. In June 1998, the Company's Board of
Directors approved the 1998 Employee Stock Purchase Plan (the "Purchase
Plan"), covering an aggregate of 700,000 shares of Common Stock. The Purchase
Plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Code. Under the Purchase Plan, the Board of
Directors may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan.
The offering period for any offering will be no more than 27 months.
Under the Purchase Plan, employees are eligible to participate if they are
employed by the Company or an affiliate of the Company designated by the Board
of Directors and are employed at least 20 hours per week and five months per
year. Employees who participate in an offering will have the right to purchase
up to the number of shares of Common Stock purchasable with a percentage
designated by the Board of Directors, up to 15%, of an employee's earnings
withheld pursuant to the Purchase Plan and applied, on specified dates
determined by the Board of Directors, to the purchase of shares of Common
Stock. The price of Common Stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company.
In the event of certain changes in control of the Company, the Company and
the Board of Directors have discretion to provide that each right to purchase
Common Stock will be assumed or an equivalent right will be substituted by the
successor corporation, or the Board may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to the change in control. The Purchase Plan will
terminate at the Board's discretion or when all of the shares reserved for
issuance under the Purchase Plan have been issued.
401(k) Plan. The Company maintains the Terayon Corporation 401(k) Retirement
Plan (the "401(k) Plan") for eligible employees ("Participants"). A
Participant may contribute up to 15% of his or her total annual compensation
to the 401(k) Plan, or up to a statutorily prescribed annual limit, if less.
The annual limit for 1998 is $10,000. Each Participant is fully vested in his
or her deferred salary contributions. Participant contributions are held and
invested by the 401(k) Plan's trustee. The Company may make discretionary
contributions as a percentage of Participant contributions, subject to
established limits. To date, the Company has not made any contributions to the
401(k) Plan on behalf of the Participants. The 401(k) Plan is intended to
qualify under Section 401 of the Code, so that contributions by employees or
by the Company to the 401(k) Plan, and income earned on the 401(k) Plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made.
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EMPLOYMENT AGREEMENTS
In February 1993, the Company entered into an employment agreement with
Shlomo Rakib to serve as President and Chairman of the Board of Directors. The
employment agreement is for a period of seven years, terminable at will or
without cause at any time upon written notice. In February 1993, the Company
also entered into an employment agreement with Zaki Rakib to serve as Chief
Executive Officer and Chief Financial Officer. The employment agreement is not
for a specified term and is terminable at will or without cause at any time
upon written notice.
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CERTAIN TRANSACTIONS
In February 1993, the Company entered into an employment agreement with Zaki
Rakib, the Company's Chief Executive Officer and a director of the Company. Dr.
Rakib is the brother of Shlomo Rakib, the Company's Chairman of the Board,
President and Chief Technical Officer. See "Management-- Employment
Agreements."
In February 1993, the Company also entered into an employment agreement with
Shlomo Rakib, the Company's Chairman of the Board, President and Chief
Technical Officer. Mr. Rakib is the brother of Zaki Rakib, the Company's Chief
Executive Officer and a director of the Company. See "Management --Employment
Agreements."
In December 1995, in connection with the purchase by Cisco of Series B
Preferred Stock of the Company, the Company granted Cisco a right of first
offer to acquire the Company in the event the Company commences a sale of 50%
or more of its outstanding capital stock or all of its assets. The Company also
granted Cisco the right to make an offer to purchase the Company in the event
the Company commences an initial public offering of its securities. Cisco holds
more than 5% of the outstanding equity of the Company. Cisco also has the right
to elect one director to the Company's Board of Directors. Cisco's rights
terminate upon the completion of the Company's initial public offering.
In March 1996, the Company loaned Shlomo Rakib, the Company's Chairman of the
Board, President and Chief Technical Officer, $100,000 pursuant to an interest-
free promissory note, with the principal amount due in March 2001. The note (i)
may be extended for a longer term at the option of the Company, (ii) is secured
by 20,000 shares of Common Stock held by Mr. Rakib and (iii) will accelerate
upon termination of his employment with the Company, the initial public
offering of the Company's securities or the sale of the Company.
In December 1997, the Company entered into a strategic partnership and
distributorship agreement with Sumitomo, a greater than 5% stockholder of the
Company, whereby Sumitomo and the Company formed a strategic partner
relationship for the purpose of promoting the Company's products in Japan.
Pursuant to this agreement, the Company appointed Sumitomo as its exclusive
distributor for the Company's products in Japan and as a non-exclusive
distributor for the Company's products in the rest of the world. Sales to
Sumitomo in the first six months of 1998 were approximately $1.3 million, which
represented approximately 14% of the Company's revenues for such period.
In the six months ended June 30, 1998, the Company sold products to Shaw for
an aggregate of approximately $3.8 million. In addition, in April 1998, the
Company issued Shaw a warrant to purchase 3,000,000 shares of Common Stock at
an exercise price of $6.50 per share in connection with the issuance of 384,615
shares of Series F convertible preferred stock. Michael D'Avella, a director of
the Company, is the Senior Vice President of Planning for Shaw.
The Company has granted options to certain of its directors and executive
officers. See "Management -- Director Compensation."
The Company believes that the terms of the transactions described above were
no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any
of its officers, directors or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the independent and disinterested members
of the Board of Directors.
The Company intends to enter into indemnification agreements with its
directors and executive officers for the indemnification of and advancement of
expenses to such persons to the full extent permitted by law. The Company also
intends to execute such agreements with its future directors and executive
officers. See "Management -- Limitation on Directors' and Officers' Liability."
Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by
(i) each of the Company's Named Executive Officers, (ii) each of the Company's
directors, (iii) each holder of more than 5% of the Company's Common Stock,
(iv) certain other stockholders and (v) all current directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNERS OWNED (1) OFFERING OFFERING
- ----------------- ------------ ----------- -----------
<S> <C> <C> <C>
Dr. Zaki Rakib (2)..................... 2,000,000 15.1% 12.3%
Shlomo Rakib (2)....................... 2,000,000 15.1% 12.3%
Entities associated with Weiss, Peck & 1,713,882 13.0% 10.6%
Greer (3).............................
555 California Street, Suite 3130
San Francisco, California 94104
Entities associated with Sequoia 1,683,882 12.7% 10.4%
Capital (4)...........................
3000 Sand Hill Road Suite 280,
Building 4
Menlo Park, California 94025
Cisco Systems, Inc..................... 896,834 6.8% 5.5%
170 West Tasman Drive
San Jose, California 95134
Entities associated with Walden 840,620 6.4% 5.2%
Ventures (5)..........................
750 Battery Street, 7th Floor
San Francisco, California 94111
Sumitomo Corporation................... 784,615 5.9% 4.8%
2-2 Hitotsubashi 1-Chome,
Chiyoda-Ku
C.P.O. Box 1524
Tokyo, 100-91 Japan
Shaw Communications Inc. (6)........... 576,923 4.4% 3.6%
Christopher J. Schaepe (3)............. 1,713,882 13.0% 10.6%
Mark Stevens (4)(7).................... 1,713,882 13.0% 10.6%
Lewis Solomon (8)...................... 100,000 * *
Michael D'Avella (6)(9)................ 611,923 4.6% 3.8%
Gary Law (10).......................... 120,000 * *
Linda Palmor (11)...................... 90,000 * *
Dennis Picker (12)..................... 240,000 1.8% 1.5%
All directors and executive officers as 8,499,687 62.3% 51.1%
a group (7 persons) (13)..............
</TABLE>
- --------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 13,220,733 shares of Common
Stock outstanding on an as-converted basis as of June 30, 1998.
(2) The address for Messrs. Rakib is c/o Terayon Communication Systems, Inc.,
2952 Bunker Hill Lane, Santa Clara, CA 95054.
(3) Includes 919,400 shares held by WPG Enterprise Fund II, L.P. and 764,482
shares held by Weiss, Peck & Greer Venture Associates III, L.P. Also
includes 16,380 shares issuable to WPG Enterprise Fund II, L.P. and 13,620
shares issuable to Weiss, Peck & Greer Venture Associates III, L.P. upon
the early exercise of options vesting through July 2000. Christopher J.
Schaepe, a director of the Company, is a General Partner of WPG Venture
Partners III, L.P., a general partner of the entities associated with
Weiss, Peck & Greer. Mr. Schaepe may be deemed to have a voting and
investment
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<PAGE>
power over the shares held by the entities associated with Weiss, Peck &
Greer. He disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(4) Includes (i) 1,532,333 shares held by Sequoia Capital VI; (ii) 84,195
shares held by Sequoia Technology Partners VI; (iii) 62,860 shares held by
Sequoia XXIV; (iv) 2,296 shares held by Sequoia 1995; (v) 791 shares held
by Sequoia 1997; and (vi) 1,407 shares held by SQP 1997. Mark Stevens, a
director of the Company, is a General Partner of the entities associated
with Sequoia Capital. Mr. Stevens may be deemed to have a voting and
investment power over the shares held by the entities associated with
Sequoia Capital. He disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein.
(5) Includes (i) 392,270 shares held by Walden-Israel Ventures, L.P.; (ii)
392,270 shares held by Walden-SBIC, L.P.; and (iii) 56,080 shares held by
Walden Technology Ventures II, L.P.
(6) Does not include 3,000,000 shares issuable pursuant to a warrant.
(7) Includes 18,000 shares subject to repurchase by the Company within 60 days
of June 30, 1998.
(8) Includes 20,000 shares issuable upon the early exercise of options vesting
through May 2000, 3,333 of which will be fully vested and no longer
subject to repurchase within 60 days of June 30, 1998.
(9) Includes 576,923 shares held by Shaw Communications Inc. Mr. D'Avella, a
director of the Company, is the Senior Vice President, Planning for Shaw.
Also includes 35,000 shares issuable upon the early exercise of options
vesting through April 2001. Mr. D'Avella may be deemed to have a voting
and investment power over the shares held by Shaw. He disclaims beneficial
ownership as to all shares held by Shaw.
(10) Includes 120,000 shares issuable upon the early exercise of options
vesting through May 2003, 32,583, of which will be fully vested and no
longer subject to repurchase within 60 days of June 30, 1998.
(11) Includes 90,000 shares issuable upon the early exercise of options vesting
through May 2003, 26,250 of which will be fully vested and no longer
subject to repurchase within 60 days of June 30, 1998.
(12) Includes 240,000 shares issuable upon the early exercise of options
vesting through May 2003, 90,000 of which will be fully vested and no
longer subject to repurchase within 60 days of June 30, 1998.
(13) Includes 415,000 shares issuable upon the early exercise of options
vesting through May 2003, 152,166 of which will be fully vested and no
longer subject to repurchase within 60 days of June 30, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, par value $0.001
per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share
("Preferred Stock").
COMMON STOCK
As of June 30, 1998, there were 13,220,733 shares of Common Stock (including
shares of Preferred Stock that will be converted into Common Stock upon
completion of this offering) outstanding held of record by 102 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon the
completion of this offering will be, fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Restated Certificate, the Board of Directors has the
authority, without further action by the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the Common Stock. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. Preferred Stock could thus be issued quickly with
terms calculated to delay, defer or prevent a change in control of the Company
or make removal of management more difficult. Additionally, the issuance of
Preferred Stock may have the effect of decreasing the market price of the
Common Stock and may adversely affect the voting and other rights of the
holders of Common Stock. Upon the completion of this offering, there will be
no shares of Preferred Stock outstanding and the Company has no current plans
to issue any shares of the Preferred Stock.
WARRANTS
In April 1998, the Company issued to Shaw a warrant ("Product Purchase
Warrant") to purchase 3,000,000 shares of Common Stock at an exercise price of
$6.50 per share. The Product Purchase Warrant is exercisable between April 6,
2003 and December 31, 2003, or earlier depending on the volume of cable modem
purchases by Shaw in 1998, 1999 and 2000. In addition, the Company issued to
Shaw a warrant ("Anti-Dilution Warrant") to purchase an indeterminate number
of shares of Common Stock for an aggregate price of $1.00. The Anti-Dilution
Warrant is exercisable from time to time when the Company issues certain new
equity securities until the date upon which Shaw ceases to own at least
384,615 shares of Common Stock.
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REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (or their
permitted transferees) of approximately 8,200,635 shares of Common Stock and
Preferred Stock (which Preferred Stock will automatically be converted into
Common Stock upon the completion of this offering) and of warrants to purchase
3,038,462 shares of Common Stock ("Holders"), the Holders will be entitled to
certain rights with respect to registration of such shares for sale in the
public market. The Holders are entitled to certain rights with respect to the
registration of such shares under the Securities Act. If the Company proposes
to register its Common Stock, subject to certain exceptions, under the
Securities Act, the Holders are entitled to notice of the registration and are
entitled at the Company's expense to include such shares therein, provided that
the managing underwriters have the right to limit the number of such shares
included in the registration or exclude such shares entirely. In addition,
certain of the Holders may require the Company, at the Company's expense, on no
more than six occasions, to file a registration statement under the Securities
Act with respect to their shares of Common Stock. Such rights may not be
exercised until six months after the completion of this offering. Further,
certain Holders may require the Company at the Company's expense on no more
than four occasions, to register all or portion of their shares on Form S-3
when such form becomes available to the Company, subject to certain conditions
and limitations. Such rights expire on the seventh anniversary of completion of
this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW
Charter Documents
The Restated Certificate and Restated Bylaws include a number of provisions
that may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company. First, the Restated
Certificate provides that all stockholder action upon completion of this
offering must be effected at a duly called meeting of holders and not by a
consent in writing. Second, the Restated Bylaws provide that special meetings
of the holders may be called only by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer or (iii) Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors. Third, the Certificate and the Bylaws provide for a
classified Board of Directors. The Certificate includes a provision requiring
cumulative voting for directors only if required by applicable California law.
Under cumulative voting, a minority stockholder holding a sufficient percentage
of a class of shares may be able to ensure the election of one or more
directors. As a result of the provisions of the Certificate and applicable
California and Delaware law, at any annual meeting whereby the Company had at
least 800 stockholders as of the end of the fiscal year prior to the record
date for such annual meeting, stockholders will not be able to cumulate votes
for directors. Finally, the Restated Bylaws establish procedures, including
advance notice procedures with regard to the nomination of candidates for
election as directors and stockholder proposals. These provisions of the
Restated Certificate and Restated Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control or management of the
Company. Such provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors--Anti-Takeover Provisions."
Delaware Takeover Statute
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
publicly held Delaware corporation, such as the Company shall become upon
completion of this offering, from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction pursuant to which the person became an interested stockholder,
unless the business combination is approved in a manner prescribed by Delaware
law. For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and
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<PAGE>
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
Boston Equiserve has been appointed as the transfer agent and registrar for
the Company's Common Stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company, and there can be no assurance that a significant public market for the
Common Stock will develop or be sustained after this offering. Future sales of
substantial amounts of Common Stock (including shares issued upon exercise of
outstanding options and warrants) in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair the Company's ability to raise capital through sale of its equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering because of certain
contractual restrictions on resale. Sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding
16,220,733 shares of Common Stock (based upon shares outstanding as of June 30,
1998), assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options or warrants that do not expire prior to
completion of this offering. Of these shares, the 3,000,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act
except for any shares purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining 13,220,733 shares
of Common Stock held by existing stockholders are "Restricted Shares" as that
term is defined in Rule 144. All such Restricted Shares are subject to lock-up
agreements providing that, with certain limited exceptions, the stockholder
will not offer, sell, contract to sell or otherwise dispose of any Common Stock
of the Company, including any securities that are convertible into or
exchangeable for, Common Stock for a period 180 days after the date of this
Prospectus without the prior written consent of BT Alex. Brown Incorporated or
the Company. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
none of these shares will be salable until 181 days after the date of this
Prospectus. Beginning 181 days after the date of this Prospectus, 12,091,022
Restricted Shares will be eligible for sale in the public market, subject to
volume and other limitations under Rule 144. In addition, as of June 30, 1998,
there were outstanding options to purchase 2,483,292 shares and warrants to
purchase 3,088,462 shares. Of such options and warrants, 5,521,754 shares
issuable upon exercise are subject to lock-up agreements. The Company has
agreed with BT Alex. Brown Incorporated not to release any stockholder from any
lock-up agreement between the Company and the stockholder without the prior
written consent of BT Alex. Brown Incorporated. BT Alex. Brown Incorporated
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately 162,207 shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
and affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to the Company who purchased shares pursuant to a
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<PAGE>
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell such shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, all Rule 701 shares are subject
to lock-up agreements and will only become eligible for sale at the expiration
of the 180-day lock-up agreements or no sooner than 90 days after the offering
upon obtaining the prior written consent of BT Alex. Brown Incorporated.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the 1995 Stock Option Plan, the 1997 Equity Incentive
Plan, the 1998 Employee Stock Purchase Plan and the 1998 Non-employee
Director's Stock Option Plan (collectively the "Incentive Stock Plans"). See
"Management--Equity Incentive Plans". Based on the number of shares subject to
outstanding options as of June 11, 1998 and currently reserved for issuance
under the Incentive Stock Plans, such registration statement would cover
approximately 5,600,000 shares. Such registration statement will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of the Company, be available for sale in the open market
immediately after the 180-day lock-up agreements expire.
Also beginning 180 days after the date of this offering, holders of
approximately 8,200,635 Restricted Shares and holders of warrants to purchase
3,038,462 shares of Common Stock will be entitled to certain rights with
respect to registration of such shares for sale in the public market. See
"Description of Capital Stock--Registration Rights". Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by affiliates) immediately upon the effectiveness of such
registration.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
through their Representatives, BT Alex. Brown Incorporated, Hambrecht & Quist
LLC, Lehman Brothers Inc. and Smith Barney Inc., have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
BT Alex. Brown Incorporated.......................................
Hambrecht & Quist LLC.............................................
Lehman Brothers Inc...............................................
Smith Barney Inc. ................................................
----------
Total........................................................... 3,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any such shares are
purchased.
The Company has been advised by Representatives of the Underwriters that the
Underwriters propose to offer the shares of Common Stock directly to the public
at the initial offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the above table bears to the total number of shares of
Common Stock offered hereby, and the Company will be obligated, pursuant to the
option, to sell such shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same terms
as those on which the 3,000,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company and its officers, directors and stockholders have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
BT Alex. Brown Incorporated. Such consent may be given without any public
notice.
64
<PAGE>
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies that the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company and its industry in general and the present state of
the Company's development and other factors deemed relevant.
The Company has been advised by the Representatives that during and after
this offering, the Underwriters may purchase and sell Common Stock in the open
market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the Common Stock; and syndicate short positions involve the sale by
the Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in this offering. The Underwriters also
may impose penalty bids, whereby selling concessions allowed to the syndicate
members or other broker-dealers in respect of the Common Stock sold in this
offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm orders to any account over which they
exercise discretionary authority.
65
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward llp ("Cooley Godward"), San Francisco, California.
Certain legal matters related to the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. As of the date of this Prospectus, certain partners and
associates of Cooley Godward own through an investment partnership an aggregate
of 36,668 shares of Common Stock of the Company.
EXPERTS
The consolidated financial statements of Terayon Communication Systems, Inc.
at December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission also maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited interim financial information for
each of the first three fiscal quarters of each fiscal year of the Company.
66
<PAGE>
GLOSSARY OF TECHNICAL TERMS
<TABLE>
<C> <S>
10BASET..................... Ethernet standard which applies to the physical
layer of the OSI Reference Model for 10 Mbps
Ethernet over two pairs of category 3, 4 or 5
Unshielded Twisted Pair (UTP) wire.
100BASET.................... An extension to the 10BaseT Ethernet network
access method which operates at 100 Mbps.
56 KBPS..................... Equivalent to a single high speed telephone
service line, capable of transmitting one voice
call or 56 Kbps of data.
ADSL........................ Asymmetric Digital Subscriber Line. A high speed
technology that enables the transfer of data
over existing copper line.
ANALOG...................... A form of transmission employing a continuous
electrical signal (rather than a pulsed or
digital system) that varies in frequency and
amplitude.
ASIC........................ Application specific integrated circuit.
ASYNCHRONOUS................ A form of concurrent input and output
communication transmission with no timing
relationship between the two signals. Slower-
speed asynchronous transmission requires start
and stop bits to avoid a dependency on timing
clocks (10 bits to send an 8-bit byte).
ATM......................... Asynchronous Transfer Mode. A fixed length 53-
byte packet-based transmission technology that
may be used to transmit data, voice and video
traffic; ATM utilizes cell switching.
BANDWIDTH................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted, measured
in bits per second (bps).
BROADBAND ACCESS............ A transmission that has a bandwidth greater than
a voice-grade line of 3KHz, usually at
transmission speeds of greater than 1.5 Mbps
(T-1).
CBR......................... Constant bit rate. A Quality of Service class
specified when service is initiated.
CDMA........................ Code Division Multiple Access. An information
transmission technology that transmits
information from multiple sources across a fixed
frequency band by encoding each in a unique
transmission code.
COAXIAL CABLE............... A large capacity data transmission medium
consisting of insulated wires grouped together
inside an insulated cable. Used for broadband
communications networks and cable TV.
DAVLC....................... Digital Audio Video Interactive Council. A
European standards setting committee.
DBS......................... Direct Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to end-user dish antennas.
</TABLE>
G-1
<PAGE>
<TABLE>
<C> <S>
DOWNSTREAM.................. The data path from service provider to end user.
DSL......................... Digital Subscriber Line. Point-to-point public
network access technologies that allow multiple
forms of data, voice and video to be carried
over twisted-pair copper wire on the local loop
between a network service provider's central
office and the customer site at limited
distances.
FCC......................... Federal Communications Commission.
FDMA........................ Frequency Division Multiple Access. A
transmission technology that multiplexes
information from multiple sources onto discrete
carrier frequencies over fixed time intervals.
FREQUENCY................... The number of identical cycles per second,
measured in hertz, of a periodic oscillation or
wave in radio propagation.
HDSL........................ High Bit Rate Digital Subscriber Line. A
technology that enables high speed transmission
of data over copper wires.
HEADEND..................... The central distribution point in a cable
system. Typically serves tens to hundreds of
thousands of homes.
HERTZ OR HZ................. Cycles per second.
HFC......................... Hybrid Fiber/Coax. Upgraded cable plant, which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
HOMES PASSED................ Homes physically passed by a cable network.
IEEE........................ Institute of Electrical and Electronics
Engineers, Inc.
ISDN........................ Integrated Services Digital Network. An
internationally accepted standard for voice,
data and signaling that makes all transmission
circuits end-to-end digital and defines a
standard out-of-band signaling system.
KBPS........................ Kilobits per second. Thousand bits per second.
LMDS........................ Local Multipoint Distribution Service. A
broadband wireless communications network that
uses millimeter wave frequencies around 28 to 38
GHz to transmit video and data to residences
over a cellular-like network at distances under
a few miles.
MBPS........................ Megabits per second. Millions of bits per
second.
MCNS........................ Multimedia Cable Network System. Industry
consortium that defines the technical
requirement for interoperability of high speed
cable modem and headend equipment.
MHZ......................... Megahertz. Millions of cycles per second.
MMDS........................ Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
</TABLE>
G-2
<PAGE>
<TABLE>
<C> <S>
OC-3........................ A specification of transmission of data over
optical cable at 155 megabits per second.
QAM......................... Quadrature Amplitude Modulation. A digital
modulation technique commonly used in broadband
networks.
RF.......................... Radio Frequency. The range of electro-magnetic
frequencies above the audio range and below
visible light.
RF MODULATION............... The transmission of a signal through a carrier
frequency.
SNR......................... Signal-to-noise ratio.
SYNCHRONOUS................. A form of communication transmission with a
direct timing relationship between input and
output signals. The transmitter and receiver are
in sync and signals are sent at a fixed rate.
Information is sent in multibyte packets.
TDMA........................ Time Division Multiple Access. An information
transmission technology that multiplexes
information from multiple sources onto a single
frequency carrier signal over discrete time
intervals.
UBR......................... Unspecified Bit Rate. A Quality of Service class
that provides no guarantee of a fixed data rate,
or bandwidth to the user. Bandwidth is provided
on a best effort basis.
UL.......................... Underwriter's Laboratory. A United States
regulatory body responsible for certification of
safety standards.
UPSTREAM.................... The data path from the end user to the service
provider.
XDSL........................ Other Digital Subscriber Line. Generic
representation of entire family of Digital
Subscriber Line technology spanning data rates
from 128 Kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.
</TABLE>
G-3
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Terayon Communication Systems, Inc.
We have audited the accompanying consolidated balance sheets of Terayon
Communication Systems, Inc. as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1997. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Terayon Communication Systems, Inc. at December 31, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
February 6, 1998,
except for Note 13, as to which
the date is July 8, 1998
F-2
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, PRO FORMA
------------------ JUNE 30, STOCKHOLDERS' EQUITY
1996 1997 1998 JUNE 30, 1998
-------- -------- ----------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 8,356 $ 1,569 $ 6,030
Short-term investments.. 4,508 418 --
Accounts receivable,
less allowance for
doubtful accounts of
$20 in 1997 and $152 in
1998................... -- 574 2,284
Accounts receivable from
related parties........ -- 362 2,236
Other receivable........ -- -- 242
Inventory............... -- 1,322 1,521
Other current assets.... 299 690 719
-------- -------- --------
Total current assets...... 13,163 4,935 13,032
Property and equipment,
net...................... 2,572 3,615 3,371
Officer note receivable... 100 100 100
Other assets.............. 143 128 131
-------- -------- --------
Total assets.............. $ 15,978 $ 8,778 $ 16,634
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable........ $ 682 $ 2,232 $ 6,642
Accrued payroll and
related expenses....... 570 1,052 1,310
Other accrued
liabilities............ 450 1,526 2,706
Advance from related
party.................. -- 2,000 --
Deferred revenue........ 425 95 --
Current portion of long-
term debt.............. 917 2,812 2,137
Current portion of
capital lease
obligations............ 148 65 43
-------- -------- --------
Total current
liabilities.......... 3,192 9,782 12,838
Long-term debt............ 1,150 -- --
Long-term portion of
capital lease
obligations.............. 105 44 24
Deferred rent............. 102 126 130
Other noncurrent
liabilities.............. 24 -- --
Commitments and
contingencies
Redeemable convertible
preferred stock, $.001
par value:
Authorized shares--
included in convertible
preferred stock
authorized
Issued and outstanding
shares--576,924 in 1998
and none pro forma,
aggregate redemption
value of $7,500;
aggregate liquidation
preference of $7,500 in
1998................... -- -- 7,500 $ --
Stockholders' equity (net
capital deficiency):
Preferred stock, $.001
par value:
Authorized shares--
4,600,903 actual and
5,000,000 pro forma
Issued and outstanding
shares--none actual and
pro forma.............. -- -- -- --
Convertible preferred
stock, $.001 par value:
Authorized shares--
10,399,097 actual and
none pro forma
Issued and outstanding
shares--6,322,174 in
1996, 7,131,161 in 1997
and 7,783,711 in 1998,
and none pro forma;
aggregate liquidation
preference--$26,158 in
1996, $36,675 in 1997
and $45,158 in 1998.... 25,989 35,807 8 --
Common stock, $.001 par
value:
Authorized shares--
30,000,000 actual and
35,000,000 pro forma
Issued and outstanding
shares--4,138,799 in
1996, 4,630,447 in
1997, 4,860,098 in 1998
and 13,220,733 pro
forma (includes 10,000
shares subject to
redemption in 1997 and
1998).................. 90 471 5 13
Additional paid in
capital................ -- -- 46,620 54,120
Accumulated deficit..... (14,614) (37,163) (48,510) (48,510)
Deferred compensation... -- (216) (1,959) (1,959)
Stockholders' notes
receivable............. (60) (73) (22) (22)
-------- -------- -------- --------
Total stockholders'
equity (net capital
deficiency).......... 11,405 (1,174) (3,858) $ 3,642
-------- -------- -------- ========
Total liabilities and
stockholders' equity
(net capital
deficiency).......... $ 15,978 $ 8,778 $ 16,634
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Product revenues............. $ -- $ -- $ 1,021 $ 93 $ 4,279
Related party product
revenues.................... -- -- 617 -- 5,097
Contract consulting and
technology development
revenues.................... -- -- 480 -- --
------- -------- -------- ------- --------
Total revenues............. -- -- 2,118 93 9,376
COST OF GOODS SOLD:
Cost of product revenues..... -- -- 3,904 482 5,017
Cost of related party product
revenues.................... -- -- 2,558 -- 6,500
Cost of contract consulting
and technology development
revenues.................... 676 -- -- -- --
------- -------- -------- ------- --------
Total cost of goods sold... 676 -- 6,462 482 11,517
------- -------- -------- ------- --------
GROSS PROFIT (LOSS)............ (676) -- (4,344) (389) (2,141)
OPERATING EXPENSES:
Research and development..... 2,028 8,020 11,319 5,886 4,923
Sales and marketing.......... 205 1,141 4,468 1,523 2,969
General and administrative... 825 1,789 2,546 1,105 1,282
------- -------- -------- ------- --------
Total operating expenses... 3,058 10,950 18,333 8,514 9,174
------- -------- -------- ------- --------
Loss from operations........... (3,734) (10,950) (22,677) (8,903) (11,315)
Interest income................ 110 393 396 231 146
Interest expense............... (42) (140) (268) (108) (178)
------- -------- -------- ------- --------
Net loss....................... $(3,666) $(10,697) $(22,549) $(8,780) $(11,347)
======= ======== ======== ======= ========
Pro forma basic and diluted net
loss per share................ $ (2.07) $ (0.94)
======== ========
Shares used in pro forma basic
and diluted net loss per
share......................... 10,873 12,132
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
CONVERTIBLE ADDI- STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK TIONAL ACCUMU- DEFERRED STOCKHOLDERS' EQUITY
------------------ ----------------- PAID-IN LATED COMPEN- NOTES (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SATION RECEIVABLE DEFICIENCY)
--------- -------- --------- ------- ------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... -- $ -- 2,000,000 $ 62 -- $ (251) $ -- $(13) $ (202)
Exercise of option to
purchase common stock.. -- -- 2,000,000 -- -- -- -- -- --
Net cash proceeds from
issuance of Series A
preferred stock........ 4,077,093 3,853 -- -- -- -- -- -- 3,853
Issuance of Series A
preferred stock for
notes receivable....... 85,000 81 -- -- -- -- -- (81) --
Net cash proceeds from
issuance of Series B
preferred stock........ 896,834 7,970 -- -- -- -- -- -- 7,970
Net loss................ -- -- -- -- -- (3,666) -- -- (3,666)
--------- -------- --------- ------- ------- -------- ------- ---- --------
BALANCE AT DECEMBER 31,
1995................... 5,058,927 11,904 4,000,000 62 -- (3,917) -- (94) 7,955
Net cash proceeds from
issuance of Series B-1
preferred stock........ 448,417 3,957 -- -- -- -- -- -- 3,957
Cash proceeds from
payment on a
shareholder note
receivable............. -- -- -- -- -- -- -- 34 34
Exercise of options for
cash to purchase common
stock.................. -- -- 106,219 11 -- -- -- -- 11
Issuance of common stock
for consulting
services............... -- -- 32,580 17 -- -- -- -- 17
Net cash proceeds from
issuance of Series C
preferred stock........ 814,830 10,128 -- -- -- -- -- -- 10,128
Net loss................ -- -- -- -- -- (10,697) -- -- (10,697)
--------- -------- --------- ------- ------- -------- ------- ---- --------
BALANCE AT DECEMBER 31,
1996................... 6,322,174 25,989 4,138,799 90 -- (14,614) -- (60) 11,405
Exercise of options for
cash to purchase common
stock.................. -- -- 481,648 140 -- -- -- -- 140
Net cash proceeds from
issuance of Series D
preferred stock........ 808,987 9,818 -- -- -- -- -- -- 9,818
Issuance of common stock
for note receivable.... -- -- 10,000 13 -- -- -- (13) --
Unearned compensation
related to stock
options................ -- -- -- 228 -- -- (228) -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 12 -- 12
Net loss................ -- -- -- -- -- (22,549) -- -- (22,549)
--------- -------- --------- ------- ------- -------- ------- ---- --------
BALANCE AT DECEMBER 31,
1997................... 7,131,161 35,807 4,630,447 471 -- (37,163) (216) (73) (1,174)
Net cash proceeds from
issuance of Series D
preferred stock
(unaudited)............ 114,089 1,454 -- -- -- -- -- -- 1,454
Conversion of advance
from related party to
Series D preferred
stock (unaudited)...... 153,846 2,000 -- -- -- -- -- -- 2,000
Net cash proceeds from
issuance of Series F
preferred stock and a
warrant (unaudited).... 384,615 4,933 -- -- -- -- -- -- 4,933
Value of preferred stock
warrant issued to
Series D preferred
stockholder
(unaudited)............ -- 19 -- -- -- -- -- -- 19
Exercise of options for
cash to purchase common
stock (unaudited)...... -- -- 205,276 56 -- -- -- -- 56
Exercise of option for
note receivable to
purchase common stock
(unaudited)............ -- -- 24,375 9 -- -- -- (9) --
Value of common stock
warrant (unaudited).... -- -- -- 35 -- -- -- -- 35
Cash proceeds from
payment on a
stockholder note
receivable (unaudited). -- -- -- -- -- -- -- 60 60
Unearned compensation
related to stock
options (unaudited).... -- -- -- 1,849 -- -- (1,849) -- --
Amortization of unearned
compensation
(unaudited)............ -- -- -- -- -- -- 106 -- 106
Transfer to additional
paid in capital as a
result of
reincorporation
(unaudited)............ -- (44,205) -- (2,415) 46,620 -- -- -- --
Net loss (unaudited).... -- -- -- -- -- (11,347) -- -- (11,347)
--------- -------- --------- ------- ------- -------- ------- ---- --------
BALANCE AT JUNE 30, 1998
(UNAUDITED)............ 7,783,711 $ 8 4,860,098 $ 5 $46,620 $(48,510) $(1,959) $(22) $ (3,858)
========= ======== ========= ======= ======= ======== ======= ==== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss...................... $(3,666) $(10,697) $(22,549) $(8,780) $(11,347)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 203 830 1,563 628 971
Amortization of unearned
compensation related to
stock options.............. -- -- 12 -- 106
Loss on disposal of fixed
assets..................... -- 20 -- -- --
Issuance of common stock for
consulting services........ -- 17 -- -- --
Value of common and
preferred stock warrants
issued..................... -- -- -- -- 54
Changes in operating assets
and liabilities:
Accounts receivable........ -- -- (574) (93) (1,710)
Accounts receivable from
related party............. -- -- (362) -- (1,874)
Other receivable........... -- -- -- -- (242)
Inventory.................. -- -- (1,322) (321) (199)
Other current assets....... (97) (177) (391) (317) (29)
Other assets............... (7) (118) 15 9 (3)
Accounts payable........... 518 8 1,550 1,646 4,410
Accrued payroll and related
expenses.................. 212 346 482 242 258
Other accrued liabilities.. 168 263 1,076 (47) 1,180
Deferred revenue........... 325 -- (330) 55 (95)
Deferred rent.............. -- 102 24 14 4
Other noncurrent
liabilities............... -- 24 (24) -- --
------- -------- -------- ------- --------
Net cash used in operating
activities................... (2,344) (9,382) (20,830) (6,964) (8,516)
INVESTING ACTIVITIES:
Purchases of short-term
investments.................. -- (6,863) (10,995) (5,501) --
Proceeds from sales and
maturities of short-term
investments.................. -- 2,355 15,085 8,732 418
Purchases of property and
equipment.................... (1,301) (1,892) (2,606) (1,613) (727)
Proceeds from sale of assets.. -- 42 -- -- --
Officer note receivable....... -- (100) -- -- --
------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities......... (1,301) (6,458) 1,484 1,618 (309)
</TABLE>
See accompanying notes.
F-6
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Principal payments on capital
leases............................ $ (82) $ (124) $ (144) $ (73) $ (42)
Principal payments on long-term
debt.............................. (16) (273) (909) (498) (675)
Proceeds from long-term debt....... 513 1,843 1,654 542 --
Exercise of option to purchase
common stock...................... -- 11 140 20 56
Advance from related party......... -- -- 2,000 -- --
Proceeds from issuance of preferred
stock............................. 11,823 14,085 9,818 -- 6,387
Proceeds from issuance of
redeemable preferred stock........ -- -- -- -- 7,500
Principal payments on stockholder
note receivable................... -- 34 -- -- 60
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities........... 12,238 15,576 12,559 (9) 13,286
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................. 8,593 (264) (6,787) (5,355) 4,461
Cash and cash equivalents at
beginning of period............... 27 8,620 8,356 8,356 1,569
------- ------- ------- ------- -------
Cash and cash equivalents at end of
period............................ $ 8,620 $ 8,356 $ 1,569 $ 3,001 $ 6,030
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for interest............. $ 42 $ 140 $ 268 $ 108 $ 178
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired
under capital leases.............. $ 176 $ 137 $ -- $ -- $ --
Maintenance agreement acquired
under capital lease............... $ 6 $ -- $ -- $ -- $ --
Issuance of convertible preferred
stock for stockholder note
receivable........................ $ 81 $ -- $ -- $ -- $ --
Sale of asset for decrease in
accounts payable.................. $ 210 $ -- $ -- $ -- $ --
Issuance of common stock for
consulting services............... $ -- $ 17 $ -- $ -- $ --
Exercise of option for note
receivable to purchase common
stock............................. $ -- $ -- $ 13 $ -- $ 9
Conversion of advance from related
party to Series D preferred stock. $ -- $ -- $ -- $ -- $ 2,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Terayon Communication Systems (the Company) was incorporated under the laws
of the state of California on January 20, 1993 for the purpose of developing,
producing, and marketing broadband access system products. In October 1997, the
Company changed its legal name from Terayon Corporation. In July 1998, the
Company reincorporated in the State of Delaware. Through December 31, 1996, the
Company was active in product development, the acquisition of equipment and
facilities, and raising capital; accordingly, the Company was in the
development stage. The Company emerged from the development stage during 1997.
Unaudited Interim Financial Information
The accompanying consolidated financial statements at June 30, 1998 and for
the six months ended June 30, 1997 and 1998 are unaudited but include all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the financial position and
the operating results and cash flows for the interim date and periods
presented. Results for the interim period ended June 30, 1998 are not
necessarily indicative of results for the entire fiscal year or future periods.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries, Terayon Communication Systems Europe and
Terayon do Brasil. The minority interests in net losses of Terayon
Communication Systems Europe and Terayon do Brasil were not significant for all
periods presented. All material intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been restated to conform with current year
presentation.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the years ended December 31, 1995,
1996 and 1997 and for the six months ended June 30, 1997 and 1998 was not
significant.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with an original maturity at the time of purchase of over three months but less
F-8
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
than a year are classified as short-term investments. At December 31, 1996 and
1997, approximately 90% and 45%, respectively, of the Company's total cash and
short-term investment balance was placed on deposit with an affiliate of a
convertible preferred stockholder (none at June 30, 1998). Management
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation at the end of each period.
At December 31, 1996 and 1997, all of the Company's investments in debt
securities were classified as available-for-sale and were obligations issued by
U.S. government agencies, maturing within one year. The amortized cost, which
approximated fair value, of debt instruments classified as cash equivalents and
short-term investments was approximately $6,436,000 and $4,508,000,
respectively, at December 31, 1996 and approximately $99,000 and $418,000,
respectively, at December 31, 1997 (none at June 30, 1998). The amount of
unrealized gains or losses was not significant at December 31, 1996 or 1997.
The estimated fair values of cash equivalents and short-term investments are
based on quoted market prices. The amount of realized gains or losses for the
years ended December 31, 1995, 1996, and 1997, and for the six months ended
June 30, 1997 and 1998 were not significant.
Concentrations of Credit Risk, Customer, Supplier, and Product
The Company operates in one business segment, the development and sale of
cable modem access products, which it sells primarily to customers within the
cable and communications industries, including related parties (see Note 12).
The Company performs ongoing credit evaluations of its customers and generally
requires no collateral. A relatively small number of customers and resellers
account for a significant percentage of the Company's revenues. The Company
expects that the sale of its products to a limited number of customers and
resellers may continue to account for a high percentage of revenues for the
foreseeable future.
Currently, the Company relies on single source suppliers of materials and
labor for the significant majority of its product inventory but is actively
pursuing additional supplier alternatives. As a result, should the Company's
current suppliers not produce and deliver inventory for the Company to sell on
a timely basis, operating results may be adversely impacted.
Substantially all of the Company's revenues have been attributable to sales
of the TeraLink and the TeraPro. These products are expected to account for a
significant part of the Company's revenues for the foreseeable future. As a
result, a decline in demand for or failure to achieve broad market acceptance
of the TeraLink or the TeraPro would adversely affect operating results.
In addition, market acceptance of the Company's products may be affected by
the emergence and evolution of industry standards. While the Company expects
its products to become compliant with industry standards, its inability to do
so may adversely affect operating results.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies, and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
F-9
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Other Receivable
At June 30, 1998, the Company had a receivable of $242,000 relating to
inventory components the Company was required to purchase from its previous
contract manufacturer that were subsequently sold to its current contract
manufacturer. Some of the components purchased from the previous subcontract
manufacturer were obsolete or sold to the new subcontract manufacturer at a
loss. The Company expensed approximately $1,300,000 for the obsolete and sold
inventory in the six months ended June 30, 1998.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market. The
components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Inventory:
Finished goods..................................... $ 163 $ 599
Work-in-process.................................... 366 383
Raw materials...................................... 793 539
------ ------
$1,322 $1,521
====== ======
</TABLE>
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Property and equipment are depreciated for financial reporting
purposes using the straight-line method over the estimated useful lives of
three to five years. Leasehold improvements are amortized using the straight-
line method over the shorter of the useful lives of the assets or the terms of
the leases.
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Software and computers........................... $ 2,516 $ 3,695 $ 3,870
Furniture and equipment.......................... 1,064 2,421 2,973
Leasehold improvements........................... 19 89 89
------- ------- -------
$ 3,599 $ 6,205 $ 6,932
Accumulated depreciation and amortization........ (1,027) (2,590) (3,561)
------- ------- -------
Property and equipment, net...................... $ 2,572 $ 3,615 $ 3,371
======= ======= =======
</TABLE>
Revenue Recognition
Revenues related to product sales are generally recognized when the products
are shipped to the customer. The Company has also performed some research and
product development work under best efforts technology development agreements.
Due to technological risk factors, the costs of these agreements have been
expensed as incurred and are included in cost of goods sold for the year ended
December 31, 1995. Revenues are recognized when applicable customer milestones
have been met,
F-10
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
including deliverables and, in any case, not in excess of the amount that would
be recognized using the percentage-of-completion method. The Company met
deliverables under an agreement in the fourth quarter of the year ended
December 31, 1997 and recognized the related revenue (see Note 3).
Warranty Reserves
Due to the recent introduction of the Company's products, the Company has
limited experience with warranty commitments that may arise with the current
generation of its products. The Company's products generally carry a one-year
warranty that includes factory and on-site repair services as needed for
replacement of parts. Estimated expenses for warranty obligations are accrued
as revenue is recognized. Reserve estimates are adjusted periodically to
reflect actual experience.
Stock-Based Compensation
As described in Note 8, the Company has elected to account for its employee
stock plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No.25), and to adopt
the disclosure-only provisions as required under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(FAS 123).
Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity (Net Capital
Deficiency)
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Options, warrants,
restricted stock and preferred stock were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from preferred
stock that will automatically convert upon the closing of the Company's initial
public offering (using the as-if-converted method). If the offering
contemplated by this Prospectus is consummated, all of the convertible
preferred stock and redeemable convertible preferred stock outstanding as of
the closing date will automatically be converted into an aggregate of
approximately 8,360,635 shares of common stock based on the shares of
convertible preferred stock outstanding at June 30, 1998. Unaudited pro forma
shareholders' equity (net capital deficiency) at June 30, 1998, as adjusted for
the conversion of preferred stock and redeemable preferred stock, is disclosed
on the balance sheet.
F-11
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net loss....................... $(3,666) $(10,697) $(22,549) $(8,780) $(11,347)
======= ======== ======== ======= ========
Shares used in computing basic
and diluted net loss per
share......................... 3,589 4,054 4,289 4,182 4,611
Historical basic and diluted
net loss per share............ $ (1.02) $ (2.64) $ (5.26) $ (2.10) $ (2.46)
======= ======== ======== ======= ========
Shares used in computing
historical basic and diluted
net loss per share............ 4,289 4,611
Adjustment to reflect the
effect of the assumed
conversion of weighted average
shares of convertible
preferred stock outstanding... 6,584 7,521
-------- --------
Shares used in computing pro
forma basic and diluted net
loss per share................ 10,873 12,132
======== ========
Pro forma basic and diluted net
loss per share................ $ (2.07) $ (0.94)
======== ========
</TABLE>
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. FAS 130 is effective for fiscal years beginning after
December 15, 1997 and will be adopted by the Company for the year ended
December 31, 1998. The Company's total comprehensive loss was the same as its
net loss for the six months ended June 30, 1998.
In addition, during June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (FAS 131). FAS 131 replaces
FAS 14, "Financial Reporting for Segments of a Business Enterprise" and changes
the way public companies report segment information. FAS 131 is effective for
fiscal years beginning after December 15, 1997 and will be adopted by the
Company for the year ended December 31, 1998.
2. OFFICER NOTE RECEIVABLE
In March 1996, the Company loaned an officer $100,000 pursuant to a
promissory note. The note does not bear interest, matures in March 2001, and is
full recourse, including being collateralized by 20,000 shares of the Company's
common stock.
F-12
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. DEFERRED REVENUE
On January 4, 1995, the Company entered into a Development and Production
Agreement with a telecommunications systems manufacturer (the Manufacturer),
whereby the Company agreed to develop an enabling technology for use with
certain manufacturer technology (the Product). Pursuant to the agreement, the
Manufacturer is obligated to purchase certain minimum quantities of the
Product, and the Company has agreed to provide the Product to the Manufacturer
on favorable pricing terms for a period of four years following completion of
the Product. In addition, the Company has agreed that for the first three
months following the completion of the Product, the Company will not sell the
Product to any third party for use in the carrying of voice-over coaxial
cables.
In accordance with the agreement, the Company will receive funding from the
Manufacturer totaling $1,000,000. These payments were originally received upon
the completion of certain milestones set forth in the agreement. In March 1998,
the agreement was amended, and the Company is to receive the remaining payments
(in addition to normal Product billings) over a certain number of future unit
shipments to the Manufacturer. As of December 31, 1997, approximately $480,000
of cash advances had been received under the agreement. In the fourth quarter
of the year ended December 31, 1997, the Company delivered the Product under
the agreement and recognized the $480,000 as revenue. During the six months
ended June 30, 1998, the Company recognized approximately $163,000 in revenue
under this agreement.
4. COMMITMENTS
The Company leases its facility and certain equipment under operating leases.
The operating lease for the Company's facility expires in 2002. Rental expense
was approximately $114,000, $542,000, and $850,000 for the years ended December
31, 1995, 1996, and 1997, respectively, and approximately $351,000 and $361,000
for the six months ended June 30, 1997 and June 30, 1998, respectively. The
Company signed a promissory note of approximately $59,000 in connection with
the initial security deposit for the facility. The note did not bear interest
and was paid in April 1997.
In March 1996, the Company subleased its former facilities to a third party
through December 1997. Sublease rental income was approximately $106,000 and
$122,000 for the years ended December 31, 1996 and 1997, respectively and
approximately $73,000 for the six months ended June 30, 1997. In October 1997,
the master lease and underlying sublease for these facilities were terminated
concurrently.
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements and included in property and equipment aggregated approximately
$452,000 at December 31, 1996 and 1997 and June 30, 1998. Related accumulated
amortization was approximately $211,000, $337,000 and $365,000 at December 31,
1996 and 1997, and June 30, 1998, respectively. Amortization expense related to
assets under capital leases is included in depreciation expense. In addition,
the capital leases are secured by the related equipment, and the Company is
required to maintain liability and property damage insurance.
F-13
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Future minimum lease payments under noncancelable operating leases and
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -----------------
OPERATING CAPITAL OPERATING CAPITAL
LEASES LEASES LEASES LEASES
--------- ------- --------- -------
<S> <C> <C> <C> <C>
1998..................................... $ 610 $ 80 $ 327 $32
1999..................................... 666 34 666 34
2000..................................... 688 11 688 11
2001..................................... 708 4 708 4
2002..................................... 178 -- 178 --
------ ---- ------ ---
Total minimum payments................... $2,850 129 $2,567 81
====== ======
Less amount representing interest........ 20 14
---- ---
109 67
Less current portion..................... 65 43
---- ---
$ 44 $24
==== ===
</TABLE>
Unconditional Purchase Obligations
The Company has unconditional purchase obligations to a few of its suppliers
that support the Company's ability to manufacture its products. The obligations
require the Company to purchase minimum quantities of the suppliers' products
at a specified price. At June 30, 1998, the Company had approximately
$16,340,000 of unconditional purchase obligations ($784,000 at December 31,
1997 and none at December 31, 1996).
5. DEBT OBLIGATIONS
In April 1997, the Company amended an existing credit agreement with a bank
to provide for a revolving line of credit up to $10,000,000 and four term loans
totaling $4,250,000. Borrowings under the revolving line of credit are limited
to the lesser of a) 80% of accounts receivable less than ninety days from the
invoice date or b) $10,000,000. Borrowings under the revolving line of credit
bear interest at the bank's prime rate plus 0.50% per annum (8.75% at December
31, 1996 and 9.0% at December 31, 1997 and June 30, 1998). There were no
borrowings under the revolving line of credit at December 31, 1996 and 1997 and
June 30, 1998.
Each term loan is subject to an interest rate calculated at the bank's prime
rate plus 1.50% per annum (9.75% at December 31, 1996 and 10% at December 31,
1997 and June 30, 1998). The first term loan is payable in thirty monthly
payments consisting of six interest payments and twenty-four equal principal
and interest payments through May 1998. Borrowings under the first term loan of
approximately $303,000 and $85,000 were outstanding at December 31, 1996 and
1997. There were no borrowings under the first term loan at June 30, 1998.
The second term loan is payable in forty monthly payments of four interest
payments and thirty-six equal principal and interest payments through October
1999. Borrowings under the second term loan of approximately $944,000,
$611,000, and $444,000 were outstanding at December 31, 1996 and 1997 and June
30, 1998, respectively.
F-14
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
The third term loan is payable according to two separate payment schedules.
The first payment schedule includes thirty-six equal principal and interest
payments through November 1999. At December 31, 1996 and 1997 and June 30,
1998, borrowings under the first payment schedule were approximately $820,000,
$539,000 and $398,000, respectively. The second payment schedule consists of
thirty-one payments of one interest payment and thirty equal principal and
interest payments through December 1999. At December 31, 1997 and June 30,
1998, borrowings under the second payment schedule were approximately $119,000
and $87,000, respectively (none at December 31, 1996).
The fourth term loan is payable in forty-one monthly payments of five
interest payments and thirty-six equal principal and interest payments through
November 2000. Borrowings under the fourth term loan of approximately
$1,458,000 and $1,208,000 were outstanding at December 31, 1997 and June 30,
1998, respectively (none at December 31, 1996).
Outstanding borrowings under the credit agreement are secured by all of the
Company's assets. The credit agreement contains affirmative and negative
covenants and will, among other things, require the Company to maintain minimum
levels of investable funds and liquid assets. The credit agreement also limits
the Company's ability to incur additional debt, to pay cash dividends, or to
purchase or sell certain assets. Finally, the agreement restricts the Company
to a maximum liability to tangible net worth ratio and prohibits certain
acquisitions, mergers, consolidations, or similar transactions. At December 31,
1997 and June 30, 1998, the Company was out of compliance with certain
covenants contained within the credit agreement and therefore has classified
all outstanding borrowings as short-term at those dates.
The Company incurred interest expense related to the term loans of
approximately $18,000, $88,000, and $205,000 for the years ended December 31,
1995, 1996, and 1997, respectively and $95,000 and $128,000 for the six months
ended June 30, 1997 and 1998, respectively.
6. CONTINGENCIES
During 1997, the Company placed a noncancelable purchase order (subject to
specific delivery date requirements) with a subcontract manufacturer. As
delivery of the initial shipments was delayed by the manufacturer, the Company
subsequently canceled the purchase order without the consent of the subcontract
manufacturer. The Company has received notification from the subcontract
manufacturer that the Company is obligated to make payment for materials and
services rendered under the terms of the purchase order. While management
believes that amounts recorded on its financial statements are adequate to
cover all related risks, the subcontract manufacturer has not agreed to a
settlement with the Company. Although the ultimate outcome of this matter
cannot be determined at this time, management does not believe that the outcome
will have a material adverse effect on the Company's financial position,
results of operations, and cash flows. However, based on future developments,
the Company's estimate of the outcome of these matters could change in the near
term.
The Company has also received a letter from an individual claiming that the
Company's technology infringes a patent held by such individual. The Company
has reviewed the allegations made by such individual, and management does not
believe that the outcome will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
In the normal course of business, the Company from time to time receives
inquiries with regard to various legal proceedings. In the opinion of
management, any liability resulting from these inquiries has
F-15
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
been accrued and will not have a material adverse effect on the Company's
financial position or results of operations.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1997, the Company entered into a Series E redeemable convertible
preferred stock agreement ("the Agreement"). The Agreement calls for the
establishment of a $5,000,000 escrow account to fund the issuance of up to
333,334 shares of Series E redeemable convertible preferred stock ("the Stock")
for cash at $15.00 per share. The escrow account will release cash to the
Company as the Company reaches certain technological and customer base
milestones as defined under the Agreement. Upon the first closing, the Company
is also to issue a warrant to purchase up to an additional 33,334 shares of the
Stock at $15.00 per share. In the event the final closing of the Agreement does
not occur prior to the earlier of the (a) completion of the Company's initial
public offering of shares of its Common Stock and (b) December 31, 1998, then
any amount remaining in the escrow account will be returned to the Series E
stockholder.
In February 1998, the Company reached a milestone under the Series E
redeemable convertible preferred stock agreement and issued 100,000 shares of
Series E redeemable convertible preferred stock, resulting in cash proceeds of
approximately $1,500,000 to the Company. In conjunction with this issuance, the
Company issued a warrant to the Series E stockholder to purchase 33,334 shares
of the Company's redeemable convertible preferred stock at $15.00 per share.
In June 1998, the Company and the Series E stockholder amended the Series E
redeemable convertible preferred stock agreement (the "Amendment"). The
Amendment calls for the cancellation of all Series E redeemable convertible
preferred stock outstanding with the $1,500,000 of proceeds from the
cancellation being applied toward the issuance of 115,385 shares of Series D
redeemable convertible preferred stock. In addition, all future milestones
under the Series E redeemable convertible preferred stock agreement were
canceled under the Amendment and 269,231 additional shares of Series D
redeemable convertible preferred stock were issued resulting in additional
proceeds of approximately $3,500,000. The Amendment also cancelled the warrant
for the purchase of 33,334 Series E redeemable convertible preferred stock at
$15.00 per share and issued a warrant for the purchase of 38,462 shares of
Series D redeemable convertible preferred stock with an exercise price of
$13.00 per share. The warrant is immediately exercisable and expires on the
earlier of the effective date of the Company's initial public offering or June
11, 2003. The Company has recorded an expense of $19,000 to reflect the value
of this warrant for the six months ended June 30, 1998.
The Series D redeemable convertible preferred stockholder also has the option
to sell to the Company some or all of the 384,616 redeemable shares held by the
Series D redeemable convertible preferred stockholder (the "Put Right") any
time after July 1, 1998. The price paid by the Company to the Series D
redeemable convertible preferred stockholder for any shares purchased pursuant
to the Put Right is $13.00 per share. In the event of the exercise of the Put
Right, the Company will apply the total amount of the Put Right toward the
purchase of the Company's products. Any of the redeemable shares not sold back
to the Company by the Series D redeemable convertible preferred stockholder
will retain their Put Right until the Put Termination Date which is defined
under the Agreement as the earlier of (a) February 20, 1999 and (b) the
completion of the Company's initial public offering of shares of its Common
Stock. In addition, in the event that prior to the Put Termination Date either
(a) the completion of the Company's initial public offering of shares of its
Common Stock has not occurred or (b) an acquisition of at least ninety percent
of all of the Company's capital stock has not occurred, then the
F-16
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Series D redeemable convertible preferred stockholder has the right to receive
a cash payment from the Company in an amount equal to ten percent of the
aggregate purchase price of the number of redeemable shares held by the Series
D redeemable convertible preferred stockholder as of the Put Termination Date.
In June 1998, the Company issued 192,308 shares of Series F redeemable
convertible preferred stock resulting in proceeds of approximately $2,500,000
to the Company. Series F redeemable convertible preferred stock also contains
an option that allows the Series F stockholder to sell some or all of the
redeemable shares back to the Company at a price of $13.00 per share any time
after June 1, 1999 to be used toward the purchase of the Company's products.
Any of the redeemable shares not sold back to the Company by the Series F
stockholder will retain the option until the completion of the Company's
initial public offering of shares of its common stock.
8. STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Convertible Preferred Stock
In April 1998, the Company's Board of Directors approved an increase in the
authorized number of shares of convertible preferred stock to 10,399,097
shares.
In April 1998, the Company issued 384,615 shares of Series F convertible
preferred stock and a warrant to purchase 3,000,000 shares of the Company's
common stock at an exercise price of $6.50 per share, resulting in cash
proceeds of approximately $5,000,000 to the Company. The warrant is exercisable
at any time on or after April 6, 2003 and prior to December 31, 2003. The
exercisability of the warrant can be accelerated based upon purchases of the
Company's cable modem product by the Series F convertible preferred stockholder
during the years ended December 31, 1998, 1999, and 2000 as defined within the
warrant.
In April 1998, a $2,000,000 advance received from a Series D preferred
stockholder in 1997 was converted into 153,846 shares of Series D convertible
preferred stock (see Note 12).
In June 1998, the Company also issued 114,089 shares of Series D convertible
preferred stock resulting in additional net proceeds of approximately
$1,454,000 to the Company.
F-17
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
The following is a summary of convertible preferred stock authorized, issued,
and outstanding, including redeemable convertible preferred stock:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
----------------------
SHARES DECEMBER 31, JUNE 30,
SERIES AUTHORIZED 1997 1998
- ------ ---------- ------------ ---------
<S> <C> <C> <C>
A............................................. 4,162,093 4,162,093 4,162,093
B............................................. 896,834 896,834 896,834
B-1........................................... 448,417 448,417 448,417
C............................................. 814,830 814,830 814,830
D............................................. 1,500,000 808,987 1,461,538
E............................................. 2,000,000 -- --
F............................................. 576,923 -- 576,923
---------- --------- ---------
10,399,097 7,131,161 8,360,635
========== ========= =========
</TABLE>
Convertible preferred stockholders and redeemable convertible preferred
stockholders have the same voting rights as common stockholders. In addition,
the Series A, B, B-1, C, D, E and F stockholders will vote as a single class.
In the event of any voluntary or involuntary liquidation of the Company, Series
A, B, B-1, C, D, E and F stockholders are entitled to a per share liquidation
preference of $0.9545, $8.92, up to $17.84, $12.50, up to $19.50, up to $22.50,
and up to $19.50, respectively, plus accrued dividends, if any. The holders of
Series A, B, B-1, C, D, E and F stock are entitled to per share noncumulative
dividends of $0.0764, $0.7136, $0.7136, $1.00, $1.04, $1.20 and $1.04 per
annum, respectively, when and if declared by the Board of Directors.
Each share of preferred stock and redeemable preferred stock is convertible
at the option of the holder into one share of common stock, subject to
adjustments for future dilution since the date of issuance. Each share of
Series A, B, and B-1 preferred stock automatically converts into common stock
at the then applicable conversion rate upon the earlier of (a) the public
offering of the Company's common stock with aggregate proceeds in excess of
$10,000,000 or (b) the date on which the Company obtains the consent of at
least two-thirds of the shares of Series A, B, and B-1 stockholders separately
by class. Each share of Series C preferred stock automatically converts at the
earlier of (a) the public offering of the Company's common stock at a per share
price of $12.50 (b) the end of any twenty-day period after a public offering of
the Company's common stock during which the closing sales price per share was
at least $12.50, or (c) the date on which the Company obtains the consent of at
least two-thirds of the shares of Series C stockholders, as applicable. Each
share of Series D preferred and redeemable preferred stock, Series E preferred
stock, and Series F preferred and redeemable preferred stock automatically
converts at the earlier of (a) the public offering of the Company's common
stock at a per share price of $13.00 or (b) the date on which the Company
obtains the consent of at least two-thirds of the shares of Series D, E and
Series F stockholders, as applicable. The Company has fully reserved shares of
common stock for issuance upon the conversion of the convertible preferred
stock and redeemable convertible preferred stock.
F-18
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Prior to undertaking an initial public offering of its securities or
initiating a sale of 50% or more of the Company's outstanding capital stock or
substantially all of the Company's assets to a third party, the Company must
provide written notice to one of the convertible preferred shareholders. The
investor then has the right to make the first offer to purchase the Company for
a period of up to thirty days from receipt of the Company's notice.
Common Stock Warrant
In June 1998, the Company issued a warrant to purchase 50,000 shares of the
Company's common stock at $10.00 per share. The warrant expires on the earlier
of the completion of the Company's initial public offering or December 1998.
The Company recorded an expense of $35,000 to reflect the value of the warrant
in the six months ended June 30, 1998.
Common Stock Reserved
Common stock reserved for issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
Convertible preferred stock.......................... 7,131,161 7,783,711
Redeemable convertible preferred stock............... -- 576,924
Common stock options................................. 2,646,880 4,937,229
Convertible preferred stock option................... 153,846 --
Redeemable convertible preferred stock in escrow..... 333,334 --
Series D preferred stock warrant..................... -- 38,462
Common stock warrants................................ -- 3,050,000
Employee stock purchase plan......................... -- 700,000
---------- ----------
10,265,221 17,086,326
========== ==========
</TABLE>
Stock-Based Compensation
In March 1995 and February 1997, the Board of Directors approved a stock
option plan and an equity incentive plan, respectively, that authorized the
grant of options to purchase shares of the Company's common stock. At December
31, 1997, the total authorized number of shares under the 1995 and 1997 plans
was 2,114,747 and 1,050,000, respectively. The plans are administered by the
Board of Directors and provide for incentive stock options or nonqualified
stock options to be issued to employees, directors, and consultants of the
Company. Prices for incentive stock options may not be less than the fair value
of the common stock at the date of grant. Prices for nonqualified stock options
may not be less than 85% of the fair value of the common stock at the date of
grant. Options are immediately exercisable and vest over a period not to exceed
five years from the date of grant. Any unvested stock issued is subject to
repurchase by the Company at the original issuance price upon termination of
the option holder's employment. Unexercised options expire ten years after the
date of grant.
In March and July 1997, the Board of Directors authorized grants of common
stock options outside the Company's stock option plans. The options are for
70,000 shares of common stock and generally vest over a three-year period in
six equal installments occurring every six months. In May and June 1998, the
Board of Directors authorized additional grants of 70,000 shares of common
stock outside the Company's stock option plans.
F-19
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
In June 1998, the Company's Board of Directors authorized (i) the adoption of
the amended 1997 Equity Incentive Plan, pursuant to which 2,250,000 additional
shares (plus a number of shares equal to the difference between the number of
shares remaining available for grant and the number of shares equal to 5% of
the Company's outstanding common stock at each year end) of the Company's
common stock have been reserved for future issuance to selected employees,
directors and consultants, (ii) the adoption of the 1998 Non-Employee
Directors' Stock Option Plan, pursuant to which 200,000 shares of the Company's
common stock have been reserved for future issuance to non-employee directors
of the Company, and (iii) the adoption of the 1998 Employee Stock Purchase
Plan, pursuant to which 700,000 shares of the Company's common stock have been
reserved for future issuance to eligible employees.
During the year ended December 31, 1997 and the six months ended June 30,
1998, the Company recorded aggregate deferred compensation of approximately
$228,000 and $1,849,000, respectively, representing the difference between the
grant price and the deemed fair value of the Company's common stock options
granted during these periods. The amortization of deferred compensation is
being charged to operations and is being amortized over the vesting period of
the options, which is typically five years. For the year ended December 31,
1997 and the six months ended June 30, 1998, the amortized expense was
approximately $12,000 and $106,000, respectively.
F-20
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
The following is a summary of additional information with respect to the 1995
Stock Option Plan, the 1997 Equity Incentive Plan, the 1998 Non-Employee
Directors' Stock Option Plan and option grants made outside the plans:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING
AND EXERCISABLE
-------------------
WEIGHTED
OPTIONS NUMBER AVERAGE
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE
---------- --------- --------
<S> <C> <C> <C>
Options authorized on March 8, 1995........... 1,414,747 -- $ --
Options granted............................... (1,630,500) 1,630,500 $0.10
Options canceled.............................. 396,000 (396,000) $0.03
---------- ---------
Balance at December 31, 1995.................... 180,247 1,234,500 $0.10
Options authorized............................ 700,000 -- $ --
Options granted............................... (988,500) 988,500 $0.51
Options exercised............................. -- (106,219) $0.10
Options canceled.............................. 229,831 (229,831) $0.15
---------- ---------
Balance at December 31, 1996.................... 121,578 1,886,950 $0.31
Options authorized............................ 1,120,000 -- $ --
Options granted............................... (1,304,050) 1,304,050 $1.71
Options exercised............................. -- (481,648) $0.30
Options canceled.............................. 372,168 (372,168) $0.56
---------- ---------
Balance at December 31, 1997.................... 309,696 2,337,184 $1.05
Options authorized (unaudited)................ 2,520,000 -- --
Options granted (unaudited)................... (716,610) 716,610 $6.37
Options exercised (unaudited)................. -- (229,651) $0.29
Options canceled (unaudited).................. 340,851 (340,851) $2.21
---------- ---------
Balance at June 30, 1998 (unaudited)............ 2,453,937 2,483,292 $2.50
========== =========
</TABLE>
The following table summarizes information about stock options that were
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING
NUMBER OF AVERAGE EXERCISE CONTRACTUAL LIFE
RANGE OF EXERCISE PRICES SHARES PRICE (IN YEARS)
------------------------ --------- ---------------- ----------------
<S> <C> <C> <C>
$0.10 - $0.50.............. 1,167,134 $0.34 8.13
$1.25 - $1.30.............. 974,800 $1.26 9.00
$3.00 - $5.00.............. 195,250 $4.26 9.90
---------
Total.................... 2,337,184 $1.05 8.64
=========
</TABLE>
F-21
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING
NUMBER OF AVERAGE EXERCISE CONTRACTUAL LIFE
RANGE OF EXERCISE PRICES SHARES PRICE (IN YEARS)
------------------------ --------- ---------------- ----------------
<S> <C> <C> <C>
$0.10 -- $0.50............. 866,782 $0.40 7.75
$1.25 -- $1.30............. 816,650 $1.25 8.41
$3.00 -- $5.00............. 162,750 $4.11 9.48
$6.50 -- $10.00............ 637,110 $6.55 9.98
---------
Total.................... 2,483,292 $2.50 8.64
=========
</TABLE>
At December 31, 1997 and June 30, 1998, 103,050 and 127,152 shares,
respectively, of common stock outstanding were subject to repurchase by the
Company.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss is required under FAS 123 and is
calculated as if the Company had accounted for its employee stock options
granted during the years ended December 31, 1995, 1996 and 1997 under the fair
value method of FAS 123. The fair value for these options was estimated at the
date of grant using the minimum value method with the following weighted
average assumptions: risk-free interest rates of 5.34%, 6.22%, and 5.75% for
1995, 1996, and 1997, respectively; no dividend yield or volatility factors of
the expected market price of the Company's common stock; and a weighted average
expected life of the option of five years.
As discussed above, the option valuation models used under FAS 123 were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Pro forma net loss............................. $(3,669) $(10,718) $(22,627)
======= ======== ========
Pro forma basic and diluted net loss per share. $ (1.02) $ (2.64) $ (5.28)
======= ======== ========
</TABLE>
F-22
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
The pro forma impact of options on the net loss for the years ended December
31, 1995, 1996, and 1997 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of options
vesting as well as the impact of multiple years of stock option grants. The
full effect of FAS 123 will not be fully reflected until 1999.
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was $0.02, $0.11, and $0.41 for options
granted during 1995, 1996, and 1997, respectively.
Stockholders' Notes Receivable
In February 1993, the Company issued common stock to a founder in return for
a full recourse note receivable for $12,500. The note bears an interest rate of
7.04% per annum and is due in February 1998.
During June and December 1995, two officers of the Company were provided cash
advances totaling $81,133 for the purpose of purchasing the Company's Series A
preferred stock. The underlying full recourse notes were paid in August 1996
and June 1998.
In September 1997, the Company issued common stock to an employee in return
for a full recourse note receivable for $13,000. The note bears an interest
rate of 5.81% per annum and is due in September 1998. Pursuant to the stock
purchase agreement, the employee has the option to sell some or all of his
shares to the Company on or after September 22, 1998 at a purchase price of
$13.00 per share (the "Put Price"). Such option expires upon the earlier of
September 22, 2003 and b) the completion of the Corporation's initial public
offering of shares of its Common Stock. The Company has accrued the difference
between the note receivable's per share price and the Put Price over the
option's vesting period and included the cumulative difference in other accrued
liabilities as of March 31, 1998. The note receivable was paid in full in
January 1998.
In January 1998, the Company issued common stock to an employee in exchange
for a full recourse note receivable for $9,375. The note bears interest at 5.7%
and is payable in three equal annual payments commencing in January 1999.
F-23
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
9. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the fiscal years ended
December 31, 1995, 1996, and 1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets as of December 31, 1996 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards........................ $ 4,412 $ 11,323
Tax credit carryforwards................................ 293 2,531
Capitalized research and development.................... 912 1,373
Other, net.............................................. 439 1,158
------- --------
Total deferred tax assets............................. 6,056 16,385
Valuation allowance....................................... (6,056) (16,385)
------- --------
Net deferred tax assets $ -- $ --
======= ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of December 31,
1996 and 1997, has been established to reflect these uncertainties. The change
in the valuation allowance was a net increase of approximately $1,533,000,
$4,444,000, and $10,329,000 for the years ended December 31, 1995, 1996, and
1997, respectively.
As of December 31, 1997, the Company had federal and California net operating
loss carryforwards of approximately $31,000,000 and $15,000,000, respectively.
The Company also had federal and California research and development tax credit
carryforwards of approximately $1,700,000 and $1,200,000, respectively. The net
operating loss and credit carryforwards will expire at various dates beginning
in the years 1999 through 2012, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before full utilization.
The reconciliation of income tax expense (benefit) attributable to continuing
operations computed at the U.S. federal statutory rates to income tax expense
(benefit) for the fiscal years ended December 31, 1995, 1996, and 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory
rate......................................... $ (1,258) $ (3,638) $ (7,667)
Loss for which no tax benefit is currently
recognizable................................. 1,258 3,638 7,667
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
F-24
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
Three of the Company's customers, Telegate Ltd., Sumitomo Corporation, and
Net Brasil S.A. accounted for 30%, 29%, and 14% of revenues, respectively, for
the year ended December 31, 1997. Shaw Communications, Inc., Sumitomo
Corporation and Cablevision Systems Corporation, accounted for 40%, 14% and 10%
of revenues for the six months ended June 30, 1998, respectively. No other
customer accounted for more than 10% of revenues during these periods.
Total net export revenues to regions outside of the United States were
approximately $1,855,000 and $7,394,000 for the year ended December 31, 1997
and the six months ended June 30, 1998, respectively. Revenues by geographic
region were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------------
<S> <C> <C>
Revenues:
United States................................ $ 263 $1,982
Canada....................................... 198 3,873
Asia......................................... 617 1,422
South America................................ 326 304
Europe and Israel............................ 714 1,795
------ ------
Total...................................... $2,118 $9,376
====== ======
</TABLE>
11. 401(K) PROFIT SHARING PLAN AND TRUST
During 1995, the Company adopted a 401(k) Profit Sharing Plan and Trust that
allows eligible employees to make contributions subject to certain limitations.
The Company may make discretionary contributions based on profitability as
determined by the Board of Directors. No amount was contributed by the Company
to the plan during the years ended December 31, 1995, 1996, and 1997 or for the
six months ended June 30, 1997 and 1998.
12. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company recognized revenue of
approximately $617,000 in connection with product shipments made to a Series D
preferred stockholder. In addition, during the six months ended June 30, 1998,
the Company recognized revenue of approximately $1,312,000 and $3,785,000 in
connection with product shipments made to a Series D preferred stockholder, and
a Series F redeemable preferred and preferred stockholder, respectively.
Accounts receivable from the related parties totaled approximately $362,000 and
$2,236,000 at December 31, 1997 and June 30, 1998, respectively.
In September 1997, the Company received $2,000,000 from a Series D preferred
stockholder in connection with a stock option agreement. As of December 31,
1997, the Company has recorded the amount received as an advance from the
related party. The stock option agreement allows for the purchase of 153,846
shares of Series D preferred stock for the $2,000,000, on or before April 30,
1998. In April 1998, the $2,000,000 advance was converted into 153,846 shares
of Series D convertible preferred stock.
F-25
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
13. SUBSEQUENT EVENT--DELAWARE REINCORPORATION
In June 1998, the Company's Board of Directors authorized the reincorporation
of the Company in Delaware and an increase in the authorized number of shares
of common stock from 20,000,000 shares to 35,000,000 shares. In July 1998, the
Company's shareholders approved the reincorporation and the increase in
authorized number of shares, and the reincorporation was effective as of July
8, 1998. The par value of the preferred and common stock is $.001 per share.
Subsequent to the initial public offering, the Company's Certificate of
Incorporation will be amended to authorize 5,000,000 shares of preferred stock
which the Board of Directors has the authority to fix or alter the designation,
powers, preferences and rights of the shares of each such series and
qualifications, limitations or restrictions to any unissued series of preferred
stock. The Company's reincorporation has been reflected in the June 30, 1998
consolidated financial statements. The change resulted in the transfer of
$44,205,000 from convertible preferred stock and $2,415,000 from common stock
to additional paid in capital.
F-26
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Information Regarding Forward-Looking Statements.......................... 21
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 33
Management................................................................ 46
Certain Transactions...................................................... 56
Principal Stockholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 64
Legal Matters............................................................. 66
Experts................................................................... 66
Additional Information.................................................... 66
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 Shares
LOGO
[LOGO OF TERAYON APPEARS HERE]
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
HAMBRECHT & QUIST
LEHMAN BROTHERS
SALOMON SMITH BARNEY
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the shares of Common Stock being registered. All the amounts shown are
estimates except for the registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Registration fee................................................. $ 15,267
NASD filing fee.................................................. 5,675
Nasdaq National Market listing fee............................... 95,000
Blue sky qualification fee and expenses.......................... 5,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 450,000
Accounting fees and expenses..................................... 250,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous.................................................... 419,058
----------
Total.......................................................... $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law, (iii) to the fullest extent permitted by the Delaware
General Corporation Law, the Company is required to advance all expenses
incurred by its directors and executive officers in connection with a legal
proceeding (subject to certain exceptions), (iv) the rights conferred in the
Bylaws are not exclusive, (v) the Company is authorized to enter into
indemnification agreements with its directors, officers, employees and agents
and (vi) the Company may not retroactively amend the Bylaws provisions relating
to indemnity.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes
legally obligated to pay (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Company or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Company. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 1, 1995, Registrant has sold and issued the following unregistered
securities:
(1) Between July 1995 and December 1995, Registrant issued and sold 110,000
shares of Series A Preferred Stock to two private investors for an
aggregate purchase price of $104,995.00.
(2) In December 1995, Registrant issued and sold 896,834 shares of Series B
Preferred Stock to Cisco Systems, Inc. for an aggregate purchase price of
$7,999,759.
(3) In February 1996, Registrant issued and sold 448,417 shares of Series B-1
Preferred Stock to Sierra Ventures for an aggregate purchase price of
$3,999,880.
(4) In April 1996, Registrant issued 32,580 shares of Common Stock to a
consultant in consideration of consulting services rendered.
(5) In December 1996, Registrant issued and sold 814,830 shares of Series C
Preferred Stock to 13 private investors for an aggregate purchase price of
$10,185,375.
(6) In September 1997, Registrant issued and sold 10,000 shares of Common
Stock to an employee for an aggregate offering price of $13,000.
(7) Between September 1997 and June 1998, Registrant issued and sold 1,461,538
shares of Series D Preferred Stock to 27 private investors for an
aggregate purchase price of $18,999,994, and issued warrants to purchase
an aggregate of 38,462 shares of Series D Preferred Stock at an exercise
price of $13.00 per share.
(8) In December 1997, Registrant issued 15,716 shares of Series D Preferred
Stock to an investment bank for services rendered as the exclusive
placement agent of the sale of Series D Preferred Stock.
(9) In April 1998, Registrant issued to Shaw Communications Inc. ("Shaw") an
aggregate of 384,615 shares of Series F Preferred Stock and a warrant to
purchase 3,000,000 shares of Common Stock at an exercise price of $6.50
per share and a warrant to purchase an indeterminate amount of Common
Stock for $1.00 upon the occurrence of certain events for an aggregate
purchase price of $5,000,000. In June 1998, Registrant issued Shaw an
aggregate of 192,308 shares of Series F Preferred Stock for an aggregate
purchase price of $2,499,999.
(10) In June 1998, the Company issued a warrant to TAL Financial Corporation to
purchase 50,000 shares of Common Stock at an exercise price of $10.00 per
share.
(11) From July 1, 1995 to July 15, 1998, Registrant granted stock options to a
total of 157 employees, directors and consultants covering an aggregate of
4,037,160 shares of Common Stock, at exercise prices varying from $.10 to
$10.00. Of such shares, 818,184 shares have been issued and sold pursuant
to the exercise of such options. Options to purchase 963,343 shares of
Common Stock have been cancelled or have lapsed without being exercised or
otherwise have been cancelled.
Registrant claimed exemptions under the Securities Act from registration
under the Securities Act for the sale and issuance of securities in the
transaction described in paragraphs (1) through (10) by virtue of Section 4(2),
Regulation D promulgated thereunder as transactions not involving a public
offering. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof. Appropriate legends are affixed to the stock certificates issued in
such transactions. All recipients either received adequate information about
the Registrant or had access, through employment or other relationships, to
such information.
The sales and issuances in the transactions described in paragraph (11) above
were deemed to be exempt from registration under the Securities Act by virtue
of Rule 701 promulgated thereunder, in that they were issued pursuant to a
written compensatory benefit plan, as provided by Rule 701.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3+ Form of Amended and Restated Certificate of Incorporation to be
filed upon consummation of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2* Specimen Stock Certificate.
4.3+ Amended and Restated Information and Registration Rights Agreement
dated April 6, 1998.
5.1 Opinion of Cooley Godward llp.
10.1+ Form of Indemnity Agreement between the Registrant and each of its
directors and officers.
10.2+ 1995 Stock Option Plan, as amended on March 26, 1996.
10.3+ 1997 Equity Incentive Plan, as amended on June 9, 1998.
10.4+ 1998 Employee Stock Purchase Plan.
10.5+ 1998 Non-Employee Directors Stock Option Plan.
10.6**+ Supply Agreement between the Registrant and ECI Telecom Ltd. dated
March 3, 1998.
10.7**+ Strategic Partnership and Distributorship Agreement between the
Registrant and Sumitomo Corporation dated December 4, 1996.
10.8**+ Master Agreement between the Registrant and NET Brasil S.A. dated
June 30, 1997.
10.9+ Resale and License Agreement between the Registrant and Digital
Equipment Corporation dated December 9, 1996.
10.10+ Lease Agreement dated January 23, 1996 between the Registrant and
Arrillaga Family Trust and Richard T. Peery Separate Property
Trust.
10.11+ Employment Agreement between the Registrant and Zaki Rakib dated
February 1993.
10.12+ Employment Agreement between the Registrant and Selim Rakib dated
February 1993.
10.13+ Credit Agreement between the Registrant and Imperial Bank dated
April 24, 1997.
10.14+ Product Development Agreement between the Registrant and Cisco
Systems, Inc. dated July 22, 1996.
10.15+ Promissory Note and Stock Pledge Agreement between the Registrant
and Shlomo Rakib dated March 6, 1996.
10.16+ Stock Repurchase Agreement between the Registrant and Zaki Rakib
dated March 16, 1995.
10.17+ Stock Repurchase Agreement between the Registrant and Shlomo Rakib
dated March 16, 1995.
10.18+ Series A Preferred Stock Purchase Agreement between the Registrant
and Lewis Solomon dated June 16, 1995.
10.19+ Promissory Note between the Registrant and Lewis Solomon dated June
16, 1997.
10.20+ Stock Pledge Agreement between the Registrant and Lewis Solomon
dated June 16, 1997.
10.21+ Anti-Dilution Warrant to Purchase Shares of Common Stock dated
April 6, 1998 issued to Shaw Communications Inc.
21.1+ List of Subsidiaries.
23.1 Consent of Cooley Godward llp (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment has been requested for portions of this document.
+ Previously filed.
II-3
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the consolidated
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described in Item 14 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.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of the registration statement as of the time it was declared effective,
(2) for the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof, and (3) 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-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, REGISTRANT HAS
CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE COUNTY OF SANTA CLARA,
STATE OF CALIFORNIA, ON THE 20TH DAY OF JULY, 1998.
TERAYON COMMUNICATION SYSTEMS, INC.
/s/ Zaki Rakib
By___________________________________
DR. ZAKI RAKIB CHIEF EXECUTIVE
OFFICER AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Zaki Rakib Chief Executive July 20, 1998
- ------------------------------------- Officer and
DR. ZAKI RAKIB Director
(Principal Executive
Officer)
Shlomo Rakib* Chairman of the July 20, 1998
- ------------------------------------- Board of Directors
SHLOMO RAKIB
Michael D'Avella* Director July 20, 1998
- -------------------------------------
MICHAEL D'AVELLA
Christopher J. Schaepe* Director July 20, 1998
- -------------------------------------
CHRISTOPHER J. SCHAEPE
Lewis Solomon* Director July 20, 1998
- -------------------------------------
LEWIS SOLOMON
Mark Stevens* Director July 20, 1998
- -------------------------------------
MARK STEVENS
*By /s/ Zaki Rakib
---------------------------------
ZAKI RAKIB AS ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
POWER OF ATTORNEY
The person whose signature appears below constitutes and appoints Dr. Zaki
Rakib and Shlomo Rakib as his true and lawful attorney-in-fact and agent, and
each acting alone, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this Registration Statement
on Form S-1, and to sign any registration statement filed under Rule 462 under
the Securities Act of 1933 including post-effective amendments) thereto, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSON IN THE
CAPACITY AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ray M. Fritz Chief Financial July 20, 1998
- ----------------------------------- Officer (Principal
RAY M. FRITZ Accounting and
Financial Officer)
</TABLE>
II-6
<PAGE>
SCHEDULE II
<TABLE>
<S> <C>
</TABLE>
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1995...................... $-- $-- $-- $--
Year ended December 31,
1996...................... $-- $-- $-- $--
Year ended December 31,
1997...................... $-- $ 20 $-- $ 20
Six months ended June 30,
1998 (unaudited).......... $ 20 $132 $-- $152
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3+ Form of Amended and Restated Certificate of Incorporation to
be filed upon consummation of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.3.
4.2* Specimen Stock Certificate.
4.3+ Amended and Restated Information and Registration Rights
Agreement dated April 6, 1998.
5.1 Opinion of Cooley Godward llp.
10.1+ Form of Indemnity Agreement between the Registrant and each
of its directors and officers.
10.2+ 1995 Stock Option Plan, as amended on March 26, 1996.
10.3+ 1997 Equity Incentive Plan, as amended on June 9, 1998.
10.4+ 1998 Employee Stock Purchase Plan.
10.5+ 1998 Non-Employee Directors Stock Option Plan.
10.6**+ Supply Agreement between the Registrant and ECI Telecom Ltd.
dated March 3, 1998.
10.7**+ Strategic Partnership and Distributorship Agreement between
the Registrant and Sumitomo Corporation dated December 4,
1996.
10.8**+ Master Agreement between the Registrant and NET Brasil S.A.
dated June 30, 1997.
10.9+ Resale and License Agreement between the Registrant and
Digital Equipment Corporation dated December 9, 1996.
10.10+ Lease Agreement dated January 23, 1996 between the
Registrant and Arrillaga Family Trust and Richard T. Peery
Separate Property Trust.
10.11+ Employment Agreement between the Registrant and Zaki Rakib
dated February 1993.
10.12+ Employment Agreement between the Registrant and Selim Rakib
dated February 1993.
10.13+ Credit Agreement between the Registrant and Imperial Bank
dated April 24, 1997.
10.14+ Product Development Agreement between the Registrant and
Cisco Systems, Inc. dated July 22, 1996.
10.15+ Promissory Note and Stock Pledge Agreement between the
Registrant and Shlomo Rakib dated March 6, 1996.
10.16+ Stock Repurchase Agreement between the Registrant and Zaki
Rakib dated March 16, 1995.
10.17+ Stock Repurchase Agreement between the Registrant and Shlomo
Rakib dated March 16, 1995.
10.18+ Series A Preferred Stock Purchase Agreement between the
Registrant and Lewis Solomon dated June 16, 1995.
10.19+ Promissory Note between the Registrant and Lewis Solomon
dated June 16, 1997.
10.20+ Stock Pledge Agreement between the Registrant and Lewis
Solomon dated June 16, 1997.
10.21+ Anti-Dilution Warrant to Purchase Shares of Common Stock
dated April 6, 1998 issued to Shaw Communications Inc.
21.1+ List of Subsidiaries.
23.1 Consent of Cooley Godward llp (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment has been requested for portions of this document.
+ Previously filed.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION OF
TERAYON MERGER CORPORATION
The undersigned, a natural person (the "Sole Incorporator"), for the
purpose of organizing a corporation to conduct the business and promote the
purposes hereinafter stated, under the provisions and subject to the
requirements of the laws of the State of Delaware hereby certifies that:
I.
The name of this corporation is TERAYON MERGER CORPORATION.
II.
The address, including street, number, city, and county, of the registered
office of the Corporation in the State of Delaware is 1013 Centre Road, City of
Wilmington, 19805, County of New Castle; and the name of the registered agent of
the corporation in the State of Delaware at such address is Corporation Service
Company.
III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Delaware General Corporation
Law.
IV.
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is Fifty Million
(50,000,000) shares. Thirty-Five Million (35,000,000) shares shall be Common
Stock. Fifteen Million (15,000,000) shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series.
Except as provided below, the Board of Directors is hereby authorized to fix or
alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices, and the liquidation preferences of any wholly unissued series
of Preferred Stock, and the number of shares constituting any such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
1.
<PAGE>
Four Million One Hundred Sixty-Two Thousand Ninety-Three (4,162,093) shares
of Preferred Stock are designated "Series A Preferred Stock," Eight Hundred
Ninety-Six Thousand Eight Hundred Thirty-Four (896,834) shares of Preferred
Stock are designated "Series B Preferred Stock," Four Hundred Forty-Eight
Thousand Four Hundred Seventeen (448,417) shares of Preferred Stock are
designated "Series B-1 Preferred Stock," Eight Hundred Fourteen Thousand Eight
Hundred Thirty (814,830) shares of Preferred Stock are designated "Series C
Preferred Stock," One Million Five Hundred Thousand (1,500,000) shares of
Preferred Stock are designated "Series D Preferred Stock", Two Million
(2,000,000) shares of Preferred Stock are designated "Series E Preferred Stock"
and Five Hundred Seventy-Six Thousand Nine Hundred Twenty-Three (576,923) shares
of Preferred Stock are designated Series F Preferred Stock. The respective
rights, preferences, privileges and restrictions of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock are specified below.
1. DIVIDENDS. The holders of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be
entitled to receive dividends at the rate of:
(a) $0.0764 per annum on each outstanding share of Series A
Preferred (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
(b) $0.7136 per annum on each outstanding share of Series B
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares);
(c) $0.7136 per annum on each outstanding share of Series B-1
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares);
(d) $1.00 per annum on each outstanding share of Series C
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares);
(e) $1.04 per annum on each outstanding share of Series D
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares); and
(f) $1.20 per annum on each outstanding share of Series E
Preferred Stock;
(g) $1.04 per annum on each outstanding share of Series F
Preferred Stock;
payable out of funds legally available therefor. Such dividends shall be
payable only when, as and if declared by the board of directors and shall be
noncumulative. No dividends (other than those payable solely in the Common
Stock of the corporation) shall be paid on any Series C Preferred Stock, Series
B-1 Preferred Stock, Series B Preferred Stock, Series A Preferred Stock or
Common Stock during any fiscal year of the corporation until dividends in the
total amount of (i) $1.04 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the Series D Preferred
Stock and Series F Preferred Stock (ii) $1.20 per share (as adjusted for any
stock dividends, contributions or splits with respect to such shares) on the
Series E Preferred Stock shall have been paid or declared and set apart during
that fiscal year. Payments of any dividends to the holders of Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be
paid pro rata, on an equal priority, pari passu basis according to their
respective dividend rates set
2.
<PAGE>
forth herein. No dividends (other than those payable solely in the Common Stock
of the corporation) shall be paid on any Series B-1 Preferred Stock, Series B
Preferred Stock, Series A Preferred Stock or Common Stock during any fiscal year
of the corporation until dividends in the total amount of $1.00 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) on the Series C Preferred Stock shall have been paid or declared and set
apart during that fiscal year. No dividends (other than those payable solely in
the Common Stock of the corporation) shall be paid on any Series B Preferred
Stock, Series A Preferred Stock or Common Stock of the corporation during any
fiscal year of the corporation until dividends in the total amount of $0.7136
per share (as adjusted for any stock dividends, combinations or splits with
respect to such shares) on the Series B-1 Preferred Stock shall have been paid
or declared and set apart during that fiscal year. No dividends (other than
those payable solely in the Common Stock of the corporation) shall be paid on
any Series A Preferred Stock or Common Stock of the corporation during any
fiscal year of the corporation until dividends in the total amount of $0.7136
per share (as adjusted for any stock dividends, combinations or splits with
respect to such shares) on the Series B Preferred Stock shall have been paid or
declared and set apart during that fiscal year. No dividends (other than those
payable solely in the Common Stock of the corporation) shall be paid on any
Common Stock of the corporation during any fiscal year of the corporation until
dividends in the total amount of $0.0764 per share (as adjusted for any stock
dividends, combinations or splits with respect to such shares) on the Series A
Preferred Stock shall have been paid or declared and set apart during that
fiscal year. No right shall accrue to holders of shares of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock by reason of the fact that dividends on said shares are not declared in
any prior year, nor shall any undeclared or unpaid dividend bear or accrue any
interest.
2. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution, or winding up of the corporation, whether voluntary or involuntary,
distributions to the stockholders of the corporation shall be made in the
following manner:
(a) The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock 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 $0.9545 per share of Series A Preferred Stock, $8.92 per share of
Series B Preferred Stock, $8.92 per share of Series B-1 Preferred Stock,
$12.50 per share of Series C Preferred Stock, $13.00 per share of Series D
Preferred Stock, $15.00 per share of Series E Preferred Stock and $13.00
per share of Series F Preferred Stock (each as adjusted for any stock
dividends, combinations or splits with respect to such shares) plus all
declared but unpaid dividends on such share for each share of Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock on the liquidation date. If, upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F 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 Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock,
3.
<PAGE>
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock in proportion to the preferential amount
each such holder is otherwise entitled to receive.
(b) After payment to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock of the full amounts to which they shall be
entitled as provided in Section 2(a) above, the holders of the Series F
Preferred Stock, Series E Preferred Stock, Series D Preferred Stock, Series
B-1 Preferred Stock and Common Stock shall be entitled to receive ratably
on a per share basis (based upon the number of shares of Common Stock into
which each share of Series F Preferred Stock, Series E Preferred Stock,
Series D Preferred Stock and Series B-1 Preferred Stock is then
convertible) all the remaining assets until, as to the holders of Series F
Preferred Stock, such holders have received pursuant to this Section 2(b)
(excluding all amounts received pursuant to Section 2(a) above) an
additional amount of $6.50 per share then held by them, adjusted for any
stock dividends, combinations or splits with respect to such shares, as to
the holders of Series E Preferred Stock, such holders have received
pursuant to this Section 2(b) (excluding all amounts received pursuant to
Section 2(a) above) an additional amount of $7.50 per share then held by
them, adjusted for any stock dividends, combinations or splits with respect
to such shares, as to the holders of Series D Preferred Stock, such holders
have received pursuant to this Section 2(b) (excluding all amounts received
pursuant to Section 2(a) above) an additional amount of $6.50 per share
then held by them, adjusted for any stock dividends, combinations or splits
with respect to such shares and, as to the holders of Series B-1 Preferred
Stock, such holders have received pursuant to this Section 2(b) (excluding
all amounts received pursuant to Section 2(a) above) an additional amount
of $8.92 per share then held by them, adjusted for any stock dividends,
combinations or splits with respect to such shares.
(c) After payment to the holders of the Series F Preferred
Stock, Series E Preferred Stock, Series D Preferred Stock, Series C
Preferred Stock, Series B-1 Preferred Stock, Series B Preferred Stock,
Series A Preferred Stock and the Common Stock of the full amounts to which
they shall be entitled as provided in Sections 2(a) and (b) above, the
entire remaining assets and funds of the corporation legally available for
distribution shall be distributed among the holders of the Common Stock in
proportion to the shares of Common Stock then held by them.
(d) For purposes of this Section 2, any acquisition of the
corporation by means of a 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 a sale of all or substantially all of the assets of the
corporation, or any transaction or series of related transactions by the
corporation in which in excess of fifty percent (50%) of the corporation's
voting power is transferred, shall be treated as a liquidation, dissolution
or winding up of the corporation.
3. CONVERSION. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall
have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock shall be convertible, at the option of the
4.
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holder thereof, at the office of the corporation or any transfer agent for
such stock. The number of shares of Common Stock to which a holder of
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock shall be entitled upon
conversion shall be the product obtained by multiplying the applicable
"Conversion Rate," determined as hereinafter provided, then in effect by
the number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock or Series F Preferred Stock being converted
by such holder.
The conversion rate in effect at any time for conversion of the
shares of Series A Preferred (the "Series A Conversion Rate") shall be the
quotient obtained by dividing $0.9545 by the "Series A Conversion Price,"
determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion. The conversion rate in effect at any time
for conversion of the shares of Series B Preferred (the "Series B
Conversion Rate") shall be the quotient obtained by dividing $8.92 by the
"Series B Conversion Price," determined as hereinafter provided, in effect
on the date the certificate is surrendered for conversion. The conversion
rate in effect at any time for conversion of the shares of Series B-1
Preferred (the "Series B-1 Conversion Rate") shall be the quotient obtained
by dividing $8.92 by the "Series B-1 Conversion Price," determined as
hereinafter provided, in effect on the date the certificate is surrendered
for conversion. The conversion rate in effect at any time for conversion of
the shares of Series C Preferred (the "Series C Conversion Rate") shall be
the quotient obtained by dividing $12.50 by the "Series C Conversion Price"
determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion. The conversion rate in effect at any time
for conversion of the shares of Series D Preferred (the "Series D
Conversion Rate") shall be the quotient obtained by dividing $13.00 by the
"Series D Conversion Price" determined as hereinafter provided, in effect
on the date the certificate is surrendered for conversion. The conversion
rate in effect at any time for conversion of the shares of Series E
Preferred (the "Series E Conversion Rate") shall be the quotient obtained
by dividing $15.00 by the "Series E Conversion Price" determined as
hereinafter provided, in effect on the date the certificate is surrendered
for conversion. The conversion rate in effect at any time for conversion of
the shares of Series F Preferred (the "Series F Conversion Rate") shall be
the quotient obtained by dividing $13.00 by the "Series F Conversion Price"
determined as hereinafter provided, in effect on the date the certificate
is surrendered for conversion.
The conversion price for the Series A Preferred Stock (the
"Series A Conversion Price") shall initially be $0.9545. The conversion
price for the Series B Preferred Stock (the "Series B Conversion Price")
shall initially be $8.92. The conversion price for the Series B-1 Preferred
Stock (the "Series B-1 Conversion Price") shall initially be $8.92. The
conversion price for the Series C Preferred Stock (the "Series C Conversion
Price") shall initially be $12.50. The conversion price for the Series D
Preferred Stock (the "Series D Conversion Price") shall initially be
$13.00. The conversion price for the Series E Preferred Stock (the "Series
E Conversion Price") shall initially be $15.00. The conversion price for
the Series F Preferred Stock (the "Series F Conversion Price") shall
initially be $13.00. The initial Series A Conversion Price, Series B
Conversion Price, Series B-1 Conversion Price, Series C Conversion Price,
Series D Conversion Price, Series E Conversion Price and Series F
Conversion Price shall be adjusted as hereinafter provided.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock shall automatically be converted into shares of Common Stock at the
then-effective Series A Conversion
5.
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Rate upon the date specified by vote or written consent of holders of at
least two-thirds of the shares of the Series A Preferred Stock; each share
of Series B Preferred Stock shall automatically be converted into shares of
Common Stock at the then-effective Series B Conversion rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series B Preferred Stock; each share of Series B-1
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series B-1 Conversion Rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series B-1 Preferred Stock; each share of Series C
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series C Conversion Rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series C Preferred Stock; each share of Series D
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series D Conversion Rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series D Preferred Stock; each share of Series E
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series E Conversion Price upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of Series E Preferred Stock and each share of Series F Preferred
Stock shall automatically be converted into shares of Common Stock at the
then-effective Series F Conversion Price upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of Series F
Preferred Stock. Each share of Series A Preferred Stock, Series B Preferred
Stock and Series B-1 Preferred Stock shall automatically be converted into
shares of Common Stock at the then-effective Conversion Rate for such
series 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, the aggregate proceeds to the corporation and/or any selling
stockholders (after deduction for underwriters' discounts) of which exceed
$10,000,000 (a "Qualified Public Offering"). Each share of Series C
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series C Conversion Rate immediately upon the
earlier of (i) the closing of the sale of the corporation's Common Stock in
a Qualified Public Offering at a price per share equal to or exceeding
$12.50 (as adjusted for any stock dividends, combinations or splits with
respect to such shares) or (ii) the end of any twenty (20) day period after
a Qualified Public Offering during which the closing sales price per share
(or closing bid, if no sales were reported) of the Common Stock of the
corporation as quoted on any established stock exchange or a national
market system, including, without limitation, the Nasdaq National Market or
the Nasdaq SmallCap, was at least $12.50 (as adjusted for any stock
dividends, combinations or splits with respect to such shares) for each day
during such period. Each share of Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock shall automatically be
converted into shares of Common Stock at the then-effective Series D
Conversion Rate , Series E Conversion Rate or Series F Conversion Rate, as
the case may be, immediately upon the closing of the sale of the
corporation's Common Stock in a Qualified Public Offering at a price per
share equal to or exceeding $13.00 (as adjusted for any stock dividends,
combinations or splits with respect to such shares).
(c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Series F Preferred Stock shall be entitled to convert the same
into shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly
6.
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endorsed, at the office of the corporation or any transfer agent for such
stock, and shall give written notice to the corporation at such office that
such holder elects to convert the same and shall state therein the name or
names in which such holder 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 Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock a certificate or certificates
for the number of shares of Common Stock to which such holder 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 Preferred 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.
(d) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND
FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
corporation 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 Series A Conversion Price, Series B
Conversion Price, Series B-1 Conversion Price, Series C Conversion Price,
Series D Conversion Price, Series E Preferred Conversion Price and Series F
Conversion Price in effect immediately prior to such event 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.
(e) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the
Common Stock issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock shall be changed into the same or a different number of
shares of any other class of classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for in Section 3(d) above or a merger or
other reorganization referred to in Section 2(d) above), the Series A
Conversion Price, the Series B Conversion Price, Series B-1 Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E
Conversion Price and Series F Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred 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 of 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
Preferred Stock, Series B Preferred Stock, Series B-1
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Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock and Series F Preferred Stock immediately before that
change.
(f) ADJUSTMENT TO SERIES C CONVERSION PRICE, SERIES D
CONVERSION PRICE SERIES E CONVERSION PRICE AND SERIES F CONVERSION PRICE.
(1) SALE OF SHARES BELOW SERIES C CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock (as hereinafter defined), other than as a
dividend or other distribution on any class of stock as provided in Section
3(d) above, and other than a subdivision or combination of shares of Common
Stock as provided in Section 3(d) above, for an Effective Price (as
hereinafter defined) less than the then effective Conversion Price for the
Series C Preferred Stock, then, and in each such case, such Conversion
Price shall be reduced, as of the opening of business on the date of such
issue or sale, to a price determined by multiplying such Conversion Price
by a fraction (i) the numerator of which shall be (A) the number of shares
of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock outstanding (as defined below)
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(4)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock actually outstanding, (B) the number of shares of
Common Stock that have been issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock, which Preferred Stock could be obtained through the exercise or
conversion of all other rights, options, warrants and convertible
securities on the day immediately preceding the given date.
(2) SALE OF SHARES BELOW SERIES D CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an
8.
<PAGE>
Effective Price less than the then effective Conversion Price for the
Series D Preferred Stock, then, and in each such case, such Conversion
Price shall be reduced, as of the opening of business on the date of such
issue or sale, to a price determined by multiplying such Conversion Price
by a fraction (i) the numerator of which shall be (A) the number of shares
of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock outstanding immediately prior to such
issue or sale, plus (B) the number of shares of Common Stock which the
aggregate consideration received (as defined in subsection (f)(4)) by the
corporation for the total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price, and (ii) the denominator of
which shall be the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue or sale plus the total number of Additional
Shares of Common Stock so issued. For the purposes of the preceding
sentence, the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding as
of a given date shall be the sum of (A) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock actually outstanding, (B) the number of shares of Common Stock that
have been issued upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock, and (C) the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock, which
Preferred Stock could be obtained through the exercise or conversion of all
other rights, options, warrants and convertible securities on the day
immediately preceding the given date.
(3) SALE OF SHARES BELOW SERIES E CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series E Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue
9.
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or sale, plus (B) the number of shares of Common Stock which the aggregate
consideration received (as defined in subsection (f)(4)) by the corporation
for the total number of Additional Shares of Common Stock so issued would
purchase at such Conversion Price, and (ii) the denominator of which shall
be the number of shares of Common Stock issued or issuable upon conversion
of the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock and Series F Preferred Stock outstanding immediately
prior to such issue or sale plus the total number of Additional Shares of
Common Stock so issued. For the purposes of the preceding sentence, the
number of shares of Common Stock issued or issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock outstanding as of a given date
shall be the sum of (A) the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock actually
outstanding, (B) the number of shares of Common Stock that have been issued
upon conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock, and (C) the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, which Preferred Stock could be obtained
through the exercise or conversion of all other rights, options, warrants
and convertible securities on the day immediately preceding the given date.
(4) SALE OF SHARES BELOW SERIES F CONVERSION PRICE. If at any
time or from time to time the corporation issues or sells, or is deemed by
the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series F Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(4)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock actually outstanding, (B) the number of shares of
Common Stock that have been issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock,
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which Preferred Stock could be obtained through the exercise or conversion
of all other rights, options, warrants and convertible securities on the
day immediately preceding the given date.
(5) For the purpose of making any adjustment required under
Section 3(f)(1), (2), or (3) the consideration received by the corporation
for any issue or sale of securities shall (A) to the extent it consists of
cash, be computed at the net amount of cash received by the corporation
after deduction of any underwriting or similar commissions, compensation or
concessions paid or allowed by the corporation in connection with such
issue or sale but without deduction of any expenses payable by the
corporation, (B) to the extent it consists of property other than cash, be
computed at the fair value of that property as determined in good faith by
the Board of Directors, and (C) if Additional Shares of Common Stock,
Convertible Securities (as hereinafter defined) or rights, options or
warrants to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the corporation for a consideration which
covers both, be computed as the portion of the consideration so received
that may be reasonably determined in good faith by the Board of Directors
to be allocable to such Additional Shares of Common Stock, Convertible
Securities, rights, options or warrants.
(6) For the purpose of any adjustment required under Section
3(f)(1), (2), or (3) if the corporation issues or sells any rights, options
or warrants for the purchase of Common Stock or Preferred Stock, or stock
or other securities convertible, exercisable or exchangeable into Common
Stock or Preferred Stock (such rights, options or warrants for the purchase
of Common Stock or Preferred Stock, or stock or other securities
convertible, exercisable or exchangeable into Common Stock or Preferred
Stock being herein referred to as "Convertible Securities"), and if the
Effective Price of such Convertible Securities is less than the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion
Price or the Series F Conversion Price, as applicable, in each case, the
maximum number of shares of Common Stock issuable upon exercise, exchange
and/or conversion thereof shall be deemed to be Additional Shares of Common
Stock as of the date of issuance of the Convertible Securities and the
corporation shall be deemed to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the corporation for the issuance of such
Convertible Securities, plus the minimum amount of consideration, if any,
payable to the corporation upon the exercise, exchange or conversion of the
Convertible Securities; provided that if the minimum amounts of such
consideration cannot be ascertained, but are a function of antidilution or
similar protective clauses, the corporation shall be deemed to have
received the minimum amounts of consideration without reference to such
clauses; provided further that if the minimum amount of consideration
payable to the corporation upon the exercise, exchange or conversion of
Convertible Securities is reduced over time or on the occurrence or non-
occurrence of specified events other than by reason of antidilution
adjustments, the Effective Price shall be recalculated using the figure to
which such minimum amount of consideration is reduced; provided further
that if the minimum amount of consideration payable to the corporation upon
the exercise, exchange or conversion of such Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated
using the increased minimum amount of consideration payable to the
corporation upon the exercise, exchange or conversion of such Convertible
Securities. No further adjustment of the Series C Conversion Price, Series
D Conversion Price , Series E Conversion Price or Series F Conversion
Price, as applicable, as adjusted upon the issuance of such Convertible
Securities, shall be made as a result of the actual issuance of Additional
Shares of Common Stock
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on the exercise, exchange or conversion of any such Convertible Securities.
If any such exercise, exchange or conversion privilege represented by any
such Convertible Securities shall expire without having been exercised,
exchanged or converted, the Series C Conversion Price, Series D Conversion
Price, Series E Conversion Price or Series F Conversion Price, as
applicable, as adjusted upon the issuance of such Convertible Securities,
shall be readjusted to the Series C Conversion Price, Series D Conversion
Price, Series E Conversion Price or Series F Conversion Price, as
applicable, that would have been in effect had an adjustment been made on
the basis that the only Additional Shares of Common Stock so issued were
the Additional Shares of Common Stock, if any, actually issued or sold on
the exercise, exchange or conversion of such Convertible Securities, and
such Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the corporation upon such exercise,
exchange or conversion, plus the consideration, if any, actually received
by the corporation for the issuance of such Convertible Securities whether
or not exercised, exchanged or converted; provided that such readjustment
shall not apply to prior conversions of Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock, as
applicable.
(7) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the corporation or deemed to be issued
pursuant to this Section 3(f), whether or not subsequently reacquired or
retired by the corporation other than (1) shares of Common Stock issued
upon conversion of the Series A, Series B, Series B-1, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock; (2) shares of Common Stock and/or options, warrants or
other Common Stock purchase rights and the Common Stock issued pursuant to
such options, warrants or other rights issued or to be issued to employees,
officers or directors of, or consultants or advisors to the corporation or
any subsidiary in connection with the provision of the services to the same
pursuant to stock purchase or stock option plans or other arrangements that
are approved by the Board; (3) shares of Common Stock issued pursuant to
the Company's acquisition of another corporation by merger, purchase of
substantially all assets or other reorganization; (4) shares of Common
Stock issued in connection with equipment lease financing arrangements,
credit agreements or other commercial transactions approved by the Board of
Directors; and (5) shares of Common Stock issued pursuant to a corporate
strategic partner transaction involving the license of technology,
establishment of a joint venture, research and development agreement,
product development or marketing agreement, or other similar arrangement.
(8) The "Effective Price" of Additional Shares of Common
Stock or Convertible Securities, as applicable, shall mean the quotient
determined by dividing the total number of Additional Shares of Common
Stock or Convertible Securities, as applicable, issued or sold, or deemed
to have been issued or sold by the corporation under this Section 3(f),
into the aggregate consideration received, or deemed to have been received
by the corporation for such issue under this Section 3(f), for such
Additional Shares of Common Stock or Convertible Securities, as applicable.
(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
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provisions of this Section 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 Preferred Stock, Series B Preferred Stock, Series
B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock against impairment.
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Conversion Price pursuant to this
Section 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 Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock a
certificate executed by the corporation's 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 Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price, Series B Conversion Price, Series B-1 Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E
Conversion Price and Series F Conversion Price 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
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F 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 Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F 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
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Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F 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 Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
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 Series A Preferred Stock, Series B Preferred Stock, Series B-
1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F 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
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock, the corporation will take
such corporate 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 these certificate.
(l) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F 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 3 to be given to the holder of shares of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at the
address for such holder appearing on the books of the corporation.
4. VOTING RIGHTS. Each holder of shares of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which such shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
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Preferred Stock, Series E Preferred Stock or Series F 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 Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F 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.
5. NO REISSUANCE OF SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK,
SERIES B-1 PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D PREFERRED STOCK,
SERIES E PREFERRED STOCK OR SERIES F PREFERRED STOCK. No share or shares of
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock acquired by the corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares that the corporation shall
be authorized to issue.
6. COVENANTS. In addition to any other rights provided by law, so long
as shares of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock are outstanding, the corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than a majority of the outstanding shares of the Series
A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series
F Preferred Stock, voting together as a single class and on an as-converted
basis:
(a) amend or repeal any provision of, or add any provision to,
this corporation's Certificate of Incorporation if such action would
adversely alter or change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock;
(b) create (by reclassification or otherwise) or issue shares
of any class or series of stock having preferences prior to or on a parity
with the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock or Series F Preferred Stock with respect to voting,
dividends or upon liquidation;
(c) declare or pay a cash dividend on the Common Stock; or
(d) sell, lease, convey or otherwise dispose of or encumber all
or substantially all of its property or business or merge into or
consolidate with any other corporation immediately after which merger or
consolidation (including any series of related transactions) the
stockholders of the corporation shall hold less than fifty percent (50%) of
the voting power of the surviving corporation.
15.
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V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed exclusively
by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I , Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding stock of voting
stock of the Corporation, entitled to vote at an election of directors (the
"Voting Stock").
4. Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director
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elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been elected and
qualified.
5. In the event that Section 2115(a) of the California Corporations
Code is applicable to this corporation, then the following shall apply:
(a) Every stockholder entitled to vote in any election of
directors of this corporation may cumulate such stockholder's votes and
give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which the stockholder's shares
are otherwise entitled, or distribute the stockholder's votes on the same
principle among as many candidates as such stockholder thinks fit;
(b) No stockholder, however, may cumulate such stockholder's
votes for one or more candidates unless (i) the names of such candidates
have been properly placed in nomination, in accordance with the Bylaws of
the corporation, prior to the voting, (ii) the stockholder has given
advance notice to the corporation of the intention to cumulative votes
pursuant to the Bylaws, and (iii) the stockholder has given proper notice
to the other stockholders at the meeting, prior to voting, of such
stockholder's intention to cumulate such stockholder's votes; and
(c) If any stockholder has given proper notice, all
stockholders may cumulate their votes for any candidates who have been
properly placed in nomination. The candidates receiving the highest number
of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares shall be declared elected.
6. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend or repeal Bylaws.
(a) The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
(b) No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called
in accordance with the Bylaws or by written consent of the stockholders in
accordance with the Bylaws prior to the closing of the Initial Public
Offering and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
(c) Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any
meeting of the stockholders of the corporation shall be given in the manner
provided in the Bylaws of the corporation.
VI.
1. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for
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liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after approval by the stockholders of this
Article to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
2. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
1. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
2. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
VIII.
The name and the mailing address of the Sole Incorporator is as follows:
Ron A. Metzger
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111
IN WITNESS WHEREOF, this Certificate has been subscribed this 11th day of
June, 1998 by the undersigned who affirms that the statements made herein are
true and correct.
/s/ RON A. METZGER
-----------------------------
RON A. METZGER
Sole Incorporator
18.
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
TERAYON COMMUNICATION SYSTEMS, INC.
(A DELAWARE CORPORATION)
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
ARTICLE I OFFICES....................................................... 1
Section 1. Registered Office............................................. 1
Section 2. Other Offices................................................. 1
ARTICLE II CORPORATE SEAL................................................ 1
Section 3. Corporate Seal................................................ 1
ARTICLE III STOCKHOLDERS' MEETINGS........................................ 1
Section 4. Place Of Meetings............................................. 1
Section 5. Annual Meeting................................................ 2
Section 6. Special Meetings.............................................. 3
Section 7. Notice Of Meetings............................................ 4
Section 8. Quorum........................................................ 4
Section 9. Adjournment And Notice Of Adjourned Meetings.................. 5
Section 10. Voting Rights................................................. 5
Section 11. Joint Owners Of Stock......................................... 5
Section 12. List Of Stockholders.......................................... 5
Section 13. Action Without Meeting........................................ 6
Section 14. Organization.................................................. 6
ARTICLE IV DIRECTORS..................................................... 7
Section 15. Number And Term Of Office..................................... 7
Section 16. Powers........................................................ 7
Section 17. Classes Of Directors.......................................... 7
Section 18. Vacancies..................................................... 8
Section 19. Resignation................................................... 8
Section 20. Removal....................................................... 8
Section 21. Meetings...................................................... 8
Section 22. Quorum And Voting............................................. 9
Section 23. Action Without Meeting........................................ 10
Section 24. Fees And Compensation......................................... 10
Section 25. Committees.................................................... 10
Section 26. Organization.................................................. 11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)
Page
<S> <C> <C>
ARTICLE V OFFICERS...................................................... 11
Section 27. Officers Designated........................................... 11
Section 28. Tenure And Duties Of Officers................................. 12
Section 29. Delegation Of Authority....................................... 13
Section 30. Resignations.................................................. 13
Section 31. Removal....................................................... 13
OF SECURITIES OWNED BY THE CORPORATION........................................... 13
Section 32. Execution Of Corporate Instruments............................ 14
Section 33. Voting Of Securities Owned By The Corporation................. 14
ARTICLE VII SHARES OF STOCK............................................... 14
Section 34. Form And Execution Of Certificates............................ 14
Section 35. Lost Certificates............................................. 15
Section 36. Transfers..................................................... 15
Section 37. Fixing Record Dates........................................... 15
Section 38. Registered Stockholders....................................... 16
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION........................... 17
Section 39. Execution Of Other Securities................................. 17
ARTICLE IX DIVIDENDS..................................................... 17
Section 40. Declaration Of Dividends...................................... 17
Section 41. Dividend Reserve.............................................. 18
ARTICLE X FISCAL YEAR................................................... 18
Section 42. Fiscal Year................................................... 18
ARTICLE XI INDEMNIFICATION............................................... 18
Section 43. Indemnification Of Directors, Executive Officers, Other
Officers, Employees And Other Agents ......................... 18
ARTICLE XII NOTICES....................................................... 21
Section 44. Notices....................................................... 21
ARTICLE XIII AMENDMENTS.................................................... 23
Section 45. Amendments.................................................... 23
ARTICLE XIV LOANS TO OFFICERS............................................. 23
</TABLE>
ii
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)
Page
<S> <C> <C>
Section 46. Loans To Officers............................................. 23
</TABLE>
iii
<PAGE>
BYLAWS
OF
TERAYON COMMUNICATION SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation, for the
purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly
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<PAGE>
brought before the meeting by or at the direction of the Board of Directors, or
(C) otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
later than the close of business on the sixtieth (60th) day nor earlier than the
close of business on the ninetieth (90th) day prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholder to be timely must be so received not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or, in the event public announcement of the date of such annual
meeting is first made by the corporation fewer than seventy (70) days prior to
the date of such annual meeting, the close of business on the tenth (10th) day
following the day on which public announcement of the date of such meeting is
first made by the corporation. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the corporation which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (c) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 5. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such
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person, (D) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nominations are to be made by the stockholder,
and (E) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the 1934 Act (including
without limitation such person's written consent to being named in the proxy
statement, if any, as a nominee and to serving as a director if elected); and
(ii) as to such stockholder giving notice, the information required to be
provided pursuant to paragraph (b) of this Section 5. At the request of the
Board of Directors, any person nominated by a stockholder for election as a
director shall furnish to the Secretary of the corporation that information
required to be set forth in the stockholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a director
of the corporation unless nominated in accordance with the procedures set forth
in this paragraph (c). The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare at the meeting, and the defective nomination
shall be disregarded.
(d) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may be called,
for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii)
the Chief Executive Officer, (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption) or (iv) for so long as Section 2115(a) of the California Corporations
Code is applicable to the corporation, by the holders of shares entitled to cast
not less than fifty percent (50%) of the votes at the meeting, and shall be held
at such place, on such date, and at such time as the Board of Directors, shall
fix.
(b) If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as limiting,
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fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided, however, that directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where a
separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter and, except
where otherwise provided by the statute or by the Certificate of Incorporation
or these Bylaws, the affirmative vote of the majority (plurality, in the case of
the election of directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series shall be the act of such
class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting,
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a notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders
entitled to vote at any meeting of the stockholders, except as otherwise
provided by law, only persons in whose names shares stand on the stock records
of the corporation on the record date, as provided in Section 12 of these
Bylaws, shall be entitled to vote at any meeting of stockholders. Every person
entitled to vote or execute consents shall have the right to do so either in
person or by an agent or agents authorized by a proxy granted in accordance with
Delaware law. An agent so appointed need not be a stockholder. No proxy shall
be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of Incorporation, any
action required by statute to be taken at any annual or special meeting of the
stockholders, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
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(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered to the corporation in the manner herein
required, written consents signed by a sufficient number of stockholders to take
action are delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of the State of Delaware if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given in accordance with
Section 228 of the General Corporation Law of Delaware.
(d) Notwithstanding the foregoing, no such action by written consent may be
taken following the closing of the initial public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), covering the offer and sale of Common Stock of the corporation
(the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the President,
or, if the President is absent, a chairman of the meeting chosen by a majority
in interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairman. The Secretary, or, in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
(b) The Board of Directors of the corporation shall be entitled to make
such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
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ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of
the corporation shall be fixed in accordance with the Certificate of
Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the
third annual meeting of stockholders following the Closing of the Initial Public
Offering, the term of office of the Class III directors shall expire and Class
III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
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SECTION 19. RESIGNATION. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
SECTION 20. REMOVAL.
Subject to the rights of the holders of any series of Preferred Stock, no
director shall be removed without cause. Subject to any limitations imposed by
law, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all the then-outstanding shares of voting stock
of the corporation, entitled to vote at an election of directors (the "Voting
Stock").
(a) After the Record Date and subject to any limitations imposed by law,
Section A(3)(a) above shall no longer apply and subject to the rights of the
holders of any series of Preferred Stock, no director shall be removed without
cause. Subject to any limitations imposed by law, the Board of Directors or any
individual director may be removed from office at any time with cause by the
affirmative vote of the holders of a majority of the Voting Stock.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be
held immediately before or after the annual meeting of stockholders and at the
place where such meeting is held. No notice of an annual meeting of the Board
of Directors shall be necessary and such meeting shall be held for the purpose
of electing officers and transacting such other business as may lawfully come
before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular
meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of
Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any
committee thereof, may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear
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each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
including a voice messaging system or other system or technology designed to
record and communicate messages, facsimile, telegraph or telex, or by electronic
mail or other electronic means, during normal business hours, at least twenty-
four (24) hours before the date and time of the meeting, or sent in writing to
each director by first class mail, charges prepaid, at least three (3) days
before the date of the meeting. Notice of any meeting may be waived in writing
at any time before or after the meeting and will be waived by any director by
attendance thereat, except when the director attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
(f) WAIVER OF NOTICE. The transaction of all business at any meeting of
the Board of Directors, or any committee thereof, however called or noticed, or
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater number and
except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; provided, however, at any meeting,
whether a quorum be present or otherwise, a majority of the directors present
may adjourn from time to time until the time fixed for the next regular meeting
of the Board of Directors, without notice other than by announcement at the
meeting.
(b) At each meeting of the Board of Directors at which a quorum is present,
all questions and business shall be determined by the affirmative vote of a
majority of the directors present, unless a different vote be required by law,
the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if
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any, for attendance at each regular or special meeting of the Board of Directors
and at any meeting of a committee of the Board of Directors. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise
and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to (i) approving or adopting, or recommending to
the stockholders, any action or matter expressly required by the Delaware
General Corporation Law to be submitted to stockholders for approval, or (ii)
adopting, amending or repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to time,
appoint such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall any such committee have the powers denied to the Executive
Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors shall serve
a term on the committee coexistent with such member's term on the Board of
Directors. The Board of Directors, subject to the provisions of subsections (a)
or (b) of this Bylaw may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such
committee may be held at any place which has been determined from time to time
by such committee, and may be called by any director who is a member of such
committee, upon
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written notice to the members of such committee of the time and place of such
special meeting given in the manner provided for the giving of written notice to
members of the Board of Directors of the time and place of special meetings of
the Board of Directors. Notice of any special meeting of any committee may be
waived in writing at any time before or after the meeting and will be waived by
any director by attendance thereat, except when the director attends such
special meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. A majority of the authorized number of members of any such
committee shall constitute a quorum for the transaction of business, and the act
of a majority of those present at any meeting at which a quorum is present shall
be the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed or is absent,
the President, or if the President is absent, the most senior Vice President,
or, in the absence of any such officer, a chairman of the meeting chosen by a
majority of the directors present, shall preside over the meeting. The
Secretary, or in his absence, an Assistant Secretary directed to do so by the
President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by the
Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of the Board
of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the
Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
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of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all meetings of
the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board of Directors has been appointed and is present. Unless
some other officer has been elected Chief Executive Officer of the corporation,
the President shall be the chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the corporation. The
President shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform
the duties of the President in the absence or disability of the President or
whenever the office of President is vacant. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such other
duties and have such other powers as the Board of Directors or the President
shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings of the
stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep or cause to be kept the books of account of the corporation in a thorough
and proper manner and shall render statements of the financial affairs of the
corporation in such form and as often as required by the Board of Directors or
the President. The Chief Financial Officer, subject to the order of the Board
of Directors, shall have the custody of all funds and securities of the
corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time. The President may direct the Treasurer or any Assistant
Treasurer, or the Controller or any Assistant Controller to assume and perform
the duties of the Chief Financial Officer in the absence or disability of the
Chief Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly incident
to his office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to
time delegate the powers or duties of any officer to any other officer or agent,
notwithstanding any provision hereof.
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SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may,
in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such
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authorization, by the Chairman of the Board of Directors, the Chief Executive
Officer, the President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares
of stock of the corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the Chairman of the Board of Directors, or the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face
or back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights. Within a reasonable time after the issuance or
transfer of uncertificated stock, the corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to this section or otherwise required
by law or with respect to this section a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation shall be made
only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.
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(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix, in advance, a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty (60) nor less than ten (10) days before the date of such meeting. If
no record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing the record date is
adopted by the Board of Directors. Any stockholder of record seeking to have
the stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board of Directors to fix a record
date. The Board of Directors shall promptly, but in all events within ten (10)
days after the date on which such a request is received, adopt a resolution
fixing the record date. If no record date has been fixed by the Board of
Directors within ten (10) days of the date on which such a request is received,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a
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record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be not
more than sixty (60) days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
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ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS,
EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its
directors and executive officers (for the purposes of this Article XI,
"executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors or executive
officer; and, provided, further, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have
power to indemnify its other officers, employees and other agents as set forth
in the Delaware General Corporation Law.
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(c) EXPENSES. The corporation shall advance to any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Bylaw, no advance shall be made by the corporation to an executive
officer of the corporation (except by reason of the fact that such executive
officer is or was a director of the corporation in which event this paragraph
shall not apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
(d) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this Bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation
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(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct. In any suit brought by a director or
executive officer to enforce a right to indemnification or to an advancement of
expenses hereunder, the burden of proving that the director or executive officer
is not entitled to be indemnified, or to such advancement of expenses, under
this Article XI or otherwise shall be on the corporation.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this
Bylaw shall not be exclusive of any other right which such person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw
shall continue as to a person who has ceased to be a director, officer, employee
or other agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware General
Corporation Law, the corporation, upon approval by the Board of Directors, may
purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be
prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement, arbitration and appeal of, and the giving of testimony in, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines, amounts
paid in settlement or judgment and any other costs and expenses of any nature or
kind incurred in connection with any proceeding.
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(3) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Bylaw with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(4) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without limitation,
situations where such person is serving at the request of the corporation as,
respectively, a director, executive officer, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee, or agent with respect to an
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to any director
may be given by the method stated in subsection (a), or by facsimile, telex or
telegram, except that such notice other than one which is delivered personally
shall be sent to such address as such director shall have filed in writing with
the Secretary, or, in the absence of such filing, to the last known post office
address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly
authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or
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notices was or were given, and the time and method of giving the same, shall in
the absence of fraud, be prima facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same method of
giving notice be employed in respect of all directors, but one permissible
method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within
which any stockholder may exercise any option or right, or enjoy any privilege
or benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be affected or extended in any manner by the
failure of such stockholder or such director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice
is required to be given, under any provision of law or of the Certificate of
Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not be
required and there shall be no duty to apply to any governmental authority or
agency for a license or permit to give such notice to such person. Any action
or meeting which shall be taken or held without notice to any such person with
whom communication is unlawful shall have the same force and effect as if such
notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
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ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS.
Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
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Cooley Godward LLP ATTORNEYS AT LAW Palo Alto, CA
650 843-5000
One Maritime Menlo Park, CA
Plaza 650 843-5000
20th Floor
San Francisco, CA San Diego, CA
94111-3580 619 550-6000
Main 415 693-2000 Boulder, CO
Fax 415 951-3699 303 546-4000
Denver, CO
303 606-4800
www.cooley.com
DEBORAH A. MARSHALL
650 843-5137
[email protected]
July 17, 1998
Terayon Communication Systems, Inc.
2952 Bunker Hill Lane
Santa Clara, CA 95054
RE: OPINION IN CONNECTION WITH FILING OF S-1 REGISTRATION STATEMENT
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Terayon Communication Systems, Inc. (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), covering an underwritten
public offering of up to 3,450,000 shares of Common Stock including 450,000
shares of Common Stock that may be sold pursuant to the exercise of an over-
allotment option, (collectively, the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment are necessary or appropriate to enable us to
render the opinion expressed below, and (ii) that the shares of Common Stock
will be sold by the underwriters at a price established by the Pricing Committee
of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the Registration
Statement and related Prospectus, will be validly issued, fully paid and
nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By /s/ Deborah A. Marshall
---------------------------
Deborah A. Marshall
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 6, 1998 (except Note 13, as to which the date is July 8, 1998) in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-56911) and
related Prospectus of Terayon Communication Systems, Inc. for the Registration
of 3,450,000 shares of its common stock.
Our audits also included the financial statement schedule of Terayon
Communication Systems, Inc. for each of the three years in the period ended
December 31, 1997 listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
July 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 1,569 6,030
<SECURITIES> 418 0
<RECEIVABLES> 936 4,520
<ALLOWANCES> 20 152
<INVENTORY> 1,322 1,521
<CURRENT-ASSETS> 4,935 13,032
<PP&E> 6,205 6,932
<DEPRECIATION> (2,590) 3,561
<TOTAL-ASSETS> 8,778 16,634
<CURRENT-LIABILITIES> 9,782 12,838
<BONDS> 0 0
0 7,500
35,807 8
<COMMON> 471 5
<OTHER-SE> (37,452) (3,871)
<TOTAL-LIABILITY-AND-EQUITY> 8,778 16,634
<SALES> 2,118 9,376
<TOTAL-REVENUES> 2,118 9,376
<CGS> 6,462 11,517
<TOTAL-COSTS> 6,462 11,517
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 268 178
<INCOME-PRETAX> (22,549) (11,347)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (22,549) (11,347)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (22,549) (11,347)
<EPS-PRIMARY> (2.07) (0.94)
<EPS-DILUTED> (2.07) (0.94)
</TABLE>
