===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________ .
COMMISSION FILE NUMBER: 000-24647
--------------
TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0328533
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
(408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 20,665,495 at May 7, 1999
===============================================================================
<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements of Terayon
Communication Systems, Inc. within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 which are subject to the "safe harbor" created by those
sections. The forward-looking statements include, but are not limited
to: statements related to industry trends and future growth in the
markets for cable modem systems; our strategies for reducing the cost
of our products; our product development efforts; the effect of GAAP
accounting pronouncements on our recognition of revenues; our future
research and development; the timing of our introduction of new
products; the timing and extent of deployment of our products by our
customers; and, future profitability. Discussions containing such
forward-looking statements may be found in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These
forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in such
forward-looking statements. We disclaim any obligation to update these
forward-looking statements as a result of subsequent events. The
business risks on pages 14 through 18, among other things, should be
considered in evaluating our prospects and future financial
performance
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 1999
and December 31, 1998
Condensed Consolidated Statements of Operations -- Three
Months Ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $40,779 $14,342
Short-term investments........................... 67,754 14,538
Accounts receivable, less allowance for doubtful
accounts of $577 in 1999 and $594 in 1998....... 5,697 2,090
Accounts receivable from related parties......... 2,278 1,549
Inventory........................................ 1,072 3,950
Other current assets............................. 1,640 1,856
------------ ------------
Total current assets............................... 119,220 38,325
Property and equipment, net........................ 4,815 3,593
Officer note receivable............................ 100 100
Other assets....................................... 630 128
------------ ------------
Total assets....................................... $124,765 $42,146
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $8,394 $8,600
Accrued payroll and related expenses............. 2,370 2,475
Other accrued liabilities........................ 3,960 2,799
Current portion of capital lease obligations..... 18 29
------------ ------------
Total current liabilities...................... 14,742 13,903
Long-term portion of capital lease obligations..... 10 10
Deferred rent...................................... 130 130
Commitments and contingencies
Common Stock, $.001 par value.................... 21 16
Additional paid in capital....................... 202,091 114,594
Accumulated deficit.............................. (90,194) (84,301)
Deferred compensation............................ (2,026) (2,184)
Stockholders' notes receivable................... (9) (22)
------------ ------------
Total stockholders' equity......................... 109,883 28,103
------------ ------------
Total liabilities and stockholders' equity......... $124,765 $42,146
============ ============
</TABLE>
See accompanying notes.
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
Product revenues.................... $10,914 $2,077
Related party product revenues...... 4,959 367
--------- ---------
Total revenues............... 15,873 2,444
--------- ---------
Cost of goods sold:
Cost of product revenues............ 10,608 3,564
Cost of related party product
revenues........................... 3,347 570
--------- ---------
Total cost of goods sold..... 13,955 4,134
--------- ---------
Gross profit(loss).................... 1,918 (1,690)
--------- ---------
Operating expenses:
Research and development............ 3,155 2,305
Cost of product development assistance
agreement 1,615 -
Sales and marketing................. 2,836 1,140
General and administrative.......... 1,163 505
--------- ---------
Total operating expenses..... 8,769 3,950
--------- ---------
Loss from operations.................. (6,851) (5,640)
Net interest income(expense)......... 958 (64)
--------- ---------
Net loss applicable to common
stockholders......................... ($5,893) ($5,704)
========= =========
Historical basic and diluted net
loss per share applicable to common
stockholders......................... ($0.32) ($1.24)
========= =========
Shares used in computing historical
basic and diluted net loss per share
applicable to common stockholders.... 18,336 4,594
========= =========
Pro forma basic and diluted net
loss per share applicable to common
stockholders......................... ($0.48)
=========
Shares used in computing pro forma
basic and diluted net loss per share
applicable to common stockholders.... 11,773
=========
</TABLE>
See accompanying notes
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Used in Operating Activities ($3,727) ($2,785)
---------- ----------
Investing Activities:
Purchase of short-term investments................ (76,016) --
Proceeds from sales and maturities of
short-term investments.......................... 22,800 418
Purchases of property and equipment............... (1,760) (260)
Purchases of developed technology (502) --
---------- ----------
Net cash provide by (used in) investing activities (55,478) 158
---------- ----------
Financing Activities:
Principal payments on capital leases.............. (11) (23)
Principal payments on long-term debt.............. -- (346)
Exercise of options and warrant to purchase
common stock................................... 10,033 29
Proceeds from issuance of redeemable
preferred stock................................. -- 1,494
Principal payments on common stockholder
notes receivable ............................... 13 13
Proceeds from issuance of common stock............ 75,607 --
---------- ----------
Net cash provided by financing activities.......... 85,642 1,167
---------- ----------
Net increase (decrease) in cash and cash
equivalents...................................... 26,437 (1,460)
Cash and cash equivalents at beginning
of period........................................ 14,342 1,569
---------- ----------
Cash and cash equivalents at end of period......... $40,779 $109
========== ==========
</TABLE>
See accompanying notes
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial statements at March
31, 1999 and for the three month periods ended March 31, 1999 and 1998
have been included.
The unaudited condensed consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries,
Terayon Communication Systems Europe and Terayon do Brasil. The
minority interest 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.
Results for the three months ended March 31, 1999 are not
necessarily indicative of results for the entire fiscal year or future
periods. These financial statements should be read in conjunction with
the consolidated financial statements and the accompanying notes
included in the Form 10-K dated March 23, 1999 as filed with the U.S.
Securities and Exchange Commission. The accompanying balance sheet at
December 31, 1998 is derived from audited financial statements at that
date.
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 than a year are classified as
short-term investments. At March 31, 1999, all of the Company's total
cash equivalents and short-term investments were classified as
available-for-sale and were obligations issued by U.S. government
agencies and U.S. corporations, maturing within one year.
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>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Finished goods.................... $844 $3,355
Work-in-process................... 123 170
Raw materials..................... 105 425
------------ ------------
$1,072 $3,950
============ ============
</TABLE>
Net Loss Per Share Applicable to Common Stockholders
Historical basic and diluted net loss per share applicable to common
stockholders 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 applicable to common stockholders because the effect would be
antidilutive.
Pro forma net loss per share applicable to common stockholders has
been computed as described above and also gives effect, even if
antidilutive, to common equivalent shares from preferred stock that
automatically converted upon the closing of the Company's initial
public offering (using the as-if-converted method).
A reconciliation of shares used in the calculation of historical and
pro forma basic and diluted net loss per share applicable to common
stockholders follows (in thousands, except per share date):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss applicable to common
stockholders..................... ($5,893) ($5,704)
========= =========
Shares used in computing
historical basic and diluted net
loss applicable to common
stockholders..................... 18,336 4,594
======== ========
Historical basic and diluted net
loss per share applicable to
common stockholders.............. ($0.32) (1.24)
======== ========
Shares used in computing
historical basic and diluted net
loss per share applicable to
common stockholders.............. 4,594
Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
convertible preferred stock
outstanding to common stock..... 7,179
---------
Shares used in computing pro
forma basic and diluted net loss
per share applicable to common
stockholders..................... 11,773
========
Pro forma basic and diluted net
loss per share applicable to
common stockholders.............. ($0.48)
=========
</TABLE>
Comprehensive Net Loss
The Company has adopted Statement of 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 (comprehensive net loss) be reported
in a financial statement that is displayed with the same prominence as
other financial statements. The Company's comprehensive net loss was
the same as its net loss for the three months ended March 31, 1999 and
1998.
Segments of an Enterprise and Related Information
The Company operates in one business segment, the sale of cable
modem access systems, which it sells primarily to customers within the
cable and communications industries. The TeraPro and TeraLink are sold
together as part of an entire system, and the Company accordingly does
not report revenue derived from these components.
The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over
resource allocation decisions and performance assessment. The CODM does
not receive discrete financial information about the individual
components.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. FAS 133 is
effective for fiscal years beginning after June 15, 1999 and the
Company believes that the adoption of FAS 133 will not have a
significant impact on the Company's operating results or cash flows.
2. Stockholders' Equity
Public Offering
In January 1999, the Company completed a public offering of
3,250,000 shares of common stock, of which 1,750,000 shares were
offered by the Company and 1,500,000 shares were offered by existing
stockholders. The public offering resulted in proceeds to the Company
of approximately $62,500,000, net of underwriting discounts,
commissions and other offering costs. In February 1999, the
underwriters purchased 487,500 additional shares of common stock as a
result of the exercise of the over-allotment option, of which 351,946
and 135,554 shares of common stock were purchased from the Company and
certain existing stockholders, respectively. This additional sale of
common stock resulted in proceeds of approximately $12,700,000 to the
Company.
Shaw Warrant Exercise
On March 11, 1999, Shaw Communications, Inc. ("Shaw") purchased
1,500,000 unregistered shares of the Company's common stock at $6.50
per share, resulting in net proceeds to the Company of approximately
$9,750,000. The shares were purchased pursuant to the exercise of a
warrant to purchase 3,000,000 shares of the Company's common stock
issued to Shaw in 1998.
During 1998, the Company also issued a warrant (the "Anti-Dilution
Warrant") to Shaw to purchase an indeterminate number of shares of
common stock. The Anti-Dilution Warrant is exercisable at the option of
Shaw during the period that Shaw owns equity securities of the Company
(purchased in April 1998) and in the event the Company issues new
equity securities at below the current market price as defined in the
Anti-Dilution Warrant. The aggregate exercise price is $1.00. Should
the Company be required to issue to Shaw certain additional shares of
its common stock under the Anit-Dilution Warrant, future material
charges may arise that adversely affect the Company's results of
operations.
3. Product Development Assistance Agreement
On March 18, 1999, the Company entered into a one-year Product
Development Assistance Agreement ("Development Agreement") with Rogers
Communications Inc. ("Rogers Communications"). Under the terms of the
Development Agreement, Rogers Communications will provide the Company
assistance with the characterization and testing of the Company's
subscriber-end and head-end voice-over-cable equipment. In addition,
Rogers Communications will provide the Company with technology to
assist the Company in connection with its efforts to develop high
quality, field proven technology solutions that are DOCSIS (1.0, 1.1
and 1.2)-compliant and packet cable-compliant. In consideration of
Rogers Communications entering into the Development Agreement, the
Company issued Rogers Communications two fully vested and non-
forfeitable warrants, each to purchase 1,000,000 shares of common
stock. One warrant provides for an exercise price of $1.00 per share
and one warrant provides for an exercise price of $37.00 per share.
The warrants may be exercised in full or in part through March 31,
2000. The fair value of the two warrants is estimated to be
approximately $45,000,000 and will result in a noncash charge included
in operations over the one-year term of the Development Agreement.
In addition, on March 18, 1999, the Company entered into a Supply
Agreement with Rogers Cablevision Limited ("Rogers Cablevision"), a
subsidiary of Rogers Communications. Under the Supply Agreement, the
Company agreed to make available to Rogers Cablevision its current
TeraLink Gateway and TeraLink 1000 Master Controller, and TeraPro Cable
Modems and specified software. The Company also committed to certain
product pricing and specifications.
The Supply Agreement and the Development Agreement do not constitute
a commitment by either Rogers Cablevision or Rogers Communications to
purchase or deploy any particular volume or quantity of the Company's
product. No such commitment will be made unless Rogers Cablevision or
Rogers Communications issue a purchase order to the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We develop, market and sell cable modem systems based upon our S-
CDMA technology. Since our inception in January 1993, we have focused
on the development of our S-CDMA technology, as well as certain other
core technologies, to enable broadband transmission of data over cable
networks. We commenced the specification and design of our first ASIC
in October 1994 and produced the first version of this ASIC in June
1996. At the same time, we developed an end-to-end broadband access
system, the TeraComm system, around the ASIC. During late 1996 and
through 1997, we commenced limited field trials of the TeraComm system
with several cable operators. We commenced volume shipments to a small
number of cable operators in the first quarter of 1998. We had revenues
of $15.9 million for the three months ended March 31, 1999 and $2.4
million for the three months ended March 31, 1998. We generally
recognize product revenues upon shipment of products to customers.
While our existing agreements do not contain price protection
provisions and certain return rights, future agreements may contain
these provisions.
We sell our products both in the United States and internationally,
and we market our products primarily to cable operators and
distributors. To date, a small number of customers have accounted for
all of our sales. In the three months ended March 31, 1999, sales to
Shaw Communications represented approximately 31% of our revenues,
sales to Cablevision Systems represented approximately 18% of our
revenues and sales to Sumitomo Corporation represented approximately
14% of our revenues. In the three months ended March 31, 1998, sales to
Shaw Communications represented approximately 37% of our revenues,
sales to Sumitomo represented approximately 13% of our revenues and
sales to Telegate represented 12% our revenues. We expect that sales to
a limited number of customers will continue to account for a
substantial portion of our sales for the foreseeable future. If orders
from significant customers are delayed, canceled or otherwise fail to
occur in any particular period, or if any significant customer delays
payment or fails to pay, we could experience significant operating
losses in that period. As a result, we expect to experience significant
fluctuations in our operating results on a quarterly and annual basis.
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. We have
experienced and expect to continue to experience downward pressure on
our unit average selling price ("ASP"). We had negative gross margins
from inception until the fourth quarter of 1998. We achieved a positive
gross margin for the first time in the quarter ended December 31, 1998.
While we have initiated cost reduction programs to offset pricing
pressures on our products, we cannot be sure that these cost reduction
efforts will continue to keep pace with competitive price pressures or
lead to an improved gross margin. If we are unable to reduce costs
efficiently, our gross margin and profitability will suffer. Our gross
margin also is affected by the sales mix of TeraLink 1000 Master
Controllers to TeraLink Gateways and to TeraPro cable modems. The
TeraPro modems have significantly lower margins than the TeraLink 1000
Master Controllers and TeraLink Gateway headend products. As a result,
our gross margin also is affected by the maturity of TeraComm
deployments in any quarter, because new deployments of the TeraComm
system involve the sale of headend equipment (which has higher
margins). In addition, new deployments generally involve smaller
quantities of product, which typically are sold at higher margins than
the larger volume sales of product associated with more mature
deployments of the TeraComm system. For the foreseeable future, we
expect to achieve only nominal margins on TeraPro cable modems. We also
expect that sales of TeraPro cable modems will continue to constitute a
significant portion of our revenues. As a result of these factors, our
gross margins and operating results are likely to suffer in the near
term. Our components are sold together as part of an entire system, and
accordingly we do not report revenues derived from each component.
Our ability to generate revenues also depends on guaranteeing the
availability of supplies from our sole sources, increasing the
manufacturing and testing capacity of our products by our contract
manufacturers while ensuring product quality, and continuing deployment
of our products by existing and new customers. In the first quarter of
1998, we transitioned our manufacturing operations from CMC to
Solectron. We recorded a charge of $1.3 million in the first quarter of
1998 relating to the write-off of inventory as a result of
transitioning manufacturing operations to Solectron. A portion of the
charge consisted of $750,000 of raw material components that were
deemed obsolete due to a design change in our bill of materials during
the quarter ended March 31, 1998. The charge also consisted of a
$550,000 write-down of parts repurchased from CMC and then resold to
Solectron. Since Solectron could purchase the related parts at a lower
cost than we had valued the inventory, we wrote down the inventory to
the lower of cost or market as part of selling the inventory to
Solectron. We currently test and assemble the TeraLink 1000 Master
Controller and the TeraLink Gateway headend equipment at our Santa
Clara facility. Finished TeraPro cable modems are drop shipped by
Solectron to our customers.
We sustained net losses applicable to common stockholders of $5.9
million for the three months ended March 31, 1999 and $5.7 million for
the same period of 1998. As a result, we had an accumulated deficit of
$90.2 million as of March 31, 1999. Our operating expenses are based in
part on our expectations of future sales, and we expect that a
significant portion of our expenses will be committed in advance of
sales. Operating results may be harmed by a reduction in sales if we
are unable to adjust expenses quickly in response to any decrease in
sales. We expect to increase significantly expenditures in technical
development, sales and marketing and manufacturing as we engage in
activities related to product enhancement, cost reduction and
commercialization of new products. Additionally, we expect to increase
capital expenditures and other operating expenses in order to support
and expand our operations. We anticipate that we will spend
approximately $4.0 million on capital expenditures and approximately
$15.2 million on research and development during the 12 months ended
March 31, 2000. Anticipated capital expenditures consist of purchases
of additional test equipment to support higher levels of production and
computer hardware, software and equipment for newly hired employees. As
a result of these anticipated increased operating expenses, we expect
to continue to incur losses for the foreseeable future.
Results of Operations
Three Months Ended March 31, 1999 and 1998
Revenues. Revenues consist primarily of sales of cable modems and
headend equipment to new and existing customers. Our revenues increased
to $15.9 million for the three months ended March 31, 1999 from $2.4
million for the same period in 1998. We did not commence volume
shipments of our products until the first quarter of 1998.
Cost of Goods Sold. Cost of goods sold consists of direct product
costs and the cost our manufacturing operations group. The cost of our
manufacturing operations group consists of assembly, test and quality
assurance for products, warranty costs and associated costs of
personnel and equipment. For the three months ended March 31, 1999, we
incurred cost of goods sold of $14.0 million compared to $4.1 million
for the three months ended March 31, 1998. Cost of goods sold for the
three months ended March 31, 1998 included the charge of $1.3 million
relating to the write-off of obsolete inventory and the transition of
manufacturing operations to Solectron.
Gross Profit/(Loss). We achieved a gross profit of $1.9 million for
the three months ended March 31, 1999 compared to a gross loss of $1.7
million for the same period in 1998. The gross profit for the three
months ended March 31, 1999 represents the second consecutive quarter
we have achieved positive margins and was primarily the result of our
lower cost, single-board modem introduced in the fourth quarter of
1998. We are continuing to pursue further cost reductions in our
products, however, we anticipate that further decreases in the average
sales price of our modem will offset partially, if not completely,
further cost reductions.
Research and Development. Research and development expenses consist
primarily of personnel costs, as well as design expenditures, equipment
and supplies required to develop and to enhance our products. Research
and development costs increased to $3.2 million for the three months
ended March 31, 1999 from $2.3 million for the three months ended
March 31, 1998 due primarily to increased headcount. We intend 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.
Cost of Product Development Assistance Agreement. In March 1999, we
entered into a one-year Product Development Assistance Agreement
("Development Agreement") with Rogers Communications Inc. ("Rogers").
Under the terms of the Development Agreement, Rogers will provide us
assistance with the characterization and testing of our subscriber-end
and head-end voice-over-cable equipment. In addition, Rogers will
provide us technology to assist us with our efforts to develop high
quality, field proven technology solutions that are DOCSIS-compliant
and packet cable-compliant. The Development Agreement has a term of
one year. In consideration of Rogers entering into the Development
Agreement, we issued to Rogers two fully vested and non-forfeitable
warrants, each to purchase 1,000,000 shares of common stock. One
warrant has an exercise price of $1.00 per share and one warrant has an
exercise price of $37.00 per share. The warrants may be exercised in
full or in part through March 31, 2000. The fair value of the two
warrants is estimated to be approximately $45,000,000 and will result
in a noncash charge included in operations over the one-year term of
the Development Agreement. The results for the three months ended
March 31, 1999 include a $1.6 million noncash charge relating to this
agreement.
Sales and Marketing. Sales and marketing expenses consist primarily
of salaries and commissions for sales, marketing and support personnel
and costs related to trade shows, consulting and travel. Sales and
marketing expenses increased to $2.8 million for the three months ended
March 31, 1999 from $1.1 million for the three months ended March 31,
1998. The increase in sales and marketing expenses was primarily due to
increased payroll costs related to additional sales and support
personnel and increased commissions related to higher sales in 1999. We
expect sales and marketing expenses to increase in the future as we
expand our customer base.
General and Administrative. General and administrative expenses
consist primarily of salary and benefits for administrative officers
and support personnel, travel expenses, legal, accounting and
consulting fees. General and administrative expenses increased to $1.2
million for the three months ended March 31, 1999 from $505,000 for the
three months ended March 31, 1998. The increase was primarily a result
of the additional reporting requirements imposed on us as a public
company and an increased infrastructure to support our expanded
activities. We expect that general and administrative expenses will
continue to increase in the near term as a result of these factors.
Net Interest Income. Net interest income was $958,000 for the three
months ended March 31, 1999 compared to net interest expense of
$64,000 for the three months ended March 31, 1998. The increase was due
to higher cash balances resulting from the proceeds of our initial
public offering in August 1998 and subsequent public offering in
January 1999.
Income Taxes. We have not generated net income to date and
therefore we have not incurred or accrued any income taxes since our
inception.
Liquidity and Capital Resources
At March 31, 1999, we had approximately $40.8 million in cash and
cash equivalents, $67.8 million in short-term investments and a $10.0
million revolving line of credit. There were no outstanding borrowings
under the line of credit and approximately $4.8 million was available.
On January 21, 1999, we completed a public offering of 3,250,000
shares of common stock at a public offering price of $38.00 per share.
Of the 3,250,000 shares, we sold 1,750,000 shares and selling
stockholders sold 1,500,000 shares. We received net proceeds of $62.5
million, after the underwriting discount of approximately $3.3 million
and offering expenses of approximately $700,000. The proceeds from this
offering have been designated for general corporate purposes. On
February 9, 1999, the underwriters exercised their option to purchase
487,500 additional shares of common stock to cover over-allotments, of
which 351,946 shares were purchased from us and 135,554 shares were
purchased from selling stockholders. Our net proceeds from the
exercise of the over-allotment option were $12.7 million.
On March 11, 1999, Shaw purchased 1,500,000 unregistered shares of
our common stock at $6.50 per share, resulting in net proceeds to us of
$9.75 million. The shares were purchased pursuant to the exercise of a
warrant to purchase 3,000,000 shares of our common stock issued to Shaw
in 1998.
Cash used in operating activities in the first three months of 1999
was $3.7 million compared to $2.8 million in the first three months of
1998. Cash used in investing activities was $55.5 million for first
three months of 1999 compared to cash provided by investing activities
of $158,000 in the first three months of 1998. Investment activities
consisted primarily of the purchase of short-term investments in 1999.
Cash provided by financing activities was $85.6 million for the three
months ended March 31, 1999 compared to $1.2 million for the three
months ended March 31, 1998. Financing activities consisted primarily
of proceeds from issuance of common stock in 1999 and from the issuance
of preferred stock in 1998.
As of March 31, 1999, we had approximately $22.1 million of
unconditional purchase obligations. We anticipate that we will pay
approximately $14.1 million of these obligations by June 30, 1999. We
intend to make these payments out of available working capital.
We believe that our current cash balances will be sufficient to
satisfy our cash requirements for at least the next twelve months. We
may require additional financing prior to that time to fund our
operations and we 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 our stockholders. Additional financing may not
be available to us on acceptable terms, or at all, when we require it.
Year 2000
The Year 2000 issue is the result of computer programs written using
two digits rather than four to define the applicable year (the "Year
2000 Issue"). Computer programs that have such date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar
normal business activities.
We are heavily dependent upon the proper functioning of our own
computer or data-dependent systems. This includes, but is not limited
to, our systems in information, business, finance, operations,
manufacturing and service. Any failure or malfunctioning on the part of
these or other systems could harm us in ways that are not currently
known, discernible, quantifiable or otherwise anticipated.
We have established an internal task force to evaluate those areas
of our business that may be affected by the Year 2000 Issue. The task
force has developed a plan for timely Year 2000 compliance (the
"Plan"). The Plan consists of four identifiable activities.
* Inventory and Assessment. This activity involves identifying and
compliance classifying products and internal systems and assessing
the potential impact to critical business processes and business
continuity in the event the products and systems are non-compliant.
In addition, this activity includes formal communication with
significant suppliers, large customers and development partners to
determine the extent to which we are vulnerable to these third
parties' failures to remedy their own Year 2000 issues.
* Testing and Remediation. This activity involves testing our products
and internal systems and upgrading and replacement of non-compliant
products and systems.
* Contingency Planning. This activity involves the development of
contingency plans for situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations.
* Audit. This activity involves assuring complete and continued
compliance of our products and systems.
The Plan has been implemented but has not been completed. We have
developed and conducted tests to determine whether our products are
Year 2000 compliant. All TeraComm System hardware and software passed
the compliance tests. Based on these results, we believe our products
are Year 2000 compliant and we will continue to test our products to
ensure continuing compliance. Inventory and assessment of our
internal systems in finance, operations, manufacturing and service is
continuing. In some instances, we have received assurances from
software vendors that Year 2000 compliance can be achieved in these
areas through standard, planned upgrades of system software. Many of
these upgrades already have been completed. We anticipate addressing
the critical Year 2000 issues by mid-1999, prior to any anticipated
impacts on our operating systems. We expect that we may address non-
critical Year 2000 issues beyond the Year 2000.
We also are in the process of attempting to determine whether our
key suppliers and customers are Year 2000 compliant. To date, we have
only limited information on the Year 2000 compliance of these suppliers
and our customers. The operations of our key suppliers and customers
could be harmed in the event they do not successfully and timely
achieve Year 2000 compliance. Our business and results of operations
could suffer if our key suppliers were to experience Year 2000 issues
that caused them to delay manufacturing or shipment of key components
to us. In addition, our results of operations may be harmed if any of
our key customers encounter Year 2000 issues that cause them to delay
or cancel substantial purchase orders or delivery of our product.
To date, we have not incurred significant costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs
have occurred as a result of normal upgrade procedures. Furthermore, we
believe that future costs associated with our Year 2000 compliance
efforts will not be material.
We may not be able to address the Year 2000 Issue in a timely manner
or to upgrade any or all of our major systems in accordance with such
plan. In addition, any upgrades we do may not effectively address the
Year 2000 Issue. If required upgrades are not completed timely or are
not successful, we may be unable to conduct our business or manufacture
our products. Furthermore, there can be no guarantee that the systems
of other companies on which our systems rely will be timely converted.
In addition, a failure to convert by another company, or a conversion
that is incompatible with our systems, would harm our business. We
intend to, but have not yet established a contingency plan detailing
actions that will be taken in the event that the assessment of the Year
2000 Issue is not successfully completed on a timely basis.
Recent Financial Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. FAS 133 is
effective for fiscal years beginning after June 15, 1999. We believe
that the adoption of FAS 133 will not have a significant impact on our
operating results or cash flows.
CERTAIN BUSINESS RISKS
We Have a Limited Operating History and a History of Losses.
We have a very limited operating history, and it is difficult
to predict our future operating results. We were incorporated in
January 1993 and began shipping products commercially in June 1997. We
have only been shipping products in volume since the first quarter of
1998. As of March 31, 1999, we had an accumulated deficit of $90.2
million. We believe that we will continue to experience net losses for
the foreseeable future. Most of our expenses are fixed in advance, and
we generally are unable to reduce our expenses significantly in the
short term to compensate for any unexpected delay or decrease in
anticipated revenues. We expect to increase expense levels in each of
the next several quarters to support increased sales and marketing and
technical support costs. Any significant delay in our anticipated
revenues or commercialization of new products would harm our business.
The revenue and profit potential of our business and our industry are
unproven. We had negative gross margins since our inception until the
fourth quarter of 1998, and any future revenue growth may not result in
positive gross margins or operating profits in future periods.
Our Operating Results May Fluctuate.
Our quarterly revenues are likely to fluctuate significantly in the
future due to a number of factors, many of which are outside our
control. Factors that could affect our revenues include the following:
* variations in the timing of orders and shipments of our products;
* variations in the size of the orders by our customers;
* new product introductions by competitors;
* delays in introducing new products;
* delays of orders forecasted by our customers;
* delays by our customers in the completion of upgrades of cable
infrastructure;
* variations in capital spending budgets of cable operators; and
* delays in obtaining regulatory approval for commercial deployment
of cable modem systems.
Our 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 we begin development of new
products and as our development programs move to wafer fabrication,
which results in higher engineering expenses.
We have 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 our products. Any
delay in the product deployment schedule of one or more of the cable
operators that we target would have an adverse effect on our operating
results for a particular period. In addition, due to the large dollar
size of a typical transaction in comparison to our total revenues, any
delay in the closing of a transaction could have a significant impact
on our operating results for a particular period.
A variety of factors affect our gross margin, including the
following:
* the sales mix of our products;
* the volume of products manufactured;
* the type of distribution channel through which we sell our
products;
* the average selling prices or "ASPs" of our products; and
* the effectiveness of our cost reduction measures.
We anticipate that unit ASPs of our products will decline in the
future. This could cause a decrease in the gross margins for these
products. In addition, the maturity of TeraComm system deployments
affects our gross margin. New deployments of the TeraComm system
involve the sale of headend equipment (which has higher margins) and
generally involve smaller quantities of product. New deployments
typically are sold at higher margins than the larger volume sales of
product associated with more mature deployments of the TeraComm system.
The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways
and TeraPro cable modems also affects our gross margin. The TeraPro
cable modems have significantly lower margins than the TeraLink 1000
Master Controller and TeraLink Gateway headend products. We expect to
achieve only nominal margins on the TeraPro cable modems for the
foreseeable future. Further, we expect that sales of TeraPro cable
modems will continue to constitute a significant portion of our
revenues for the foreseeable future.
We Are Dependent on a Small Number of Customers.
Three customers accounted for approximately 63% of our revenues in
the first three months of 1999 and for approximately 62% of our
revenues in the first three months of 1998. We believe that a
substantial majority of our revenues will continue to be derived from
sales to a relatively small number of customers for the foreseeable
future. In addition, we believe that sales to these customers will be
focused on a small number of projects. The cable industry is undergoing
significant consolidation in the United States and internationally, and
a limited number of cable operators controls an increasing number of
cable systems. As a result, our sales will be largely dependent upon
product acceptance by the leading cable operators. Ten cable operators
in the United States owned and operated facilities passing
approximately 74% of total homes passed in 1997. The timing and size of
each customer's order is critical to our operating results. Our major
customers are likely to have significant negotiating leverage and may
attempt to change the terms, including pricing, on which we do business
with them. These customers also may require longer payment terms than
we anticipate, which could require us to raise additional capital to
meet our working capital requirements. Our success will depend on our
cable modems being widely deployed and our ability to sell to new
customers.
The Sales Cycle for Our Products Is Lengthy.
The sales cycle associated with our products typically is lengthy,
often lasting six months to a year. Our customers typically conduct
significant technical evaluations of competing technologies prior to
the commitment of capital and other resources. In addition, purchasing
decisions may be delayed because of our customers' internal budget
approval procedures. 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, our operating results for that quarter could suffer.
There are Many Risks Associated with Our Participation in Co-Authoring
the DOCSIS 1.2 Specification.
In November 1998, CableLabs selected us to co-author a technical
specification for DOCSIS 1.2, an enhanced version of the DOCSIS cable
modem standard based in part on our S-CDMA technology. Our agreement to
co-author the DOCSIS 1.2 specification will require us to contribute
some aspects of our S-CDMA technology to a royalty-free intellectual
property pool. As a result, any of our competitors who join the DOCSIS
intellectual property pool will have access to some aspects of our
technology and will not be required to pay us any royalties or other
compensation. Further, some of our competitors have been successful in
reverse engineering the technology of other companies, and our
contribution to the DOCSIS 1.2 intellectual property pool would expose
some aspects of our technology to those competitors. If a competitor is
able to duplicate the functionality and capabilities of our technology,
we could lose some or all of the time-to-market advantage we might
otherwise have.
CableLabs may select additional authors to contribute to the
DOCSIS 1.2 proposal. Any vendors that participate in the drafting
process, including us, must contribute any of their technology that is
essential to implement the DOCSIS 1.2 specification to the DOCSIS
intellectual property pool on a royalty-free basis. If the DOCSIS
Certification Board includes our proposal in the DOCSIS 1.2 draft
specification, it will then be made available for comment by the
organizations that participate in the DOCSIS specification process. The
DOCSIS Certification Board may decide not to proceed with our proposal.
Further, the comment process may take considerably longer than expected
and may delay the publication of a DOCSIS 1.2 standard, currently
anticipated to occur in 2000. If our draft proposal is not approved by
the DOCSIS Certification Board, we may be unable to develop DOCSIS 1.2-
compliant cable modems in a timely fashion or at all.
We believe the adoption of DOCSIS 1.2 will result in increased
competition in the North American cable modem market. This competition
could come from existing competitors or from new competitors who enter
the market as a result of the adoption of DOCSIS 1.2. This increased
competition is likely to result in lower ASPs of cable modem systems
and likely will harm our gross margin. Because our competitors will be
able to incorporate some aspects of our technology into their products,
our current customers may choose alternate cable modem suppliers or
choose to purchase DOCSIS 1.2-compliant cable modems from multiple
suppliers. We may be unable to produce DOCSIS 1.2-compliant cable
modems more quickly or at lower cost than our competitors. The
inclusion of our S-CDMA technology in DOCSIS 1.2 could result in
increased competition for the services of our existing employees who
have experience with S-CDMA. The loss of these employees to one or more
competitors could harm our business.
DOCSIS standards have not yet been accepted in Europe and Asia. If
standards that are not compatible with DOCSIS standards ultimately
achieve widespread acceptance outside of the United States and Canada,
we could be required to redesign our products for use in those markets.
Even if we were able to successfully redesign our products, this would
likely delay the deployment of our products in markets outside of the
United States and Canada.
We Need to Develop New Products.
Our future success will depend in part on our ability to develop,
introduce and market new products in a timely manner. We must also
respond to competitive pressures, evolving industry standards and
technological advances. Our current products are not DOCSIS-compliant,
and we do not expect to sell our DOCSIS 1.2-compliant products until
2000. As 2000 approaches, existing or potential customers may delay
purchases of our current cable modem system in order to purchase
systems that comply with the DOCSIS 1.2 standard. In addition,
potential new customers could decide to purchase DOCSIS 1.2-compliant
products from one or more of our competitors rather than from us. As a
result, in the second half of 1999 and early 2000, our product sales
may be lower than we anticipate. As 2000 approaches, we may be required
to reduce the price of our current products for sales to existing
customers. This would harm our operating results and gross margin.
It is expected that the DOCSIS 1.2 specifications will be based
upon both S-CDMA and advanced TDMA technology. In that event, we will
have to incorporate advanced TDMA technology into our DOCSIS 1.2-
compliant products. If we are unable to do this effectively, or in a
timely manner, we will lose some or all of the time-to-market advantage
we might otherwise have had.
Average Selling Prices of Cable Equipment Typically Decrease.
The cable equipment systems industry has been characterized by
erosion of average selling prices. We expect this to continue. This
erosion is due to a number of factors, including competition, rapid
technological change and price performance enhancements. The average
selling prices for our products may be lower than expected as a result
of competitive pricing pressures, our promotional programs and
customers who negotiate price reductions in exchange for longer term
purchase commitments. We anticipate that ASPs and gross margins for our
products will decrease over product life cycles. In addition, we
believe that the widespread adoption of industry standards is likely to
further erode ASPs, particularly for cable modems. It is likely that
the adoption of industry standards will result in increased retail
distribution of cable modems, which could put further price pressure on
our modems. Decreasing ASPs could result in decreased revenues even if
the number of units sold increases. As a result, we may experience
substantial period-to-period fluctuations in future operating results
due to ASP erosion. Therefore, we must continue to develop and
introduce on a timely basis next-generation products with enhanced
functionality that can be sold at higher gross margins. Our failure to
do this could cause our revenues and gross margin to decline.
We Must Achieve Cost Reductions.
Certain of our competitors currently offer cable modems at prices
lower than ours. Market acceptance of our products will depend in part
on reductions in the unit cost of our products. We expect that as
headend equipment becomes more widely deployed, the price of cable
modems and other products will decline. In particular, we believe that
the adoption of industry standards such as DOCSIS will cause increased
price competition for cable modems. However, we may be unable to reduce
the cost of our modems sufficiently to enable us to compete with other
cable modem suppliers. Our cost reduction efforts may not allow us to
keep pace with competitive pricing pressures or lead to gross margin
improvement.
Some of our competitors are larger and manufacture products in
significantly greater quantities than we intend to for the foreseeable
future. Consequently, these competitors have more leverage in obtaining
favorable pricing from suppliers and manufacturers. In order to remain
competitive, we must significantly reduce the cost of manufacturing our
cable modems through design and engineering changes. We may not be
successful in redesigning our products. Even if we are successful, our
redesign may be delayed or may contain significant errors and product
defects. In addition, any redesign may not result in sufficient cost
reductions to allow us to significantly reduce the list price of our
products or improve our gross margin. Reductions in our manufacturing
costs will require us to use more highly integrated components in
future products and may require us to enter into high volume or long-
term purchase or manufacturing agreements. Volume purchase or
manufacturing agreements may not be available on acceptable terms. We
could incur expenses without related revenues if we enter into a high
volume or long-term purchase or manufacturing agreement and then decide
that we cannot use the products or services offered by that agreement.
We Face Many Other Risks.
Also inherent in our business are additional risks, which include
but are not limited to the following:
* acceptance of cable modems by cable operators and end users of
broadband access services;
* our ability to develop additional distribution channels;
* our ability to convince cable operators to accept our
technologies, purchase our products and effectively market our
product to end users;
* the magnitude and timing of capital spending by cable operators
for implementation of access systems for data transmission over
cable networks;
* our limited experience manufacturing our products and our
dependence on the manufacturing capabilities of our contract
manufacturers to assemble and test our products;
* our dependence on key suppliers;
* our ability to develop products that utilize new semiconductor
process technologies;
* the risks associated with our international business activities,
which account for a substantial portion of our total revenues;
* the highly competitive nature of the market for broadband access
systems and the existence of many established competitors;
* our dependence on the Internet and the development of the
internet infrastructure;
* our ability to manage growth;
* our dependence on key personnel;
* the risks of product returns, product liability and product
defects;
* our ability to adequately protect or enforce our intellectual
property rights; and,
* communications industry and other regulatory approvals.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities. In March 1999, we
issued 1,500,000 shares of Common Stock valued at $6.50 per share to
Shaw Communications Inc. ("Shaw") pursuant to the exercise of a warrant
to purchase 3,000,000 shares of our common stock issued in 1998. The
issuance and sale of these shares was intended to be exempt from
registration under the Securities Act of 1933 as amended by virtue of
Section 4(2) thereof. Shaw represented its intention to acquire the
securities for investment only and not with a view to the distribution
thereof. Appropriate legends are affixed to the stock certificate.
Shaw received adequate information about us.
(d) Use of Proceeds from Sales of Registered Securities. We
commenced our initial public offering on August 18, 1998 pursuant to a
Registration Statement on Form S-1 (the "Registration Statement") (File
No. 333-56911). The managing underwriters of the public offering were
BT Alex. Brown, Hambrecht & Quist, Lehman Brothers and Salomon Smith
Barney (the "Underwriters"). In the offering, we sold an aggregate of
3,000,000 shares of our common stock for an initial price of $13.00 per
share.
The aggregate proceeds from the offering were $39.0 million. We
paid expenses of approximately $3.9 million, of which approximately
$2.7 million represented underwriting discounts and commissions and
approximately $1.2 million represented expenses related to the
offering. Net proceeds from the offering were $35.1 million. Of the net
proceeds, as of March 31, 1999, approximately $9.0 million had been
used to fund operating activities, $1.5 million had been used for
payments on long-term debt and capital lease obligations, $2.7 million
had been used to purchase property and equipment and $500,000 had been
used to purchase other assets. The use of the proceeds from the
offering does not represent a material change in the use of proceeds
described in our Registration Statement. As of March 31, 1999, we had
invested the remainder of the net proceeds in short-term, interest-
bearing, investment grade securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TERAYON COMMUNICATION SYSTEMS, INC.
By: /s/ RAY M. FRITZ Date: May 12, 1999
------------------------------------
Ray M. Fritz
Chief Financial Officer
(Principal Accounting and Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 40,779
<SECURITIES> 67,754
<RECEIVABLES> 6,274
<ALLOWANCES> 577
<INVENTORY> 1,072
<CURRENT-ASSETS> 119,220
<PP&E> 4,815
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,765
<CURRENT-LIABILITIES> 14,742
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 109,862
<TOTAL-LIABILITY-AND-EQUITY> 124,765
<SALES> 15,873
<TOTAL-REVENUES> 15,873
<CGS> 13,955
<TOTAL-COSTS> 13,955
<OTHER-EXPENSES> 8,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (5,893)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,893)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,893)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
