<PAGE>
SECURITIES EXCHANGE AND COMMISSION
Washington, D. C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 16, 1999
Terayon Communication Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
<TABLE>
<S> <C>
000-24647 77-0328533
(Commission File No.) (I.R.S. Employer Identification No.)
</TABLE>
2952 Bunker Hill Lane
Santa Clara, CA 95054
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 727-4400
<PAGE>
Item 7. Financial Statements and Exhibits.
The following financial statements and exhibits are filed as part of this
report.
(a) Financial statements of Imedia Corporation.
Included herein are the balance sheets of Imedia Corporation ("Imedia")
as of December 31, 1998 and 1997, and the related statements of
operations, changes in redeemable preferred stock and shareholders
equity, and cash flows for each of the years in the three year period
ended December 31, 1998.
<PAGE>
Imedia Corporation
Index to Financial Statements
Report of Independent Accountants........................................
Balance Sheets as of December 31, 1998...................................
and 1997 and June 30, 1999
Statement of Operations for the Years....................................
Ended December 31, 1998, 1997 and 1996
and the Six Months Ended June 30, 1999.
Statements of Changes in Redeemable......................................
Preferred Stock and Shareholders
Equity for the Years Ended
December 31, 1998, 1997, and 1996
and the Six Months Ended
June 30, 1999
Statements of Cash Flows for the Years...................................
Ended December 31, 1998, 1997, & 1996
and the Six Months Ended June 30, 1999
Notes to Financial Statements............................................
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Imedia Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in redeemable preferred stock and shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Imedia Corporation at December 31, 1998 and 1997, and the results of its
operations and its cashflows for the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred net losses since inception and
has an accumulated deficit at December 31, 1998, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that may result from the outcome of this uncertainty.
/s/ Pricewaterhouse Coopers LLP
February 12, 1999
<PAGE>
Imedia Corporation
Balance Sheet
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30
------------------------------------------------
1998 1997 1999
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 689,000 $ 2,313,000 $ 556,000
Short-term investments - 1,497,000 -
Accounts receivable, net - - 705,000
Inventory, net 350,000 - 466,000
Other current assets 60,000 373,000 74,000
------------ ----------- ------------
Total current assets 1,099,000 4,183,000 1,801,000
Property and equipment, net 2,607,000 2,543,000 2,198,000
Restricted cash 530,000 165,000 530,000
Other assets 197,000 151,000 228,000
------------ ----------- ------------
$ 4,433,000 $ 7,042,000 $ 4,757,000
============ =========== ============
Liabilities, Redeemable Preferred Stock
and Shareholders' Equity
Current liabilities:
Accounts payable $ 745,000 $ 583,000 $ 687,000
Accrued expenses 372,000 443,000 942,000
Accrued compensation 289,000 59,000 869,000
Convertible notes, current 4,931,000 - 7,379,000
Note payable - - 1,000,000
Deferred revenue - - -
------------ ----------- ------------
Total current liabilities 6,337,000 1,085,000 10,877,000
Convertible notes, long-term 20,000 20,000 20,000
Deposit 29,000 29,000 29,000
------------ ----------- ------------
6,386,000 1,134,000 10,926,000
------------ ----------- ------------
Commitments and contingencies (Note 7)
Redeemable Preferred Stock and Shareholders' Equity:
Redeemable Convertible Preferred Stock: Series A,
$0.01 par value; 597,674 shares authorized, issued
and outstanding , Series B, $0.01 par value;
400,000 shares authorized, issued and outstanding 2,044,000 1,889,000 2,128,000
Series C Preferred Stock, $0.01 par value;
1,156,176 shares authorized;
1,155,782 shares issued and outstanding 11,499,000 11,499,000 11,499,000
Common Stock, $0.01 par value;
10,000,000 shares authorized; 2,577,833 and 2,526,500
shares issued and outstanding in 1998 and 1997 293,000 259,000 300,000
Warrants outstanding 287,000 - 423,000
Accumulated deficit (16,076,000) (7,739,000) (20,519,000
------------ ----------- ------------
Total Redeemable Preferred Stock
and Shareholders' Equity (Deficit) (1,953,000) 5,908,000 (6,169,000)
------------ ----------- ------------
$ 4,433,000 $ 7,042,000 $ 4,757,000
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Imedia Corporation
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, Six Months ended June 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1999 1998
<S> <C> <C> <C> <C> <C>
Revenues: $ - $ 1,283,000 $ 1,750,000 $ 1,803,000 $ -
Cost and expenses:
Cost of revenues - 144,000 343,000 939,000 -
Sales and marketing 2,301,000 2,225,000 903,000 1,481,000 1,154,000
Research and development 3,449,000 3,415,000 660,000 3,383,000 1,511,000
General and administrative 3,147,000 1,843,000 984,000 1,015,000
------------ ----------- ----------- ----------- -----------
Loss from operations (8,897,000) (6,344,000) (1,140,000) (4,000,000) (3,680,000)
------------ ----------- ----------- ----------- -----------
Other income, net 864,000 - - - -
Interest income 103,000 430,000 290,000 34,000 80,000
Interest expense (252,000) - - (393,000) (26,000)
------------ ----------- ----------- ----------- -----------
Net Loss $ (8,182,000) $(5,914,000) $ (850,000) $(4,359,000) $(3,626,000)
============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Imedia Corporation
Statement of Changes in Redeemable Preferred Stock and Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(unaudited) Redeemable
Convertible Convertible
Preferred Stock Preferred Stock
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Balance at December 31, 1995 597,674 $ 916,000 - $ -
Issuance of Series B Preferred Stock for cash,
net of issuance costs 400,000 712,000 - -
Issuance of Series C Preferred Stock for cash, - - 1,155, 782 11,499,000
net of issuance costs
Accretion of Series A Preferred Stock to
redemption amount - 74,000 - -
Accretion of Series B Preferred Stock to
redemption amount - 43,000 - -
Net Loss - - - -
------------------------------------------------------------------------
Balance at December 31, 1996 997,674 1,745,000 1,155,782 11,499,000
Issuance of Common Stock on exercise of
stock options - - - -
Accretion of Series A Preferred Stock to
redemption amount - 83,000 - -
Accretion of Series B Preferred Stock to
redemption amount - 61,000 - -
Net Loss - - - -
------------------------------------------------------------------------
Balance at December 31, 1997 997,674 1,889,000 1,155,782 11,499,000
Issuance of Common Stock on exercise of
stock options - - - -
Accretion of Series A Preferred Stock to
redemption amount - 89,000 - -
Accretion of Series B Preferred Stock to
redemption amount - 66,000 - -
Issuance of warrants - - - -
Net loss - - - -
------------------------------------------------------------------------
Balance at December 31,1998 997,674 2,044,000 1,155,782 11,499,000
------------------------------------------------------------------------
Issuance of Common Stock on exercise of
stock options - - - -
Accretion of Series A Preferred Stock to
redemption amount - 48,000 - -
Accretion of Series B Preferred Stock to
redemption amount - 36,000 - -
Issuance of Warrants - - - -
Net loss (unaudited) - - - -
------------------------------------------------------------------------
Balance at June 30, 1999 (unaudited) 997,674 $ 2,128,000 1,155,782 $ 11,499,000
========================================================================
<CAPTION>
Total
Shareholders'
Common Stock Warrants Accumulated Equity
Shares Amount Outstanding Deficit (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,500,000 $ 246,000 $ - $ (714,000) $ 448,000
Issuance of Series B Preferred Stock for cash,
net of issuance costs - - - - 712,000
Issuance of Series C Preferred Stock for cash,
net of issuance costs - - - - 11,499,000
Accretion of Series A Preferred Stock to
redemption amount - - - (74,000) -
Accretion of Series B Preferred Stock to
redemption amount - - - (43,000) -
Net Loss - - - (850,000) (850,000)
------------------------------------------------------------------------------
Balance at December 31, 1996 2,500,000 246,000 - (1,681,000) 11,809,000
Issuance of Common Stock on exercise of
stock options 26,500 13,000 - - 13,000
Accretion of Series A Preferred Stock to
redemption amount - - - (83,000) -
Accretion of Series B Preferred Stock to
redemption amount - - - (61,000) -
Net Loss - - - (5,914,000) (5,914,000)
------------------------------------------------------------------------------
Balance at December 31, 1997 2,526,500 259,000 - (7,739,000) 5,908,000
Issuance of Common Stock on exercise of
stock options 51,333 34,000 - - 34,000
Accretion of Series A Preferred Stock to
redemption amount - - - (89,000) -
Accretion of Series B Preferred Stock to
redemption amount - - - (66,000) -
Issuance of warrants - - 287,000 - 287,000
Net loss - - - (8,182,000) (8,182,000)
------------------------------------------------------------------------------
Balance at December 31,1998 2,577,833 293,000 287,000 (16,076,000) (1,953,000)
------------------------------------------------------------------------------
Issuance of Common Stock on exercise of
stock options 11,979 7,000 - - 7,000
Accretion of Series A Preferred Stock to
redemption amount - - - (48,000) -
Accretion of Series B Preferred Stock to
redemption amount - - - (36,000) -
Issuance of Warrants - - 136,000 - 136,000
Net loss (unaudited) - - (4,359,000) (4,359,000)
------------------------------------------------------------------------------
Balance at June 30, 1999 (unaudited) 2,589,812 $ 300,000 $ 423,000 $ (20,519,000) $ (6,169,000)
==============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Imedia Corporation Six Months Ended
Statement of Cash Flows Year Ended December 31, June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1999 1998
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(8,182,000) (5,914,000) (850,000) $(4,359,000) $(3,626,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 793,000 481,000 111,000 527,000 342,000
Amortization of discount on convertible notes 118,000 - - 184,000 12,000
Changes in assets and liabilities:
Accounts receivable - - - (705,000) -
Inventory (350,000) - - (116,000) -
Other current assets 313,000 (251,000) (61,000) (14,000) 83,000
Other assets (46,000) (151,000) - (31,000) (4,000)
Accounts payable 162,000 (163,000) 645,000 (58,000) (425,000)
Accrued expenses (71,000) 70,000 335,000 570,000 (402,000)
Accrued compensation 230,000 52,000 580,000 85,000
Deferred revenue - (1,250,000) 1,250,000 - -
----------- ---------- ---------- ---------- -----------
Net cash provided by (used in) operating activities (7,033,000) (7,126,000) 1,430,000 (3,422,000) (3,935,000)
----------- ---------- ---------- ---------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (857,000) (1,350,000) (1,570,000) (118,000) (229,000)
Sale (purchase) of restricted time deposit (365,000) - 49,000 - -
Sale of short term investments 1,497,000 495,000 - - (17,000)
Purchase of short term investment - - (1,992,000) - -
----------- ---------- ---------- ---------- -----------
Net cash provided by (used in) investing activities 275,000 (855,000) (3,513,000) (118,000) (246,000)
----------- ---------- ---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of Series B Preferred Stock - - 712,000 - -
Proceeds from issuance of Series C Preferred Stock - - 11,499,000 - -
Proceeds from issuance of Convertible notes 5,100,000 - - 2,400,000 2,500,000
Proceeds from note payable - - - 1,000,000 -
Proceeds from exercise of Common Stock options 34,000 13,000 - 7,000 7,000
----------- ---------- ---------- ---------- -----------
Net cash provided by financing activities 5,134,000 13,000 12,211,000 3,407,000 2,507,000
----------- ---------- ---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (1,624,000) (7,968,000) 10,128,000 (133,000) (1,674,000)
Cash and cash equivalents at beginning of year 2,313,000 10,281,000 153,000 689,000 2,313,000
----------- ---------- ---------- ---------- -----------
Cash and cash equivalents at end of year $ 689,000 $ 2,313,000 $10,281,000 $ 556,000 $ 639,000
----------- ---------- ---------- ---------- -----------
Supplemental disclosures:
Cash paid for interest $ 252,000 $ - $ 2,200 $ - $ -
----------- ---------- ---------- ---------- -----------
Cash paid for income taxes $ 1,000 $ 192,000 $ - $ 1,000 $ 1,000
----------- ---------- ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Imedia Corporation
Notes to Financial Statement
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
1. The Company
Imedia Corporation (the "Company") was incorporated in California on March
23, 1994, and is engaged in the development and marketing of technology and
products for the digital cable, satellite, broadcast, wireless cable and
streaming video markets that enable customized programming and delivery of
digital tiered services to the home, such as digital ad insertion,
datacasting and internet services, telephony and niche programming.
2. Summary of Significant Accounting Policies
Basis of presentation
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred losses since
inception and has not generated cash flows from operations. Management is
seeking additional financing to meet working capital requirements. Since
there is no assurance that management will be successful in raising
additional working capital financing, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
Revenue recognition
Through December 31, 1997, the Company's revenues were derived from the
license of its technology, development services and the grant of specified
intangible rights to one customer in the Cable Television industry. The
revenue under this contract allocable to the above components was
recognized ratably through December 31, 1997, the period in which the
specified products, services and rights were provided. No revenues were
recognized during the year ended December 31, 1998.
Cash equivalents and short term investments
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist principally of a money-market account that is stated at cost, which
approximates fair value.
The Company accounts for its short term investments in accordance with the
provision of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company classifies its short-term investments as available-for-sale. These
securities are stated at fair market value. Realized gains or losses are
determined on the specific identification method and are reflected in
income. Unrealized gains and losses were immaterial at December 31, 1998,
1997 and 1996.
Restricted cash
At December 31, 1998, $530,000 of cash was restricted as to withdrawal and
held by a bank as certificates of deposit to guarantee the Company's
letters of credit.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is determined primarily using the straight-line
method over the estimated useful lives of the assets, which range from
three to seven years. Leasehold improvements are depreciated over the
shorter of the useful life of the asset or the lease term.
<PAGE>
Inventories
Inventories are stated at the lower of cost or market value. Cost is
calculated using the first-in first-out (FIFO) method.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash
equivalents and short term investments. The Company limits the amount of
investment exposure to any one financial institution and financial
instrument.
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets is based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to
be realized.
Stock based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is recognized based on
the difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee must pay to acquire the stack.
Research and development
Costs incurred in the research and development of new products and
enhancements to existing products are charged to operations as incurred,
SFAS No. 86 "Accounting for the Costs of Software to be Sold, Leased or
Otherwise Marketed" requires the capitalization of certain software
development costs once technological feasibility is established, which the
Company defines as completion of a working model. Such costs can be
capitalized until the products are available for general release. The
capitalized costs are then amortized on a straight-line basis over the
estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. To date, all software,
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial. Accordingly, the Company has not
capitalized any software development costs.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Sales to significant customers
During 1997 and 1996, 100% of revenues were derived from development
services provided to and certain rights granted to a single customer.
<PAGE>
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
3. Balance Sheet Components
Property and equipment:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
<S> <C> <C>
Computer equipment and purchased software $ 2,687,000 $ 2,159,000
Leasehold improvements 545,000 420,000
Office furniture and equipment 797,000 593,000
----------- -----------
4,029,000 3,172,000
Less: Accumulated depreciation and amortization (1,422,000) (629,000)
----------- -----------
$ 2,607,000 $ 2,543,000
----------- -----------
Accrued expenses
December 31,
---------------------------------
1998 1997
Accrued payroll and benefits $ 289,000 $ 112,000
Other accrued expenses 372,000 419,000
----------- -----------
$ 661,000 $ 531,000
----------- -----------
</TABLE>
4. Borrowings
Letters of credit
The Company maintains two Letters of credit totaling $530,000 with a bank.
These letters of credit, restricted as to use, are secured by funds kept in
an interest bearing account, as security deposits for the Company's
noncancelable operating leases. These letters of credit are irrevocable as
long as the leases are in effect.
<PAGE>
Convertible bridge notes
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
<S> <C> <C>
Convertible notes $ 5,100,000 -
Less: Debt discount (169,000) -
------------ ------------
$ 4,931,000 -
------------ ------------
</TABLE>
In 1998, the Company received bridge financing totaling $5.1 million from
certain investors in exchange for convertible promissory notes and warrants
to purchase Preferred Stock of the Company. The notes and the related
accrued interest will automatically be converted, if the holders so elect,
(a) into Series C Preferred Stock of the Company at the same price, terms
and conditions as the Series C Preferred Stock financing twelve months from
date of issuance; or (b) upon the closing of the Company's next round of
financing into a new series, of Preferred Stock issued in such financing at
the price so established, provided that the Company receives in excess of
$5 million in such financing (excluding the conversion of the notes),
whichever occurs earlier. The warrants issued in connection with the first
$2.5 million in principal of the notes provided for the issuance of 37,500
shares (15% coverage) at $10.00 per share. The warrants issued in
connection with the remaining $2.6 million in principal of the notes
provide for the issuance of 78,000 shares (15% coverage) at $5.00 per
share. The fair value of the warrant was calculated to be $287,000, using
the Black Scholes model and was reflected as a discount to the convertible
bridge notes and accreted as interest expense over the term of the notes.
Convertible note payable
In December 1994, the Company issued a $20,000 noninterest bearing
convertible, note to a consultant which is due on or after December 31,
1999. The note may be converted into shares of Common Stock at the rate of
$0.67 per share at the option of the holder at any time, and will
automatically convert into shares of Common Stock upon an initial public
offering of the Company's Common Stock. The note is unsecured and contains
no underlying covenants or other restrictions.
5. Income Taxes
Due to operating losses, income tax expense for the years ended December
31, 1998, 1997 and 1996, consists solely of the California franchise tax,
which is included in other income, net.
From inception through July 5, 1995, the Company elected to be treated as
an "S Corporation" for federal and state income tax purposes. Under these
elections, tax losses and other tax attributes resulting from the Company's
operations were passed-through to shareholders. Accordingly, net operating
loss and tax credit carryforwards generated during this period are not
available to the Company. Effective July 5, 1995, the Company revoked its S
Corporation elections.
<PAGE>
At December 31, 1998, the Company has federal and California net operating
loss carryforwards of approximately $10,000,000 and $3,000,000,
respectively, which expire in varying amounts through tax year 2003. The
difference between the federal and California net operating loss
carryforwards results primarily from a 50 percent limitation on the
California loss carryforward amounts and capitalization of certain research
and development expenditures.
At December 31.1998, 1997 and 1996, the Company has net deferred tax assets
of approximately $4,638,000, $2,784,000 and $661,000, respectively, which
are fully offset by valuation allowances. Net deferred tax assets are
comprised principally of net operating loss carryforwards, research and
development credit carryforwards, depreciation and amortization and payroll
related accruals.
6. Related Party Transactions
Executive compensation
In September 1995, the Company engaged a shareholder to serve as its Chief
Executive Officer. During 1997, this individual received $157,000 cash as
compensation. No compensation was paid to this individual during 1996.
Note receivable from a Director
During 1997, the Company advanced $120,000 to a director in exchange for a
note receivable. The note bears annual interest at 6.9%, is for a term of
three years and is secured by a pledge of 60,000 shares of the Company's
Common Stock.
Convertible bridge notes
During 1998, the Company received bridge financing totaling $5.1 million
from certain investors and directors of the Company. See Note 4
"Borrowings".
7. Commitments and Contingencies
Operating leases
The Company leases its facilities under noncancelable operating leases with
various expiration dates through 2003. Under the terms of these leases, the
Company is responsible for utilities, taxes, insurance, and maintenance.
The term of these leases provide for rental payments on a graduated scale.
The Company has subleased part of their San Francisco, CA office to another
company.
Scheduled future minimum lease payments, net of sublease amounts, are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Year ending Amount
December 31,
<S> <C>
1999 $ 534,000
2000 518,000
2001 911,000
2002 952,000
2003 159,000
----------
$3,074,000
----------
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996, totaled
$741,000, $358,000, and $124,000, respectively.
Legal proceedings
On August 12, 1997, the Company sued Western Telecommunications ("WTCI")
for breach of contract based on WTCI's failure to pay for or use the
Company's software product as required by the contract between the Company
and WTCI entered into in September 1996. The complaint sought an
injunction, $5 million in unpaid development foes and additional amounts in
continuing per-subscriber license fees. WTCI counterclaimed in December
1997, seeking rescission of the contract, restitution of $3 million in
development fees previously paid by WTCI under the contract and additional
unspecified damages.
The parties settled the litigation in December 1998. Included among the
terms of the settlement, WTCI paid the Company $1 million, the parties
dismissed their claims and the quit was dismissed. The settlement amount,
net of legal costs, is included in other income.
8. Redeemable Preferred Stock
The Company's Articles of Incorporation designate and authorize 2,153,850
shares of $0.01 par value Preferred Stock and 10,000.000 shares of $0.01
par value Common Stock.
In connection with the formation of the Company, 1,500,000 shares of Common
Stock were issued to three founding shareholders in exchange for $36,000
cash, services rendered valued at $74,000 and equipment valued at cost
totaling $6,000.
Redeemable and Nonredeemable Convertible Preferred Stock
Holders of the Series A, B and C Preferred Stock have the following rights
and preferences:
Conversion
Each share of Series A, B and C Preferred Stock shall automatically be
converted into shares of Common Stock at the then effective conversion rate
of each series upon the closing of a firm commitment underwritten initial
public offering of the Company's Common Stock at a price per share of not
less than $7.50 and aggregate gross proceeds of not less than $5,000,000,
exclusive of underwriting discounts and offering expenses or convertible at
the option of the holder at any time into Common Stock at a conversion rate
of $1.54766, $1.80, and $9.98 per share, respectively.
<PAGE>
Voting rights
Each holder of Preferred Stock is entitled to the number of votes equal to
the number of shares of Common Stock into which the shares of Preferred
Stock could be converted.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A, B, and C Preferred Stock shall be entitled to
receive, prior and in preference to any distribution to the holders of the
Common Stock, the amount of $1.54766, $1.80 and $9.98, respectively, per
share, plus an amount equal to all accrued but unpaid dividends on such
shares. Holders of the Series A, B, and C Preferred Stock are entitled to
non-cumulative dividends, when and if declared by the Board of Directors,
equal to $0.12, $0.14 and $0.80 per share per annum, respectively, prior
and in preference to any distribution on the Common Stock.
Redemption
Holders of the Series A and B Preferred Stock have the following rights and
preferences:
Upon written notice by two-thirds of the holders of Series A Preferred
Stock and Series B Preferred Stock at any time subsequent to June 30, 2002,
the Company must redeem all, but not less than all, of the shares of Series
A Preferred Stock and Series B Preferred Stock outstanding as of June 30,
2002, at a price equal to $1.54766 and $1.80, respectively, per share, plus
all declared but unpaid dividends on such shares and an amount equal to 8
percent of the original purchase price of $1.54766 per share per annum and
$1.80 per share per annum, respectively, compounded annually, from the date
such shares were originally issued through the redemption date. The
redemption amount shall be payable in cash in three equal annual
installments beginning on the redemption date. As a result of issuance
costs totaling $40,000 and $8,000, and interest through the redemption
date, the estimated redemption amount of $1,575,000 and $1,165,000,
assuming no dividends, is greater than the book value of the Series A and B
Preferred Stock, respectively. The difference of $650,000 and $445,000,
respectively, will be accreted through June 30, 2002.
9. Stock Option Plans
Stock Option Plan
In 1995, the Company adopted an incentive and non-statutory stock option
plan (the "Plan") for which 1,046,648 shares have been reserved for
issuance. Options granted under the Plan are for periods not to exceed ten
years. Exercise prices of incentive stock option grants under the Plan must
be at least 100% of the fair market value of the stock at the date of grant
and for non-statutory stock options must be at least 85% of the fair market
value of the stock at the date of grant, all as determined by the Board of
Directors. Options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be
issued at prices not less than 110% of the fair market value of the stock
on the date of grant as determined by the Board of Directors. Under the
Plan, the options generally vest 25% after the initial year, with the
remainder vesting in an equal amount each month thereafter over the next
three years.
Executive Officer Option Plan
In September 1995, the Company entered into a Common Stock Purchase
Agreement with an officer of the Company. The Company granted an incentive
stock option to purchase 500,000 shares of the Common Stock at an exercise
price of $0.15 per share. These options were fully vested and exercised
immediately.
<PAGE>
Imedia Corporation
Notes to Financial Statement (Continued)
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Stock Option Plan activity
Activity under the 1995 Plan is as follows:
<TABLE>
<CAPTION>
Options Options Weighted
Available Outstanding Average
For Grant Exercise Price
Per Share
<S> <C> <C> <C>
Balance at December 31, 1995 - - $ -
Shares authorized 546,648 - -
Options granted (179,100) 179,100 0.40
Options exercised - - -
Options canceled - - -
--------------- ---------------
Balance at December 31, 1996 367,548 179,100 0.40
Options granted (120,000) 120,000 1.00
Options exercised - (26,500) 0.52
Options canceled 39,500 (39,500) 0.32
--------------- ---------------
Balance at December 31, 1997 287,048 233,100 0.70
--------------- ---------------
Shares authorized 500,000 - -
Options granted (967,396) 967,396 1.00
Options exercised - (51,333) 0.67
Options canceled 184,167 (184,167) 0.95
--------------- ---------------
Balance at December 31, 1998 3,819 964,996 0.97
--------------- ---------------
</TABLE>
Significant option groups outstanding at December 31, 1998, and related
weighted average exercise price and contractual life information are as
follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
--------------------------------
Range of Number Weighted- Weighted- Number Weighted-
Exercise Outstanding at Average Average Exercisable at Average
Prices December 31, Contractual Exercise Price December 31, Exercise Price
1998 Life 1998
(Years)
<S> <C> <C> <C> <C> <C>
$0.15 - 0.18 37,100 7.36 $0.16 25,418 $0.16
$0.75 - 1.00 927,896 9.02 1.00 38,147 0.99
----------------- -----------------
964,996 8.81 0.97 63,565 0.66
----------------- -----------------
</TABLE>
Using the minimum value method, the weighted average fair value of options
granted in 1998, 1997 and 1996 were $0.70, $0.22 and $0.09, respectively.
<PAGE>
Had compensation cost for the Company's options plans been determined based
on the fair value at the grant dates using the minimum value model as
prescribed by SFAS No. 123, the Company's pro forma net loss for the years
ended December 31, 1998, 1997 and 1996 would have been $8,281,000,
$5,923,000 and $854,000, respectively, which represents an increase to the
net loss of $99,000, $9,000 and $4,000, respectively.
Additional option grants are expected to be made in the future and the
annual compensation expense will increase relative to the fair value of the
stock option granted in those future years. Accordingly, pro forma
disclosures may differ materially from the reported results of operations
in the future.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants
during 1998, 1997 and 1996:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Expected life (years) 4 4 4
Risk-free interest rate 4.22-5.60% 5.70-6.75% 6.09%
Volatility 0.00% 0.00% 0.00%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
Subsequent Event (Unaudited)
In 1999, the Company received additional bridge financing totaling $2.4
million in exchange for Series C convertible promissory notes and warrants
to purchase Preferred Stock of the Company from the same investors and with
substantially the same terms as the bridge financing received in 1998. The
1998 financing was issued as $2.5 million in Series A convertible
promissory notes and $2.6 million in Series B convertible promissory notes.
The Series A promissory notes matured and were extended prior to the
acquisition of the Company by Terayon Communication Systems, Inc.
("Terayon").
The Series A and Series B convertible promissory notes, respectively,
included warrants to purchase Preferred Stock of The Company at $10.00 per
share and $5.00 per share. Prior to the acquisition, the Series A and
Series B convertible promissory notes and warrants were exchanged for
Series C convertible promissory notes, including warrant rights to purchase
Preferred Stock of the Company at the price per share of the next preferred
stock financing round.
Immediately prior to the acquisition the Series C convertible promissory
notes were converted into Series D Preferred Stock of the Company at a
price of $5.00 per share. The warrants issued with the Series C convertible
promissory notes provided for the issuance of 225,030 shares (15% coverage)
of Preferred Stock at $5.00 per share.
Additional bridge financing in the form of a $1.8 million nonconvertible
promissory note maturing in one year was provided by Terayon prior to its
acquisition of the Company. The first $1.5 million borrowed under the note
bore interest at 4.98% and the remaining $0.3 million borrowed bore
interest at 5.43%. The first $1 million borrowed under the note was
forgiven as part of the terms of the Agreement and Plan of Reorganization.
In July 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Terayon. Pursuant to the Agreement
the Company's shareholders, vested optionholders and warrantholders will
receive shares of Terayon common stock, options and warrants to purchase
shares of Terayon common stock and, in certain circumstances, cash, valued
at up to approximately $99,000,000 and not less than approximately
$69,000,000, subject to adjustment. Commensurate with the closing, all
outstanding preferred stock and convertible notes payable will be converted
in accordance with respective conversion ratios. Additionally, all unvested
options will be assumed by Terayon. The transaction was completed on
September 16, 1999.
<PAGE>
(b) Terayon Communication Systems, Inc. unaudited pro forma combined
condensed financial statements.
TERAYON COMMUNICATION SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Terayon Imedia Pro-forma
Actual Actual Adjustments Total
------------ --------------- ------------- -----------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 27,939 $ 556 $ - $ 28,495
Short-term investments 78,154 - - 78,154
Accounts receivable, net 6,878 705 - 7,583
Accounts receivable from related party 1,985 - - 1,985
Inventory 5,618 466 - 6,084
Other current assets 3,245 74 (1,000) (2) 2,319
---------- -------- -------- ---------
Total current assets 123,819 1,801 (1,000) 124,620
Property and equipment, net 4,109 2,198 - 6,307
Developed technology - - 27,000 (1) 27,000
Assembled workforce - - 2,500 (1) 2,500
Trademark - - 4,000 (1) 4,000
Restricted Cash - 530 - 530
Other assets 720 228 - 948
Goodwill - - 61,047 (1) 61,047
---------- -------- -------- ---------
Total assets $ 128,648 $ 4,757 $ 93,547 $ 226,952
========== ======== ======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,058 $ 687 - $ 14,745
Accrued payroll and related expenses 2,757 869 - 3,626
Other accrued liabilities 3,912 942 1,240 (3) 6,094
(365) (4) (365)
Current portion of capital lease obligations 5 - - 5
Convertible notes payable - 7,379 (7,379) (4) -
Note payable - 1,000 (1,000) (2) -
---------- -------- -------- ---------
Total current liabilities 20,732 10,877 (7,504) 24,105
Convertible notes, Long-term - 20 (20) (4) -
Long-term obligations 136 29 - 165
Redeemable preferred stock and stockholders' equity:
Redeemable convertible preferred stock - 2,128 (2,128) (6) -
Convertible preferred stock - 11,499 7,744 (4) -
(19,263) (5) -
Common stock 214,496 300 105,602 (7) 320,398
Warrants Outstanding - 423 (423) (5) -
Accumulated deficit (104,841) (20,519) 9,519 (8) (115,841)
Deferred compensation (1,869) - - (1,869)
Stockholders' notes receivable (6) - - (6)
---------- -------- -------- ---------
Total redeemable preferred stock and
stockholders' equity 107,780 (6,169) 101,071 202,682
---------- -------- -------- ---------
Total liabilities and stockholders' equity $ 128,648 $ 4,757 $ 93,547 $ 226,952
========== ======== ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Combined
Condensed Financial Statements
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Terayon Imedia Pro-forma
Actual Actual Adjustments Total
----------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Product revenues $ 19,150 $ - $ - $ 19,150
Related party product revenues 12,546 - - 12,546
--------- -------- --------- ---------
Total revenues 31,696 - - $ 31,696
Cost of Goods Sold:
Cost of product revenues 22,296 - 4,696 (10) 26,992
Cost of related party product revenues 12,222 - - 12,222
--------- -------- --------- ---------
Total cost of goods sold 34,518 - 4,696 39,214
Gross loss (2,822) - (4,696) (7,518)
Operating Expenses:
Research and development 10,685 3,449 494 (10) 14,628
Sales and marketing 6,947 2,301 963 (10) 10,211
General and administrative 3,223 3,147 264 (10) 6,634
Goodwill - - 10,175 (10) 10,175
--------- -------- --------- ---------
Total operating expenses 20,855 8,897 11,896 41,648
--------- -------- --------- ---------
Operating loss (23,677) (8,897) (16,592) (49,166)
Interest income (expense), net 449 715 - 1,164
--------- -------- --------- ---------
Net loss (23,228) (8,182) (16,592) (48,002)
Convertible preferred stock dividend and redeemable
convertible preferred stock dividend (23,910) - (155) (9) (24,065)
--------- -------- --------- ---------
Net loss applicable to common stockholders $ (47,138) $ (8,182) $ (16,747) $ (72,067)
========= ======== ========= =========
Historical basic and diluted net loss per
share attributable to common stockholders $ (5.25) $ (6.63)
========= =========
Shares used in computing historical basic
and diluted net loss per share attributable
to common stockholders 8,986 1,884 10,870
========= ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Combined
Condensed Financial Statements.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Terayon Imedia Pro-forma
Actual Actual Adjustments Total
----------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product revenues $ 24,448 $ 1,803 $ - $ 26,251
Related party product revenues 10,507 - - 10,507
--------- -------- --------- ---------
Total revenues 34,955 1,803 - 36,758
Cost of Goods Sold:
Cost of product revenues 22,018 939 $ 2,348 (10) 25,305
Cost of related party product revenues 7,211 - - 7,211
--------- -------- -------- ---------
Total cost of goods sold 29,229 939 2,348 32,516
Gross profit 5,726 864 (2,348) 4,242
Operating Expenses:
Research and development 7,106 1,481 247 (10) 8,834
Cost of product development assistance agreement 12,793 - - 12,793
Sales and marketing 5,852 1,635 481 (10) 7,968
General and administrative 2,712 1,748 132 (10) 4,592
Goodwill - - 5,088 (10) 5,088
--------- -------- -------- ---------
Total operating expenses 28,463 4,864 5,948 39,275
--------- -------- -------- ---------
Operating loss (22,737) (4,000) (8,296) (35,033)
Interest income (expense), net 2,197 (359) - 1,838
--------- -------- -------- ---------
Net loss (20,540) (4,359) (8,296) (33,195)
Convertible preferred stock dividend and redeemable
convertible preferred stock dividend - - (84) (9) (84)
--------- -------- -------- ---------
Net loss applicable to common stockholders $ (20,540) $ (4,359) $ (8,380) $ (33,279)
========= ======== ======== =========
Historical basic and diluted net loss
per share attributable to common stockholders $ (1.06) $ (1.56)
====== ======
Shares used in computing historical basic and diluted
net loss per share attributable to common stockholders 19,425 1,884 21,309
====== ===== ======
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
As of, and For the Six Months Ended June 30, 1999 and For the Year Ended
December 31, 1998
The unaudited pro forma combined condensed financial statements give effect to
the Terayon Communication Systems, Inc. ("Terayon") acquisition of Imedia
Corporation ("Imedia") through a merger and exchange of shares ("the Imedia
merger"). The Unaudited Pro Forma Combined Condensed Statements of Operations
for the year ended December 31, 1998 and for the six months ended June 30, 1999
reflect these transactions as if they had taken place on January 1, 1998 and
January 1, 1999, respectively. The Unaudited Pro Forma Combined Condensed
Balance Sheet gives effect to these transactions as if they had taken place on
June 30, 1999. The transaction was completed on September 16, 1999.
The Imedia merger was accounted for using the purchase method of accounting.
The unaudited pro forma combined condensed financial statements have been
prepared on the basis of assumptions described in the following notes and
include assumptions relating to the allocation of the consideration paid for the
assets and liabilities of Imedia based on actual fair value. Terayon does not
expect that the final allocation of the purchase price will differ materially
from the preliminary allocations. In the opinion of Terayon's management, all
adjustments necessary to present fairly such unaudited pro forma combined
condensed financial statements have been made on the proposed terms and
structure of the Imedia merger.
In connection with the acquisition of Imedia, Terayon expects to incur write-
offs related to in-process research and development of approximately $11.0
million. The Unaudited Pro Forma Combined Condensed Balance Sheet includes the
effect of the write-off related to in-process research and development; however,
the Unaudited Pro Forma Combined Condensed Statements of Operations do not
reflect this charge. The charge related to in-process research and development
will be reflected in Terayon's consolidated financial statements when the Imedia
merger is consummated. Terayon expects integration costs to be insignificant as
a result of the Imedia merger.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of what the actual financial results would have been had
the transaction taken place on January 1, 1998, January 1, 1999 or June 30, 1999
and do not purport to indicate the results of future operations.
The unaudited pro forma combined condensed financial statements give effect to
the following pro forma adjustments.
1. In accordance with the Agreement and Plan of Merger and Reorganization among
Terayon and Imedia ("the Agreement"), Imedia is to become a wholly-owned
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--(continued)
subsidiary of Terayon, and all outstanding shares of its common stock are to
be converted into shares of common stock of Terayon.
The Imedia merger was accounted for using the purchase method of accounting. In
general, the shareholders, vested optionholders and warrantholders will receive
shares of Terayon common stock, options and warrants to purchase shares of
Terayon common stock and cash, in certain circumstances, valued at up to
approximately $99.0 million and not less than approximately $69.0 million, as
adjusted for items defined more fully in the Agreement. For purposes of the pro
forma combined condensed financial statements the number of shares, options and
warrants to purchase shares to be issued was determined based on $47.30 per
share, which is the average of the market price before and immediately after the
announcement of the Imedia merger, assuming the maximum purchase price as
defined in the Agreement.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
Imedia Terayon Fair Value
Shares Shares (in thousands)
----------------------------------------------------
<S> <C> <C> <C>
Shares.............................. 7,497,277 1,883,652 $ 89,097
Stock options and warrants.......... 1,628,496 408,313 16,810
Forgiveness of Imedia note
payable........................... - - 1,000
----------------------------------------------------
Totals.......................... 9,125,773 2,291,965 $106,907
</TABLE>
The Imedia shares were first converted into Terayon equivalent shares by taking
the number of Terayon shares divided by the exchange ratio of approximately 0.25
Imedia shares for each Terayon share.
The fair value of "shares" was calculated by taking the fair value of the stock
($47.30 per share) times the number of Terayon shares to be acquired.
With respect to stock options exchanged as part of the Imedia merger, all vested
Imedia options exchanged for vested Terayon options are included as part of the
purchase price based on their fair value. Any unvested Imedia options issued in
exchange for unvested Terayon options are also included as part of the purchase
price based on their fair value.
The fair value of the stock options and warrants was calculated by taking the
options and warrants to purchase Terayon shares (408,313 options and warrants)
multiplied by the fair value of the stock ($47.30 per share) less the proceeds
which will be received from the optionholders and warrantholders upon exercise
(approximately $2.5 million).
The unaudited pro forma combined condensed financial statements have been
prepared on the basis of assumptions described in the notes thereto and include
assumptions relating to the allocation of the consideration paid for the assets
and liabilities of Imedia
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--(continued)
based upon preliminary estimates of fair value. The actual allocation of such
consideration may differ from that reflected in the unaudited pro forma combined
condensed financial statements after valuations and other procedures to be
performed after the closing of the Imedia merger have been completed. Below is a
table of the estimated acquisition cost, purchase price allocation and annual
amortization of the intangible assets acquired. The historical net book value of
Imedia, the developed technology and the goodwill presented are as of June 30,
1999. Upon the closing of the acquisition on September 16, 1999, the pro forma
net tangible assets of Imedia were $655,000 which resulted in goodwill of $63.0
million (in thousands):
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
--------------------------------------
<S> <C> <C> <C>
Estimated Acquisition Cost:
Estimated Purchase Price................ $106,907
Acquisition Expenses.................... 1,240
--------
Total Estimated Acquisition Cost...... $108,147
========
Purchase Price Allocation:
Historical net tangible assets of Imedia
at June 30, 1999...................... $ (6,165)
Forgiveness of Imedia note payable...... 1,000
Conversion of Imedia convertible notes
and accrued interest.................. 7,765
--------
Pro forma net tangible assets of Imedia
at June 30, 1999..................... 2,600
Intangible assets acquired:
Developed technology................. 27,000 6 $ 4,500
Assembled workforce.................. 2,500 2 1,250
Trademark............................ 4,000 6 667
In-Process Technology................ 11,000
Goodwill............................. 61,047 6 10,175
--------
Total................................ $108,147
========
</TABLE>
Tangible assets of Imedia to be acquired principally include cash, accounts
receivable and property and equipment. Liabilities of Imedia assumed in the
Imedia merger principally include accounts payable and accrued liabilities.
Upon the closing of the Imedia merger, Imedia's note payable obligation to
Terayon of $1.0 million will be forgiven by Terayon. In addition, the remaining
$7.4 million of convertible notes payable and $0.4 million of accrued interest
relating to the convertible notes payable will be converted into Imedia
convertible preferred stock, which will then be converted into Terayon common
stock.
To determine the value of the developed technology, the expected future cash
flow attributed to all existing technology was discounted, taking into account
risks related to the characterisitics and applications of the technology,
existing and future markets, and
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--(continued)
assessments of the life cycle stage of technology. The analysis resulted in a
valuation of approximately $27.0 million for developed technology which had
reached technological feasibility and therefore was capitalizable. The developed
technology is being amortized on a straight line basis over a six year period.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis yielded a valuation
of approximately $2.5 million for the assembled workforce. The asset is being
amortized on a straight line basis over a two year period.
The preliminary goodwill allocation is approximately $61.0 million. Amortization
of goodwill will occur over six years due to the pace of technological
development within the industries emerging to support the cable industry's
expansion into multimedia functions. The goodwill allocation changed to $63.0
million upon the closing of the acquisition on September 16, 1999.
The projects identified as in-process at Imedia are those that will be underway
at the time of the acquisition of Imedia and would, after consummation of the
acquisition, require additional effort to establish technological feasibility.
These projects have indentifiable technological risk factors which indicate that
even though successful completion is expected, it is not assured. The
preliminary estimate of in-process research and development is $11.0 million.
The estimated amount of the in-process research and development charge is still
a preliminary estimate which could materially differ from the actual results
that will be experienced by Terayon, as final values will not be established
until after the closing of the acquisition of Imedia.
In-process technology acquired in the transaction consists primarily of major
additions to Imedia's core technology, which is related to Imedia's planned
development of new features. The majority of the intended functionality of
these new features is not supported by Imedia's current technology. Intended
new features include offering high quality video service over the Internet and
multiplexing data with video.
Terayon expects that the in-process technology will be successfully developed,
and that initial benefits from these projects will begin in calendar 2001.
Notwithstanding Terayon's expectation that the in-process technology will be
successfully developed, there remain significant technical challenges that must
be resolved in order to complete the in-process technology.
2. The pro forma adjustment to "Other current assets" and "Note payable"
reflects the forgiveness of a $1.0 million note payable from Imedia to
Terayon that has also been incorporated into the determination of the
purchase price.
3. The pro forma adjustment to "Other accrued liabilities" reflects the accrual
of acquisition costs arising from the Imedia acquisition, estimated to be
approximately $1.2 million. The $1.2 million includes approximately $0.3
million for liabilities related to involuntary employee termination benefits
of Imedia employees.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--(continued)
4. The pro forma adjustment to "Convertible notes payable," "Convertible note,
long-term," "Other accrued liabilities," and "Warrants outstanding" reflects
the elimination of Imedia's convertible notes ($7.4 million) and accrued
interest on the convertible notes ($0.4 million) as the notes and accrued
interest convert into shares of Imedia convertible preferred stock and then
into shares of Terayon common stock upon the close of the Imedia meger.
5. The $19.3 million pro forma adjustment to "Convertible preferred stock" and
the $0.4 million pro forma adjustment to "Warrants outstanding" reflects the
elimination of Imedia's convertible preferred stock and the fair value
recorded for convertible preferred stock warrants. The adjustment includes
the $7.7 million of convertible notes payable and accrued interest described
in footnote 4.
6. The pro forma adjustment to "Redeemable convertible preferred stock"
reflects the elimination of Imedia's redeemable convertible preferred stock
($2.1 million)
7. The pro forma adjustment to "Common stock" reflects the elimination of
Imedia common stock ($0.3 million), and the impact of the issuance of
Terayon common stock ($105.9 million).
8. The pro forma adjustment to "Accumulated deficit" reflects the elimination
of Imedia's accumulated deficit ($20.5 million), and the in-process
technology charge ($11.0 million).
9. The pro forma adjustment to redeemable convertible preferred stock dividend
and convertible preferred stock dividend reflects a dividend to Imedia
redeemable preferred stockholders totaling $0.2 million for the year ended
December 31, 1998 and $0.1 million for the six months ended June 30, 1999.
10. The pro forma adjustment is for the amortization of goodwill, developed
technology trademark and assembled workforce.
<PAGE>
(c) Exhibits
Exhibit Number Exhibit
2.1 Agreement and Plan of Merger, dated as of July 15, 1999,
among Terayon Communication Systems, Inc., Cherry Acquisition
Corp. and Imedia Corporation. (Incorporated by reference to
exhibits to the Company's Form 8-K filed on October 1, 1999
(File No. 000-25071)).
<PAGE>
SIGNATURE
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.
Dated: October 4, 1999 By: /s/ Ray M. Fritz
-----------------
Ray M. Fritz
Chief Financial Officer
