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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section (S)(S) 240.14a-11(c) or Section
(S)(S) 240.14a-12
Terayon Communication Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE>
Preliminary Copy
TERAYON COMMUNICATION SYSTEMS, INC.
2952 Bunker Hill Lane
Santa Clara, CA 95054
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 12, 1999
TO THE STOCKHOLDERS OF TERAYON COMMUNICATION SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of TERAYON
COMMUNICATION SYSTEMS, INC., a Delaware corporation (the "Company"), will be
held on Wednesday, May 12, 1999 at 8:30 a.m. local time at the Santa Clara
Marriott, 2700 Mission College Boulevard, Santa Clara, California for the
following purposes:
1. To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.
2. To approve an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 30,000,000 to
45,000,000 shares.
3. To ratify the selection of Ernst & Young LLP as independent auditors of the
Company for its fiscal year ending December 31, 1999.
4. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on April 6, 1999, as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors
[Facsimile Signature]
ZAKI RAKIB
Secretary
Santa Clara, California
April 14, 1999
All stockholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please complete, date, sign and
return the enclosed proxy as promptly as possible in order to ensure your
representation at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for that purpose. Even if you have
given your proxy, you may still vote in person if you attend the meeting.
Please note, however, that if your shares are held of record by a broker, bank
or other nominee and you wish to vote at the meeting, you must obtain from the
record holder a proxy issued in your name.
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TERAYON COMMUNICATION SYSTEMS, INC.
2952 Bunker Hill Lane
Santa Clara, CA 95054
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 12, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
TERAYON COMMUNICATION SYSTEMS, INC., a Delaware corporation (the "Company"), for
use at the Annual Meeting of Stockholders to be held on May 12, 1999, at 8:30
a.m. local time (the "Annual Meeting"), or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting. The Annual Meeting will be held at the Santa Clara Marriott,
2700 Mission College Boulevard, Santa Clara, California. The Company intends to
mail this proxy statement and accompanying proxy card on or about April 14,
1999, to all stockholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or
other regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on April 6,
1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on April 6, 1999 the Company had outstanding and entitled to
vote ___________________ shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting
unless applicable California law requires cumulative voting with respect to the
election of directors. Under cumulative voting, each holder of Common Stock
will be entitled to two votes for each share held. Each stockholder may give
one candidate, who has been nominated prior to voting, all the votes such
stockholder is entitled to cast or may distribute such votes among as many such
candidates as such stockholder chooses. However, no stockholder will be
entitled to cumulate votes unless the candidate's name has been placed in
nomination prior to the voting and at least one stockholder has given notice at
the meeting, prior to the voting, of his or her intention to cumulate votes.
Unless the proxyholders are otherwise instructed, stockholders, by means of the
accompanying proxy, will grant the proxyholders discretionary authority to
cumulate votes.
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 record date for such annual meeting,
stockholders will not be able to cumulate votes for directors. These provisions
could discourage potential acquisition proposals and could delay or prevent a
change in control or management of the Company.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Except for Proposal 2, broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether a matter has been approved. With respect to Proposal 2, abstentions and
broker non-votes will have the same effect as negative votes.
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REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 2952
Bunker Hill Lane, Santa Clara, California 95054, a written notice of revocation
or a duly executed proxy bearing a later date, or it may be revoked by attending
the meeting and voting in person. Attendance at the meeting will not, by
itself, revoke a proxy.
STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 annual
meeting of stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is December 16, 1999. The deadline for submitting a stockholder
proposal or a nomination for director that is not to be included in such proxy
statement and proxy is the close of business on a date no earlier than January
15, 2000 and no later than February 14, 2000. Stockholders are also advised to
review the Company's Bylaws, which contain additional requirements with respect
to advance notice of stockholder proposals and director nominations.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Board of Directors shall be divided into three classes, each class
consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the Board of Directors) shall serve for the remainder of the full
term of the class of directors in which the vacancy occurred and until such
director's successor is elected and qualified.
The Board of Directors is presently composed of six members. There are two
directors in the class whose term of office expires in 1999. Each of the
nominees for election to this class is currently a director of the Company who
was previously elected by the stockholders. If elected at the Annual Meeting,
each of the nominees would serve until the 2002 annual meeting and until his or
her successor is elected and has qualified, or until such director's earlier
death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting unless applicable
California law requires cumulative voting. Under cumulative voting, the two
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for such directors will be elected directors of the
Company. Shares represented by executed proxies will be voted, if authority to
do so is not withheld, for the election of the two nominees named below. In the
event that any nominee should be unavailable for election as a result of an
unexpected occurrence, such shares will be voted for the election of such
substitute nominee as management may propose. Each person nominated for
election has agreed to serve if elected, and management has no reason to believe
that any nominee will be unable to serve.
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 record date for such annual meeting,
stockholders will not be able to cumulate votes for directors. These provisions
could discourage potential acquisition proposals and could delay or prevent a
change in control or management of the Company.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the Annual
Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2002 ANNUAL MEETING
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
1990 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
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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; and Artesyn Technologies, Inc., a power supply and power
converter supply company. 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, NVIDIA Corporation, a developer of graphics processors, 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.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING
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.
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.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
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.
Christopher J. Schaepe has served as a director of the Company since March
1995. Mr. Schaepe is a Managing Director of Weiss, Peck & Greer, L.L.C., 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.
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BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998 the Board of Directors held
15 meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is composed of two non-employee
directors: Messrs. Schaepe and Solomon. It met one time during 1998.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's equity incentive plans and otherwise determines compensation
levels and performs such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of the Company's CEO, Dr.
Rakib, and two non-employee directors: Messrs. Schaepe and Stevens. Dr. Rakib
does not participate in decisions relating to his compensation. The
Compensation Committee met one time during 1998.
The Board did not have a standing Nominating Committee during 1998.
During 1998, each Board member attended 75% or more of the aggregate of the
meetings of the Board and of the committees on which he served, held during the
period for which he was a director or committee member, respectively.
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Proposal 2
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Restated Certificate of Incorporation to increase the
Company's authorized number of shares of Common Stock from 30,000,000 shares to
45,000,000 shares.
The additional Common Stock to be authorized by adoption of the amendment
would have rights identical to the currently outstanding Common Stock of the
Company. Adoption of the proposed amendment and issuance of the Common Stock
would not affect the rights of the holders of currently outstanding Common Stock
of the Company, except for effects incidental to increasing the number of shares
of the Company's Common Stock outstanding, such as dilution of the earnings per
share and voting rights of current holders of Common Stock. If the amendment is
adopted, it will become effective upon filing of a Certificate of Amendment of
the Company's Restated Certificate of Incorporation with the Secretary of State
of the State of Delaware.
In addition to the 20,376,482 shares of Common Stock outstanding at March
12, 1999, the Board has reserved 3,263,643 shares for issuance upon exercise of
options and rights granted under the Company's stock option and stock purchase
plans, and up to approximately 1,519,191 shares of Common Stock which may be
issued upon exercise of warrants currently held by Shaw.
Although at present the Board of Directors has no other plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use its capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, raising capital, providing equity incentives to employees, officers
or directors, establishing strategic relationships with other companies and
expanding the Company's business or product lines through the acquisition of
other businesses or products.
The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by the Company to
oppose a hostile takeover attempt or delay or prevent changes in control or
management of the Company. For example, without further stockholder approval,
the Board could strategically sell shares of Common Stock in a private
transaction to purchasers who would oppose a takeover or favor the current
Board. Although this proposal to increase the authorized Common Stock has been
prompted by business and financial considerations and not by the threat of any
hostile takeover attempt (nor is the Board currently aware of any such attempts
directed at the Company), nevertheless, stockholders should be aware that
approval of proposal could facilitate future efforts by the Company to deter or
prevent changes in control of the Company, including transactions in which the
stockholders might otherwise receive a premium for their shares over then
current market prices.
The affirmative vote of the holders of a majority of the shares of the
Common Stock will be required to approve this amendment to the Company's
Restated Certificate of Incorporation. As a result, abstentions and broker non-
votes will have the same effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
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PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999 and has
further directed that management submit the selection of independent auditors
for ratification by the stockholders at the Annual Meeting. Ernst & Young has
audited the Company's financial statements since its inception in 1993.
Representatives of Ernst & Young are expected to be present at the Annual
Meeting, will have an opportunity to make a statement if they so desire and will
be available to respond to appropriate questions.
Stockholder ratification of the selection of Ernst & Young as the Company's
independent auditors is not required by the Company's Bylaws or otherwise.
However, the Board is submitting the selection of Ernst & Young to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of the Company
and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of Ernst & Young. Abstentions will be
counted toward the tabulation of votes cast on proposals presented to the
stockholders and will have the same effect as negative votes. Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of March 12, 1999 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of the Company as
a group; and (iv) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership (1)
------------------------
Beneficial Owner Number of Shares Percent of Total
- ---------------- ---------------- ----------------
<S> <C> <C>
Shaw Communications Inc. (2).......................................... 3,346,114 15.3%
630 Third Avenue S.W., Suite 900
Calgary, Alberta T2P 4L4
Dr. Zaki Rakib (3).................................................... 1,700,000 8.3%
Shlomo Rakib (3)...................................................... 1,700,000 8.3%
Entities associated with Weiss, Peck & Greer (4)...................... 1,246,605 6.1%
555 California Street, Suite 3130
San Francisco, California 94104
Entities associated with Sequoia Capital (5).......................... 1,217,279 6.0%
3000 Sand Hill Road Suite 280, building 4
Menlo Park, California 94025
Michael D'Avella (2)(6)............................................... 3,381,114 15.4%
Christopher J. Schaepe (4)............................................ 1,246,605 6.1%
Mark Stevens (5)(7)................................................... 1,253,690 6.1%
Lewis Solomon (8)..................................................... 80,000 *
Brian Bentley (9)..................................................... 103,500 *
Dennis Picker (10).................................................... 208,001 1.0%
Gary Law.............................................................. 43,031 *
All directors and executive officers as a group (8 persons) (11)...... 9,750,405 43.7%
</TABLE>
- ------------------------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
20,376,482 shares outstanding on March 12, 1999, adjusted as required by
rules promulgated by the SEC.
(2) Shares beneficially owned includes 1,519,191 shares issuable pursuant to
warrants exercisable within 60 days of March 12, 1999.
(3) The address for Messrs. Rakib is c/o Terayon Communication Systems, Inc.,
2952 Bunker Hill Lane, Santa Clara, CA 95054.
(4) Shares beneficially owned includes 680,647 shares held by WPG Enterprise
Fund II, LLC, 8,910 of which are subject to a right of repurchase by the
Company and 565,958 shares held by Weiss, Peck & Greer Venture Associates
III, LLC, 6,810 of which are subject to a right of repurchase by the
Company. Christopher J. Schaepe, a director of the Company, is a General
Partner of WPG Venture Partners III, L.P., the fund investment advisory
member of the entities associated with Weiss, Peck & Greer. Mr. Schaepe
may be deemed to have a voting and investment 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.
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(5) Shares beneficially owned includes (i) 1,107,111 shares held by Sequoia
Capital VI; (ii) 60,831 shares held by Sequoia Technology Partners VI;
(iii) 44,843 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 all
shares held by Sequoia except to the extent of his pecuniary interest
therein.
(6) Shares beneficially owned includes 3,346,114 shares held by Shaw
Communications Inc. Mr. D'Avella, a director of the Company, is the Senior
Vice President, Planning for Shaw. Also includes 33,750 shares issuable
upon the early exercise of options vesting through April 2001, of which
11,250 will be fully vested and no longer subject to repurchase within 60
days of March 12, 1999. 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.
(7) Shares beneficially owned includes 12,499 shares subject to repurchase by
the Company within 60 days of March 12, 1999.
(8) Shares beneficially owned includes 20,000 shares issuable upon the early
exercise of options vesting through May 2000, 10,000 of which will be fully
vested and no longer subject to repurchase within 60 days of March 12,
1999.
(9) Shares beneficially owned includes 103,500 shares issuable upon the early
exercise of options vesting through April 2003, 33,332 of which will be
fully vested and no longer subject to repurchase within 60 days of March
12, 1999.
(10) Shares beneficially owned includes 208,001 shares issuable upon the early
exercise of options vesting through May 2003, 96,668 of which will be fully
vested and no longer subject to repurchase within 60 days of March 12,
1999.
(11) Shares beneficially owned includes (i) 441,751 shares issuable upon the
early exercise of options vesting through May 2003, 117,918 of which will
be fully vested and no longer subject to repurchase within 60 days of March
12, 1999, (ii) 27,499 shares subject to repurchase by the Company within 60
days of March 12, 1999 and (iii) 1,519,191 shares issuable pursuant to
warrants exercisable within 60 days of March 12, 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with; except that one
report, covering one transaction, was filed late by Mr. D'Avella.
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EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Lewis Solomon receives $2,000 per month for his service as member of the
Board. No other director of the Company receives cash for services provided as
a director. Certain directors have been granted options to purchase Common
Stock in the past. Mr. Stevens, Mr. D'Avella and entities affiliated with
Weiss, Peck and Greer L.L.C., of which Mr. Schaepe is a partner, have each
received options to purchase 30,000 shares of Common Stock at exercise prices of
$1.25, $6.50 and $1.25 per share, respectively. Each of the foregoing option
exercise prices were equal to the fair market value of the Common Stock on the
date of the respective grant, as determined by the Board after consideration of
a number of factors. In the fiscal year ended December 31, 1998, the total
compensation paid to non-employee directors was $24,000. The members of the
Board of Directors are also eligible for reimbursement for their expenses
incurred in connection with attendance at Board meetings in accordance with
Company policy.
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 August 1998, 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 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.
As of March 12, 1999, no options had been exercised under the Directors'
Plan.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended December 31, 1998 and
1999, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
at December 31, 1998 (the "Named Executive Officers"):
9
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table (1)
Long-Term Compensation
----------------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Year Salary Bonus sation Awards Options/ Payouts Compen-
Position ($) ($) ($) ($) SARs (#) ($) sation ($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Zaki Rakib 1998 172,500 ----- ----- ----- ----- ----- -----
Chief Executive 1997 150,000 12,500 ----- ----- ----- ----- -----
Officer
- --------------------------------------------------------------------------------------------------------------------------------
Shlomo Rakib 1998 172,500 ----- ----- ----- ----- ----- -----
President and Chief 1997 150,000 12,500 ----- ----- ----- ----- -----
Technical Officer
- --------------------------------------------------------------------------------------------------------------------------------
Dennis Picker 1998 153,000 ----- ----- ----- 40,000 ----- -----
Chief Operating 1997 129,000 31,800 75,166(2) ----- ----- ----- -----
Officer
- --------------------------------------------------------------------------------------------------------------------------------
Gary Law 1998 136,750 32,500 ----- ----- 5,000 ----- -----
Vice President, 1997 108,333 ----- ----- ----- 115,000 ----- -----
Marketing and
Business Development
- --------------------------------------------------------------------------------------------------------------------------------
Brian Bentley 1998 125,650 ----- 93,974(3) ----- 10,000 ----- -----
Vice President, 1997 ----- ----- ----- ----- ----- ----- -----
Worldwide Sales
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) As permitted by the rules promulgated by the Securities and Exchange
Commission, no amounts are shown for 1996.
(2) Consists of reimbursement to Mr. Picker for travel costs of which $35,140
was attributable to tax gross-up payments made by the Company.
(3) Represents sales commissions earned in 1998.
10
<PAGE>
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under its 1995 Stock
Option Plan (the "1995 Plan") and its 1997 Equity Incentive Plan (the "1997
Plan", together with the 1995 Plan, the "Plans"). As of March 12, 1999, options
to purchase a total of 1,013,808 shares and 1,392,103 shares were outstanding
under the 1995 Plan and the 1997 Plan, respectively, and options to purchase
59,106 shares and 1,766,051 shares remained available for grant under the 1995
Plan and the 1997 Plan, respectively.
The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (4)
----------------- ---------------
Number % of
of Securi- Total
ties Under- Options
lying Granted to Exercise
Options Employees Or Base Expira-
Granted in Fiscal Price tion
Name (#) (1) Year(2) ($/Sh) (3) Date 5% ($) 10% ($)
------- ---------- ----------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Dr. Zaki Rakib --- --- --- --- --- ---
Shlomo Rakib --- --- --- --- --- ---
Dennis Picker 40,000 3.38% $6.50 05/27/08 $423,513 $674,373
Gary Law 5,000 0.42% $6.50 05/27/08 $ 52,939 $ 84,297
Brian Bentley 10,000 0.84% $6.50 05/27/08 $105,878 $168,593
</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 1,185,081 options granted to employees, consultants
and directors, including the Named Executive Officers of the Company during
the fiscal year ended December 31, 1998.
(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 after consideration of a number of factors, including, but not
limited to, the development life cycle of the Company's products, the
Company's financial performance, market conditions, the price preferred
rights and privileges of shares of equity securities sold to or purchased by
outside investors, and third-party appraisals.
(4) The potential realizable value is calculated based on the terms 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 is exercised and sold on the last day of its term for the
appreciated stock price.
11
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION
There were no exercises of options by any Named Executive Officers in the
fiscal year ended December 31, 1998.
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 specified duration of seven years, but it is
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. Both employment agreements
further provide that the Company's Board of Directors will set each executive's
salary in accordance with the payroll policies of the Company as constituted
from time to time.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION (1)
The Compensation Committee of the Board of Directors ("Committee") is
composed of Dr. Zaki Rakib, the Company's Chief Executive Officer, and Messrs.
Schaepe and Stevens, neither of whom are currently officers or employees of the
Company. The Committee is responsible for establishing the Company's
compensation programs for all employees, including executives. Dr. Rakib is not
present during the discussion of his compensation. For executive officers, the
Committee evaluates performance and determines compensation policies and levels.
COMPENSATION PHILOSOPHY
The goals of the compensation program are to align compensation with
business objectives and performance and to enable the Company to attract, retain
and reward executive officers and other key employees who contribute to the
long-term success of the Company and to motivate them to enhance long-term
stockholder value. Key elements of this philosophy are:
. The Company pays competitively with leading technology companies with
which the Company competes for talent. The ensure that pay is
competitive, the Company regularly compares its pay practices with
these companies and sets it pay parameters based on this review.
. The Company maintains annual incentive opportunities sufficient to
provide motivation to achieve specific operating goals and to generate
rewards that bring total compensation to competitive levels.
. The Company provides significant equity-based incentives for
executives and other key employees to ensure that they are motivated
over the long-term to respond to the Company's business challenges and
opportunities as owners and not just as employees.
Philosophy Regarding Section 162(m) of the Internal Revenue Code. Section
162(m) of the Internal Revenue Code (the "Code") limits the Company to a
deduction for federal income tax purposes of no more than $1 million of
compensation paid to certain Named Executive Officers in a taxable year.
Compensation above $1 million may be deducted if it is "performance-based
compensation" within the meaning of the Code.
____________________
(1) The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any filing
of the Company under the 1933 Act or 1934 Act, whether made before or after the
date hereof and irrespective of any general incorporation language contained in
such filing."
12
<PAGE>
The Compensation Committee has determined that stock options granted under
the Company's 1997 Equity Incentive Plan with an exercise price at least equal
to the fair market value of the Company's common stock on the date of grant
shall be treated as "performance-based compensation."
Base Salary. The Committee annually reviews each executive officer's base
salary. When reviewing base salaries, the Committee considers individual and
corporate performance, levels of responsibility, prior experience, breadth of
knowledge and competitive pay practices.
Long-Term Incentives. The Company's long-term incentive program consists
of the 1995 Stock Option Plan, and the 1997 Equity Incentive Plan. The option
program utilizes vesting periods (generally five years) to encourage key
employees to continue in the employ of the Company. Through option grants,
executives receive significant equity incentives to build long-term stockholder
value. Grants are made at 100% of fair market value on the date of grant.
Executives receive value from these grants only if the Company's Common Stock
appreciates over the long-term. The size of option grants is determined based
on competitive practices at leading companies in the technology industry and the
Company's philosophy of significantly linking executive compensation with
stockholder interests. In 1998 the Committee granted to executives stock
options that will vest over a two to five year period. Such grants were
intended to provide incentive to maximize stockholder value over the next
several years. The Committee believes this approach creates an appropriate
focus on longer term objectives and promotes executive retention.
CHIEF EXECUTIVE OFFICER COMPENSATION
Dr. Rakib's base salary at the beginning of 1998 as President and Chief
Executive Officer was $150,000. Following the Committee's review of
compensation paid by leading technology companies, the Committee set Dr. Rakib's
base annual salary through 1998 at $172,500. In setting this amount, the
Committee took into account (i) its belief that Dr. Rakib is the CEO of a
leading technology company who has significant and broad-based experience in the
broadband equipment industry, (ii) the scope of Dr. Rakib's responsibility, and
(iii) the Board's confidence in Dr. Rakib to lead the Company's continued
development.
OTHER EXECUTIVE OFFICER'S COMPENSATION
In May 1998, the Committee established the base salary ranges for other
executive officers based on data regarding executive compensation of the
Company's competitors, including published survey information, each executive
officer's base salary for prior years, past performance, the scope of such
officer's responsibility and other information available to the Committee. In
addition, in May 1998 the Committee established bonus compensation formulas for
each level of upper management based on individual and Company-wide performance
criteria. The Committee also awarded stock options to certain executive
officers to provide additional incentives.
The members of the Compensation Committee of Terayon Communication Systems,
Inc.:
Dr. Zaki Rakib
Christopher J. Schaepe
Mark A. Stevens
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.
13
<PAGE>
PERFORMANCE MEASUREMENT COMPARISON(1)
The following graph shows the total stockholder return of an investment of
$100 in cash on August 17, 1998 for the Company's Common Stock and an investment
of $100 in cash on August 31, 1998 for (i) the Standards & Poor's 500 Index (the
"S&P 500") and (ii) the Nasdaq Telecommunication Stocks Index (the "Nasdaq
Telecom"). All values assume reinvestment of the full amount of all dividends
and are calculated as of last day of each month:
Comparison of 7 month Cumulative Total Return on Investment
[GRAPH APPEARS HERE]
Company S&P 500 Nasdaq Telecom
------- ------- --------------
Aug. 1998 100 100 100
Sept. 1998 97 106 113
Oct. 1998 92 115 123
Nov. 1998 236 122 130
Dec. 1998 279 129 155
Jan. 1999 314 135 179
Feb. 1999 239 -NA- -NA-
- ----------
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the 1933 Act or the 1934 Act whether made before or after the date hereof
and irrespective of any general incorporation language in any such filing.
14
<PAGE>
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.
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.
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
purpose of the loan was to permit Mr. Rakib to purchase a residence. Pursuant
to its terms the note accelerated upon the completion of the Company's initial
public offering. In October 1998, the board approved an extension of the
repayment of such note until August 1999. The note is secured by 20,000 shares
of Common Stock held by Mr. Rakib.
In 1998, the Company sold products to Shaw for an aggregate of
approximately $12.5 million. In addition, in April 1998, the Company issued
Shaw a warrant ("Common Stock 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. The exercise price of
the Common Stock Warrant is equal to the fair market value of the Company's
Common Stock at the time the Common Stock Warrant was granted, as determined by
the Company's Board of Directors. The Common Stock Warrant is exercisable by
Shaw at any time prior to December 31, 2003. 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 shares of the
Company's Common Stock. As of December 31, 1998, Shaw had the right to receive
19,191 shares pursuant to the Anti-dilution Warrant. 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.
In July 1998, the Company entered into indemnification agreement 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.
Certain holders of Common Stock are entitled to certain registration rights
with respect to such Common Stock.
In March 1999, Shaw acquired 1,500,000 shares of the Company's Common Stock
at $6.50 per share, pursuant to the partial exercise of the Common Stock
Warrant. The net value realized (the difference between the exercise price and
the fair market value of such shares, based on the closing sales price reported
on the Nasdaq National Market on the date of the sale) was $47,062,500.
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.
15
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
[FACSIMILE SIGNATURE]
Zaki Rakib
Secretary
April 14, 1999
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1998 is available
without charge upon written request to: Corporate Secretary, Terayon
Communication Systems, Inc., 2952 Bunker Hill Lane, Santa Clara, California
95954.
16
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 12, 1999
The undersigned hereby appoints Dr. Zaki Rakib and Ray M. Fritz, and each
of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Terayon Communication
Systems, Inc. which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of Terayon Communication Systems, Inc. to be held at the
Santa Clara Marriott, 2700 Mission College Boulevard, Santa Clara, California,
on Wednesday, May 12, 1999 at 8:30 a.m. (local time), and at any and all
postponements, continuations and adjournments thereof, with all powers that the
undersigned would possess if personally present, upon and in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS pROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2 AND 3, AS MORE SPECIFICALLY
DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS
PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
PROPOSAL 1: To elect two directors whether by cumulative voting or otherwise,
to hold office until the 2002 Annual Meeting of Stockholders.
[_] FOR all nominees listed below [_] WITHHOLD AUTHORITY
(except as marked to the contrary to vote for all nominees
below). listed below.
Nominees: Lewis Solomon and Mark A. Stevens
To withhold authority to vote for any nominee(s) write such nominee(s)' name(s)
below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 2 AND 3.
Proposal 2: To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the authorized number of
shares of Common Stock from 30,000,000 to 45,000,000 shares.
[_] For [_] Against [_] Abstain
Proposal 3: To ratify selection of Ernst & Young LLP as independent auditors
of the Company for its fiscal year ending December 31, 1999.
[_] For [_] Against [_] Abstain
DATED _________________ ________________________________
________________________________
SIGNATURE(S)
Please sign exactly as your name appears hereon.
If the stock is registered in the names of two or
more persons, each should sign. Executors,
administrators, trustees, guardians and attorneys-
in-fact should add their titles. If signer is a
corporation, please give full corporate name and
have a duly authorized officer sign, stating
title. If signer is a partnership, please sign in
partnership name by authorized person.
Please vote, date and promptly return this proxy in the enclosed return envelope
which is postage prepaid if mailed in the United States.
2
