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As filed with the Securities and Exchange Commission on February 11, 2000
Registration No. 333-95357
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Amendment No. 1 to the
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________
TERAYON COMMUNICATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 3661 77-0328533
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number
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2952 Bunker Hill Lane
Santa Clara, California 95054
(408) 727-4400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Edward Lopez
General Counsel
2952 Bunker Hill Lane
Santa Clara, California 95054
(408) 727-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
____________
Copies to:
Karyn S. Tucker
Angelique C. Tremble
Rachel N. Halpren
Cooley Godward llp
One Maritime Plaza, 20/th/ Floor
San Francisco, CA 94111
(415) 693-2000
___________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8 (a), may determine.
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Explanatory Note
This Registration Statement contains a Prospectus relating to a public
offering of an aggregate of 2,200,000 shares of common stock, $0.001 par value
per share ("Common Stock"), of Terayon Communication Systems, Inc., a Delaware
corporation, that are owned by former shareholders of Telegate Ltd., a company
organized under the laws of the State of Israel (the "Telegate Offering"). The
complete Prospectus for the Telegate Offering follows immediately.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion
February 11, 2000
TERAYON COMMUNICATION SYSTEMS, INC.
2,200,000 Shares
Common Stock
The Selling Stockholders: The selling stockholders identified in this
prospectus are selling 2,200,000 shares of our
common stock. We are not selling any shares of our
common stock under this prospectus and will not
receive any of the proceeds from the sale of
shares by the selling stockholders.
Offering Price: The selling stockholders may sell the shares of
common stock described in this prospectus in a
number of different ways and at varying prices. We
provide more information about how they may sell
their shares in the section titled "Plan of
Distribution" on page 18.
Trading Market: Our common stock is listed on the Nasdaq National
Market under the symbol "TERN." On February 9,
2000, the closing sale price of our common stock,
as reported on the Nasdaq National Market, was
$151.50.
Risks: Investing in our common stock involves a high
degree of risk. See "Risk Factors" beginning on
page 3.
The shares offered or sold under this prospectus have not been approved by
the Securities and Exchange Commission or any state securities commission, nor
have these organizations determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is ______________, 2000
Terayon, TeraComm, TeraLink, TeraPro, TeraView and the Terayon logo are our
trademarks. This prospectus also includes trade dress, trade names and
trademarks of other companies. Our use or display of other parties' trademarks,
trade dress or products is not intended to and does not imply a relationship
with the trademark or trade dress owners.
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PROSPECTUS SUMMARY
The following is a summary of our business. You should carefully read the
section entitled "Risk Factors" in this prospectus, our Annual Report on Form
10-K for the year ended December 31, 1998 and our Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1999, June 30, 1999 and September 30, 1999 for
more information on our business and the risks involved in investing in our
stock.
In addition to the historical information contained in this prospectus,
this prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of
1934. These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors"
beginning on page 3 of this prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in our
Annual Report and Quarterly Reports contain a discussion of some of the factors
that could contribute to those differences.
Terayon
Overview
Our core line of business is to develop, market and sell broadband access
systems that enable cable operators to cost-effectively deploy reliable two-way
broadband access services. Our TeraComm system is designed to enable cable
operators to maximize the capacity and reliability of broadband access services
over any cable plant. This allows cable operators to minimize time-consuming and
costly network infrastructure upgrades, achieve reduced time to market and
provide a wide range of service levels to residential and commercial end users.
Cable operators using the TeraComm system can provide additional revenue-
generating services to end users. This enables cable operators to compete
effectively in the emerging market for broadband access services.
In recent years, the volume of bandwidth intensive data, voice and video
traffic across the Internet, corporate intranets and other public networks has
increased dramatically. International Data Corporation estimates that the number
of Internet users will increase from approximately 69 million at the end of 1997
to approximately 320 million by the end of 2002. IDC also estimates that the
number of home office households will increase from approximately 35 million at
the end of 1997 to approximately 50 million by the end of 2002. Although various
technologies have emerged to address the need for broadband access, the existing
cable infrastructure currently provides the highest available two-way
transmission speeds and "always-on" availability. In addition, the existing
cable infrastructure currently passes more than 95% of homes in the U.S. and a
large number of small businesses.
The TeraComm system is based on our Synchronous Code Division Multiple
Access or "S-CDMA" technology. The TeraComm system is comprised of the TeraPro
cable modem, the TeraLink 1000 Master Controller, the TeraLink Gateway, and the
TeraView Element Management and Provisioning Software. Our S-CDMA technology
enables reliable two-way broadband communications over both pure coaxial and
hybrid fiber/coax cable infrastructure. It does this by maximizing resistance to
noise that interferes with data transmissions over previously unusable frequency
spectrum. We sell our products to cable operators through direct sales forces in
North America, Latin America and Europe. We also distribute our products via
distributors and systems integrators. Companies currently using or distributing
the TeraComm system include Shaw Communications Inc., Rogers Communications
Inc., TCA Cable TV, Inc., Cablevision Systems, Inc., and Crossbeam Networks
Corporation, a wholly owned subsidiary of Sumitomo Corporation.
Our Company was incorporated in California in January 1993 and
reincorporated in Delaware in July 1998. References in this report to "Terayon,"
"we," "our," "us" and the "Company" refer to Terayon Communication Systems, Inc.
and its subsidiaries.
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Recent Developments
* On January 18, 2000, we announced revenues of approximately $38.7 million
for the fourth quarter ended December 31, 1999. Our expectations are
preliminary and are subject to the completion of an audit of our December
31, 1999 financial statements.
* We have signed definitive agreements to acquire ComBox Ltd. and Tyco
Electronic's Access Network Electronics Division, however these
acquisitions are subject to various closing conditions.
Acquisitions
Radwiz Ltd.
On November 22, 1999, we acquired all of the outstanding shares of Radwiz
Ltd. in exchange for 996,153 shares of our common stock. We accounted for the
acquisition as a purchase.
Telegate Ltd.
On January 2, 2000, we acquired all of the outstanding shares of
Telegate Ltd. in exchange for 2,200,000 shares of our common stock. We
accounted for the acquisition as a purchase.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
We Have a Limited Operating History and a History of Losses.
We have a very limited operating history, and it is difficult to predict
our future operating results. We were incorporated in January 1993 and began
shipping products commercially in June 1997. We have only been shipping products
in volume since the first quarter of 1998. As of September 30, 1999, we had an
accumulated deficit of $129.4 million. We believe that we will continue to
experience net losses for the foreseeable future. Most of our expenses are fixed
in advance, and we generally are unable to reduce our expenses significantly in
the short term to compensate for any unexpected delay or decrease in anticipated
revenues. We expect to increase expense levels in each of the next several
quarters to support increased sales and marketing and technical support costs.
Any significant delay in our anticipated revenues or commercialization of new
products would harm our business. The revenue and profit potential of our
business and our industry are unproven. We had negative gross margins from our
inception until the fourth quarter of 1998, and any future revenue growth may
not result in positive gross margins or operating profits in future periods.
Our Operating Results May Fluctuate.
Our quarterly revenues are likely to fluctuate significantly in the future
due to a number of factors, many of which are outside our control. Factors that
could affect our revenues include the following:
. variations in the timing of orders and shipments of our products;
. variations in the size of the orders by our customers;
. new product introductions by competitors;
. delays in introducing new products;
. delays of orders forecasted by our customers;
. delays by our customers in the completion of upgrades of cable
infrastructure;
. variations in capital spending budgets of cable operators; and
. delays in obtaining regulatory approval for commercial deployment of
cable modem systems.
Our expenses generally will vary from quarter to quarter depending on the
level of actual and anticipated business activities. Research and development
expenses will vary as we begin development of new products and as our
development programs move to wafer fabrication, which results in higher
engineering expenses.
We have a limited backlog of orders, and net sales for any future quarter
are difficult to predict. Supply, manufacturing or testing constraints could
result in delays in the delivery of our products. Any delay in the product
deployment schedule of one or more of the cable operators that we target would
have an adverse effect on our operating results for a particular period. In
addition, due to the large dollar size of a typical transaction in comparison to
our total revenues, any delay in the closing of a transaction could have a
significant impact on our operating results for a particular period.
A variety of factors affect our gross margin, including the following:
. the sales mix of our products;
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. the volume of products manufactured;
. the type of distribution channel through which we sell our products;
. the average selling prices or "ASPs" of our products; and
. the effectiveness of our cost reduction measures.
We anticipate that unit ASPs of our products will decline in the future.
This could cause a decrease in the gross margins for these products. In
addition, the maturity of TeraComm system deployments affects our gross margin.
New deployments of the TeraComm system involve the sale of headend equipment
(which has higher margins) and generally involve smaller quantities of product.
New deployments typically are sold at higher margins than the larger volume
sales of product associated with more mature deployments of the TeraComm system.
The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways and TeraPro
cable modems also affects our gross margin. The TeraPro cable modems have
significantly lower margins than the TeraLink 1000 Master Controller and
TeraLink Gateway headend products. We expect to achieve only nominal margins on
the TeraPro cable modems for the foreseeable future. Further, we expect that
sales of TeraPro cable modems will continue to constitute a significant portion
of our revenues for the foreseeable future.
We Are Dependent on a Small Number of Customers.
Three customers accounted for approximately 54% of our revenues in the
first nine months of 1999 and three customers accounted for approximately 65% of
our revenues for the year ended December 31, 1998. We believe that a substantial
majority of our revenues will continue to be derived from sales to a relatively
small number of customers for the foreseeable future. In addition, we believe
that sales to these customers will be focused on a small number of projects. The
cable industry is undergoing significant consolidation in the United States and
internationally, and a limited number of cable operators controls an increasing
number of cable systems. As a result, our sales will be largely dependent upon
product acceptance by the leading cable operators. Currently, ten cable
operators in the United States own and operate facilities passing approximately
86% of total homes passed. Currently, the timing and size of each customer's
order is critical to our operating results. Our major customers are likely to
have significant negotiating leverage and may attempt to change the terms,
including pricing, upon which we do business with them. These customers also may
require longer payment terms than we anticipate, which could require us to raise
additional capital to meet our working capital requirements. Our success will
depend on our cable modems being widely deployed and our ability to sell to new
customers.
Acquisitions Could Result In Dilution, Operating Difficulties and Other Harmful
Consequences.
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are strategic. We
recently completed the acquisition of Imedia Corporation, as well as the two
acquisitions described earlier in this prospectus. The process of integrating
any acquired business into our business and operations is risky and may create
unforeseen operating difficulties and expenditures. The areas in which we may
face difficulties include:
. diversion of management time (both ours and at the acquired companies)
during the period of negotiation through closing and further diversion
of such time after closing from the ongoing development of our
businesses, issues of integration and future products;
. decline in employee morale and retention issues resulting from changes
in compensation, reporting relationships, future prospects or the
direction of the business;
. the need to integrate each company's accounting, management
information, human resource and other administrative systems to permit
effective management and the lack of control if such integration is
delayed or not implemented; and
. the need to implement controls, procedures and policies appropriate
for a larger public group of companies that prior to acquisition had
been smaller, private companies.
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We have almost no experience in managing this integration process.
Moreover, the anticipated benefits of any or all of these acquisitions may not
be realized. Future acquisitions could result in potentially dilutive issuances
of equity securities, the incurrence of debt, contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could harm our business. Future acquisitions may require us to obtain
additional equity or debt financing, which may not be available on favorable
terms or at all. Even if available, this financing may be dilutive.
The Sales Cycle for Our Products Is Lengthy.
The sales cycle associated with our products typically is lengthy, often
lasting six months to a year. Our customers typically conduct significant
technical evaluations of competing technologies prior to the commitment of
capital and other resources. In addition, purchasing decisions may be delayed
because of our customers' internal budget approval procedures. Sales also
generally are subject to customer trials, which typically last three months.
Because of the lengthy sales cycle and the large size of customers' orders, if
orders forecasted for a specific customer for a particular quarter do not occur
in that quarter, our operating results for that quarter could suffer.
There are Many Risks Associated with Our Participation in the Establishment of
Advanced Physical Layer specifications to be added to DOCSIS.
In November 1998, CableLabs selected us to co-author a technical
specification for DOCSIS 1.2, an enhanced version of the DOCSIS cable modem
standard based in part on our S-CDMA technology. Since then, CableLabs has
reaffirmed its intention to add advanced upstream physical layer ("PHY")
capabilities to the DOCSIS specifications as enhancements; however, CableLabs
has modified its plans for how the specifications will be created. In
September, 1999, CableLabs indicated that it wants to proceed with the advanced
PHY work on two parallel tracks: one for the inclusion of our S-CDMA technology,
as proposed by Terayon; and, one for the inclusion of Advanced TDMA technology,
as proposed by other companies. CableLabs wants work to proceed in parallel on
these two complementary technologies, but the intention remains to include both
as operating modes in a future version of the DOCSIS specification, consistent
with the original plans for DOCSIS 1.2. As part of the new plan to add advanced
PHY capabilities to DOCSIS, CableLabs has dropped reference to what was formerly
called DOCSIS 1.2, the name given in November to the specification that includes
advanced PHY.
CableLabs has requested that we submit a prototype of a DOCSIS system that
incorporates an S-CDMA advanced PHY capability for testing. CableLabs has
stated that if the testing of this prototype reveals that the S-CDMA advanced
PHY works as claimed, and if the costs for adding S-CDMA to DOCSIS products are
in line with estimates, then it is highly likely that it will add S-CDMA
advanced PHY capabilities to a future version of the DOCSIS specification.
There can be no guarantee that the prototype we submit to CableLabs will
demonstrate the level of performance that CableLabs seeks, or, that even if it
does meet performance expectations that CableLabs will incorporate the
technology into a future version of DOCSIS specifications. In addition, if
CableLabs does proceed to include S-CDMA in a future DOCSIS specification, there
can be no guarantee that the DOCSIS S-CDMA specification will be the same as the
specification we incorporated in the prototype submitted for tests.
If CableLabs does not adopt an enhancement to the DOCSIS specifications
based on S-CDMA technology, or if it adopts a version that is substantially
different than what we propose, it is likely our future revenues and operating
results will be adversely affected. It may also cause us to incur substantial
additional research and development expenditures to adapt our specifications to
the version adopted by CableLabs.
CableLabs has not established a schedule for adding either the S-CDMA or
Advanced TDMA capabilities to the DOCSIS specifications; although, CableLabs has
indicated that they want to proceed expeditiously. Delays in the establishment
of a firm specification for S-CDMA in DOCSIS could harm our plans to sell DOCSIS
compatible modems and headend equipment. In particular, if the final DOCSIS S-
CMDA specification is not approved prior to the time when the company is ready
to ship DOCSIS products with S-CDMA features included, then we could face two
choices. The first would be to delay the introduction of those products until
the DOCSIS S-CDMA specification is released. The second would be to introduce
the S-CDMA features as proprietary enhancements on top of a standard DOCSIS
product. Either one of the choices could harm revenues and operating results.
We have already given CableLabs assurances that we will contribute some
aspects of our proprietary S-CDMA technology to a royalty-free intellectual
property pool, if S-CDMA is included in a future version of DOCSIS
specifications. This royalty-free pool has been established by CableLabs to
facilitate the participation of
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as many vendors as possible in providing equipment that is compatible with the
DOCSIS specifications. As a result, any of our competitors who join the DOCSIS
intellectual property pool would have access to some aspects of our technology
and will not be required to pay us any royalties or other compensation. If a
competitor is able to duplicate the functionality and capabilities of our
technology, we could lose some or all of the time-to-market advantage we might
otherwise have which could harm our future revenues and operating results.
We believe the addition of advanced upstream PHY capabilities to DOCSIS
will increase the overall market for DOCSIS-compatible products, and as such
will result in increased competition in the cable modem market. This competition
could come from existing competitors or from new competitors who enter the
market as a result of the enhancements to the specifications. This increased
competition is likely to result in lower ASPs of cable modem systems and could
harm revenues and gross margins. Because our competitors will be able to
incorporate some aspects of our technology into their products, our current
customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
cable modems with advanced PHY capabilities from multiple suppliers. We may be
unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
more quickly or at lower cost than our competitors. The inclusion of our S-CDMA
technology in DOCSIS could result in increased competition for the services of
our existing employees who have experience with S-CDMA. The loss of these
employees to one or more competitors could harm our business.
DOCSIS standards have not yet been accepted in Europe and Asia. If
standards that are not compatible with DOCSIS standards ultimately achieve
widespread acceptance outside of the United States and Canada, we could be
required to redesign our products for use in those markets. We would also be
faced with the additional challenge of convincing additional standards bodies
that an advanced PHY based on S-CDMA technology should be included in those
standards. There is no guarantee that we would be successful in convincing
them of this. Even if we were able to successfully redesign our products to
implement standards other than DOCSIS, this would likely adversely affect our
sales and gross margin results outside of the North America.
We Need to Develop New Products.
Our future success will depend in part on our ability to develop, introduce
and market new products in a timely manner. We must also respond to competitive
pressures, evolving industry standards and technological advances. Our current
S-CDMA products are not DOCSIS-compliant, and we do not expect to sell our
DOCSIS compliant products with advanced PHY based on S-CDMA until 2000. As 2000
approaches, existing or potential customers may delay purchases of our current
cable modem system in order to purchase systems that comply with the DOCSIS
standard. In addition, potential new customers could decide to purchase DOCSIS
compliant products from one or more of our competitors rather than from us. As a
result our product sales in the first half of 2000 may be lower than we
anticipate. As 2000 approaches, we may be required to reduce the price of our
current products for sales to existing customers. This would harm our operating
results and gross margin.
It is expected that the DOCSIS specifications that include specifications
for advanced PHY will be based upon both S-CDMA and advanced TDMA technology. In
that event, we will have to incorporate advanced TDMA technology into our DOCSIS
compliant products. If we are unable to do this effectively, or in a timely
manner, we will lose some or all of the time-to-market advantage we might
otherwise have had.
Average Selling Prices of Cable Equipment Typically Decrease.
The cable equipment systems industry has been characterized by erosion of
average selling prices. We expect this to continue. This erosion is due to a
number of factors, including competition, rapid technological change and price
performance enhancements. The average selling prices for our products may be
lower than expected as a result of competitive pricing pressures, our
promotional programs and customers who negotiate price reductions in exchange
for longer term purchase commitments. We anticipate that ASPs and gross margins
for our products will decrease over product life cycles. In addition, we believe
that the widespread adoption of industry standards is likely to further erode
ASPs, particularly for cable modems. It is likely that the widespread adoption
of industry standards will result in increased retail distribution of cable
modems, which could put further price pressure on our modems. Decreasing ASPs
could result in decreased revenue even if the number of units sold increases. As
a result, we may experience substantial period-to-period fluctuations in future
operating results due to ASP erosion. Therefore, we must continue to develop and
introduce on a timely basis next-generation products with enhanced
functionalities that can be sold at higher gross margins. Our failure to do this
could cause our revenues and gross margin to decline.
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We Must Achieve Cost Reductions.
Certain of our competitors currently offer cable modems at prices lower
than ours. Market acceptance of our products will depend in part on reductions
in the unit cost of our products. We expect that as headend equipment becomes
more widely deployed, the price of cable modems and other products will decline.
In particular, we believe that the widespread adoption of industry standards
such as DOCSIS will cause increased price competition for cable modems. However,
we may be unable to reduce the cost of our modems sufficiently to enable us to
compete with other cable modem suppliers. Our cost reduction efforts may not
allow us to keep pace with competitive pricing pressures or lead to gross margin
improvement.
Some of our competitors are larger and manufacture products in
significantly greater quantities than we intend to for the foreseeable future.
Consequently, these competitors have more leverage in obtaining favorable
pricing from suppliers and manufacturers. In order to remain competitive, we
must significantly reduce the cost of manufacturing our cable modems through
design and engineering changes. We may not be successful in redesigning our
products. Even if we are successful, our redesign may be delayed or may contain
significant errors and product defects. In addition, any redesign may not result
in sufficient cost reductions to allow us to significantly reduce the list price
of our products or improve our gross margin. Reductions in our manufacturing
costs will require us to use more highly integrated components in future
products and may require us to enter into high volume or long-term purchase or
manufacturing agreements. Volume purchase or manufacturing agreements may not be
available on acceptable terms. We could incur expenses without related revenues
if we enter into a high volume or long-term purchase or manufacturing agreement
and then decide that we cannot use the products or services offered by such
agreement.
We Must Keep Pace with Rapid Technological Change to Remain Competitive.
The markets for our products are characterized by rapid technological
change, evolving industry standards, changes in end-user requirements and
frequent new product introductions and enhancements. Our future success will
depend upon our ability to enhance our existing products and to develop and
introduce new products that achieve market acceptance. Cable operators may adopt
alternative technologies or they may deploy alternative services that are
incompatible with our products.
The demand for broadband access services has resulted in the development of
several competing modulation technologies. Our products utilize a modulation
technology known as Synchronous Code Division Multiple Access or "S-CDMA," while
several of our competitors utilize modulation technologies known as Time
Division Multiple Access or "TDMA" and Frequency Division Multiple Access or
"FDMA." Our headend equipment and cable modem products currently are not
interoperable with the headend equipment and modems of other suppliers of
broadband access products. As a result, potential customers who wish to purchase
broadband access products from multiple suppliers may be reluctant to purchase
our products. Although our technology may be incorporated into a future version
of industry standards, we cannot be certain that major cable operators will
adopt these standards. Major cable operators may not adopt products or
technologies based on our current proprietary S-CDMA technology or on any future
industry standard S-CDMA technology. Further, major cable operators may adopt
products or standards technologies based on competing modulation technologies.
If competitors using other modulation technologies can incorporate functionality
and capabilities currently found in S-CDMA, the value of our S-CDMA technology
would be diminished.
Cable Modems Have Not Achieved Widespread Market Acceptance and Many Competing
Technologies Exist.
Our success will depend upon the widespread commercial acceptance of cable
modems by cable operators and end users of broadband access services. Cable
operators have only recently begun to deploy broadband access services based on
cable modem technology, and the market for these services is not fully
developed. We cannot accurately predict the future growth rate or the ultimate
size of the cable modem market. Potential users of our products may have
concerns regarding the security, reliability, cost, ease of installation and use
and capability of cable modems in general.
The general market for cable modems may be affected by the development of
alternative technologies that provide broadband access services. These include
the following:
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. Digital Subscriber Line technologies known as "xDSL";
. Integrated Service Digital Network or "ISDN";
. data transmission over fiber optic cable;
. direct broadcast satellite;
. Local Multipoint Distribution Service; and
. Multichannel Multipoint Distribution Service.
Broadband access services based on some of these competing technologies are
already available and could significantly limit acceptance of cable modem-based
services.
We Need to Develop Additional Distribution Channels.
We presently market our products to cable operators and systems
integrators. We believe that much of the North American cable modem market may
shift to a retail distribution model. Accordingly, we may need to redirect our
future marketing efforts to sell our cable modems directly to retail
distributors and end users. This shift would require us to establish new
distribution channels for our products. We may be unable to establish these
additional distribution channels. If we do establish them, we may be unable to
hire the additional personnel necessary to foster and enhance such distribution
channels. In addition, if the cable modem market shifts to a retail distribution
model, we may not successfully establish a retail distribution presence. To the
extent that large consumer electronics companies enter the cable modem market,
their well-established retail distribution capabilities would provide them with
a significant competitive advantage.
We May Be Unable to Market Effectively to Cable Operators.
Our growth and future success will be substantially dependent upon our
ability to convince cable operators to adopt our technologies, purchase our
products and effectively market our products to end users. Cable operators are
likely to prefer purchasing products from established manufacturing companies
that can demonstrate the capability to supply large volumes of products on short
notice. In addition, many cable operators may be reluctant to adopt technologies
that have not gained acceptance among other cable operators. This reluctance
could result in lengthy product testing and acceptance cycles for our products.
Consequently, the impediments to our initial sales may be even greater than
those to later sales. No established distribution network in the cable modem
industry exists that would provide us with easy access to smaller or
geographically diverse cable operators. Therefore, our initial sales to larger,
more established cable operators are critical to our business. Although we
intend to establish strategic relationships with leading distributors worldwide,
we may not succeed in establishing these relationships. Even if we do establish
these relationships, the distributors may not succeed in marketing our products
to cable operators. Some of our competitors have already established
relationships with certain cable operators, such as Motorola Inc.'s
relationships with Tele-Communications, Inc. or "TCI," Time Warner Cable,
Comcast Corporation and Cox Communications, Inc. These established relationships
may further limit our ability to sell products to those cable operators. We do
not have long, well-established relationships with those cable operators. If we
were to sell our products to those cable operators, it would likely not be based
on long-term contracts and those customers would be able to terminate their
relationships with us at any time. In addition, one or more of our current
customers could cancel its relationship with us at any time.
We Are Dependent on Cable Operators and Other Service Providers.
We depend on cable operators to purchase our cable modem systems and to
provide our cable modems to end users. Cable operators have a limited amount of
available bandwidth over which they can offer robust data services, and they may
not choose to provide these data services to their customers. If cable operators
choose to provide these services, we also will depend upon them to market these
services to cable customers, to install our equipment and to provide support to
end users. In addition, we will be highly dependent on cable operators to
continue to maintain their cable infrastructure in a manner that allows us to
provide consistently high performance and reliable services. Our success also
will depend upon the acceptance of our products by other providers of
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services to the cable industry, such as Excite@ Home's @Home Network and Road
Runner, a joint venture between MediaOne Group, Inc. and Time Warner Cable.
We Are Dependent on the Cable Industry to Upgrade to Two-Way Cable
Infrastructure.
Demand for our products will depend to a significant degree upon the
magnitude and timing of capital spending by cable operators for implementation
of access systems for data transmission over cable networks. This involves the
enabling of two-way transmission over existing coaxial cable networks and the
eventual upgrade to HFC in areas of higher penetration of data services. If
cable operators fail to complete these upgrades of their cable infrastructures
in a timely and satisfactory manner, the market for our products could be
limited. In addition, few businesses in the United States currently have cable
access. Cable operators may not choose to upgrade existing residential cable
systems or to install new cable systems to serve business locations.
The success and future growth of our business will be subject to economic
and other factors affecting the cable television industry generally,
particularly its ability to finance substantial capital expenditures. Capital
spending levels in the cable industry in the United States have fluctuated
significantly in the past, and we believe that such fluctuations will occur in
the future. The capital spending patterns of cable operators are dependent on a
variety of factors, including the following:
. the availability of financing;
. cable operators' annual budget cycles, as well as the typical
reduction in upgrade projects during the winter months;
. the status of federal, local and foreign government regulation and
deregulation of the telecommunications industry;
. overall demand for cable services;
. competitive pressures (including the availability of alternative data
transmission and access technologies);
. discretionary consumer spending patterns; and
. general economic conditions.
In recent periods, the United States cable market has been characterized by
the acquisition of smaller and independent cable operators by large cable
operators. We cannot predict the effect, if any, that consolidation in the
United States cable industry will have on overall capital spending patterns by
cable operators. The effect on our business of further industry consolidation
also is uncertain.
We Have Limited Manufacturing Experience and We Are Dependent on Contract
Manufacturers.
We have had limited experience manufacturing our products and we depend
heavily upon the manufacturing capabilities of our contract manufacturers. We
only began shipping our products in volume in the first quarter of 1998, and we
may encounter difficulties as we increase the volume of our manufacturing
operations. Our limited operating history and the early stage of the cable modem
market make it difficult for us to accurately forecast demand for our products.
Our inability to accurately forecast the actual demand for our products could
result in supply, manufacturing or testing capacity constraints. These
constraints could result in delays in the delivery of our products or the loss
of existing or potential customers, either of which could negatively impact our
business, operating results or financial condition. In addition, we had
unconditional purchase obligations of approximately $24.5 million as of
September 30, 1999 to purchase minimum quantities of materials and components
used to manufacture our products. We must fulfill these obligations even if
demand for our products is lower than we anticipate.
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We Are Dependent on Key Suppliers.
We manufacture all of our products using components or subassemblies
procured from third-party suppliers. Certain of these components are available
from a single source and others are available from limited sources. All of our
sales are from products containing one or more components that are available
only from single supply sources. In addition, some of the components are custom
parts produced to our specifications. For example, we currently rely on Philips
Semiconductors, Inc. to supply a custom ASIC that is used in our products. Other
components, such as the radio frequency tuner and some surface acoustic wave
filters, are procured from sole source suppliers. Any interruption in the
operations of vendors of sole source parts could adversely affect our ability to
meet our scheduled product deliveries to customers. Delays in key component or
product deliveries may occur due to shortages resulting from a limited number of
suppliers, the financial or other difficulties of such suppliers or a limitation
in component product availability. We are dependent on semiconductor
manufacturers and are affected by worldwide conditions in the semiconductor
market. If we are unable to obtain a sufficient supply of components from our
current sources, we could experience difficulties in obtaining alternative
sources or in altering product designs to use alternative components. Resulting
delays or reductions in product shipments could damage customer relationships.
Further, a significant increase in the price of one or more of these components
could harm our gross margin or operating results.
We Must Transition to New Semiconductor Process Technologies.
Our future success will depend in part upon our ability to develop products
that utilize new semiconductor process technologies. These technologies change
rapidly and require us to spend significant amounts on research and development.
We continuously evaluate the benefits of redesigning our integrated circuits
using smaller geometry process technologies to improve performance and reduce
costs. The transition of our products to integrated circuits with increasingly
smaller geometries will be important to our competitive position. Other
companies have experienced difficulty in migrating to new semiconductor
processes and, consequently, have suffered reduced yields, delays in product
deliveries and increased expense levels. Moreover, we depend on our relationship
with our third-party manufacturers to migrate to smaller geometry processes
successfully. We may be unable to migrate to new semiconductor process
technologies successfully or on a timely basis.
We Are Dependent on Contract Manufacturers to Assemble and Test Our Products.
Most of our products are assembled and tested by contract manufacturers
using testing equipment that we provide. As a result of our dependence on these
contract manufacturers for assembly and testing of our products, we do not
directly control product delivery schedules or product quality. Any product
shortages or quality assurance problems could increase the costs of manufacture,
assembly or testing of our products. In addition, as manufacturing volume
increases, we will need to procure and assemble additional testing equipment and
provide it to our contract manufacturers . The production and assembly of
testing equipment typically requires significant time. We could experience
significant delays in the shipment of our products if we are unable to provide
this testing equipment to our contract manufacturers in a timely manner.
There Are Many Risks Associated with International Operations.
Sales to customers outside of the United States accounted for approximately
80% of our revenues in the first nine months of 1999 and approximately 74% of
our revenues in the year ended December 31, 1998. We expect sales to customers
outside of the United States to continue to represent a significant percentage
of our revenues for the foreseeable future. International sales are subject to a
number of risks, including the following:
. changes in foreign government regulations and communications
standards;
. export license requirements, tariffs and taxes;
. other trade barriers;
. difficulty in collecting accounts receivable;
. difficulty in managing foreign operations; and
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. political and economic instability.
If our customers are impacted by currency devaluations or general economic
crises, such as the recent economic crisis affecting many Asian and Latin
American economies, their ability to purchase our products could be
significantly reduced. Payment cycles for international customers typically are
longer than those for customers in the United States. Foreign markets for our
products may develop more slowly than currently anticipated. Foreign countries
may decide not to construct cable infrastructure or may prohibit, terminate or
delay the construction of new cable plants for a variety of reasons. These
reasons include environmental issues, economic downturns, the availability of
favorable pricing for other communications services or the availability and cost
of related equipment. Any action like this by foreign countries would reduce the
market for our products.
We anticipate that our foreign sales generally will be invoiced in U.S.
dollars, and we currently do not plan to engage in foreign currency hedging
transactions. However, as we commence and expand our international operations,
we may be paid in foreign currencies and exposure to losses in foreign currency
transactions may increase. We may choose to limit our exposure by the purchase
of forward foreign exchange contracts or through similar hedging strategies. No
currency hedging strategy can fully protect against exchange-related losses. In
addition, if the relative value of the U.S. dollar in comparison to the currency
of our foreign customers should increase, the resulting effective price increase
of our products to those foreign customers could result in decreased sales.
We May Be Unable to Provide Adequate Customer Support.
Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to the TeraComm system, particularly in the initial deployment and
implementation stage. To date, we have sold a limited number of products, and
our sales have been concentrated in a small number of customers. We have limited
experience with widespread deployment of our products to a diverse customer
base. We may not have adequate personnel to provide the levels of support that
our customers may require during initial product deployment or on an ongoing
basis. Our inability to provide sufficient support to our customers could delay
or prevent the successful deployment of our products. In addition, our failure
to provide adequate support could harm our reputation and relationship with our
customers and could prevent us from gaining new customers.
Our Industry is Highly Competitive with Many Established Competitors.
The market for broadband access systems is extremely competitive and is
characterized by rapid technological change. Our direct competitors in the cable
modem arena include Cisco Systems, Inc., Com21, Inc., General Instrument
Corporation, Hayes Corporation, Hybrid Networks, Inc., Matsushita Electric
Industrial Co., Ltd. (which markets products under the brand name "Panasonic"),
Motorola, Nortel Networks, Inc., Phasecom Inc., Thomson Consumer Electronics
Inc. (which markets products under the brand name "RCA"), Samsung Corporation,
Scientific-Atlanta, Inc., Sony Corporation, 3Com Corporation, Toshiba
Corporation and Zenith Electronics Corporation. We also compete with companies
that develop integrated circuits for broadband access products, such as Broadcom
Corporation. As cable modem standards such as DOCSIS are adopted, other
companies may enter the cable modem market. In addition, Com21, Hybrid, Motorola
and Nortel introduced cable modems before we did, and they have established
relationships and have worked with customers for a longer period of time than we
have. The principal competitive factors in our market include the following:
. product performance, features and reliability;
. price;
. size and stability of operations;
. breadth of product line;
. sales and distribution capability;
. technical support and service;
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. relationships with cable operators; and
. compliance with industry standards.
Some of these factors are outside of our control. The existing conditions
in the broadband access market could change rapidly and significantly as a
result of technological changes. The development and market acceptance of
alternative technologies could decrease the demand for our products or render
them obsolete. Our competitors may introduce broadband access products that are
less costly, provide superior performance or achieve greater market acceptance
than our products.
We also sell products that compete with existing data access and
transmission systems utilizing the telecommunications networks, such as those of
3Com. Additionally, our controller and headend system products face intense
competition from well-established companies such as Cisco, Nortel and 3Com.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, distribution, customer support and other
resources, as well as greater name recognition and access to customers than we
do. The anticipated widespread adoption of DOCSIS is likely to cause increased
price competition in the North American market. The adoption of DOCSIS also
could result in lower sales of our headend products in the North American
market. Any increased price competition or reduction in sales of our headend
products would result in downward pressure on our gross margin. We cannot
accurately predict how the competitive pressures that we face will affect our
business.
Our Business Is Dependent on the Internet and the Development of the Internet
Infrastructure.
The commercial market for products designed for the Internet has only
recently begun to develop. Our success will depend in large part on increased
use of the Internet to increase the need for high speed broadband access
networks. Critical issues concerning the commercial use of the Internet remain
largely unresolved and are likely to affect the development of the market for
our products. These issues include security, reliability, cost, ease of access
and quality of service. The adoption of the Internet for commerce and
communications, particularly by enterprises that have historically relied upon
alternative means of commerce and communications, generally requires the
acceptance of a new method of conducting business and exchanging information. In
addition, we depend on the growth of the use of the Internet by businesses,
particularly for applications that utilize multimedia content and thus require
high bandwidth. The recent growth in the use of the Internet has caused frequent
periods of performance degradation. This has required the upgrade of routers,
telecommunications links and other components forming the infrastructure of the
Internet by Internet service providers and other organizations with links to the
Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our products. Potentially increased
performance provided by our products and the products of others ultimately is
limited by and reliant upon the speed and reliability of the Internet backbone
itself. Consequently, the emergence and growth of the market for our products
will depend on improvements being made to the entire Internet infrastructure to
alleviate overloading and congestion.
Our Failure to Manage Growth Could Adversely Affect Us.
The growth of our business has placed, and is expected to continue to
place, a significant strain on our limited personnel, management and other
resources. Our management, personnel, systems, procedures and controls may be
inadequate to support our existing and future operations. To manage any future
growth effectively, we will need to attract, train, motivate, manage and retain
employees successfully, to integrate new employees into our overall operations
and to continue to improve our operational, financial and management systems.
We Are Dependent on Key Personnel.
Due to the specialized nature of our business, we are highly dependent on
the continued service of, and on the ability to attract and retain qualified
engineering, sales, marketing and senior management personnel. The competition
for this personnel is intense. The loss of any of these persons, particularly
our Chairman, President and Chief Technical Officer, Shlomo Rakib, and our Chief
Executive Officer, Zaki Rakib, would have a material adverse effect on our
business and operating results. In addition, if we are unable to hire additional
qualified personnel as needed, we may not be able to adequately manage and
complete our existing sales commitments and to bid for and execute additional
sales. Further, we must train and manage our growing employee base, which is
likely to require increased levels of responsibility for both existing and new
management personnel. Our current management personnel and systems may be
inadequate, and we may fail to assimilate new employees successfully.
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Highly skilled employees with the education and training that we require,
especially employees with significant experience and expertise in both data
networking and radio frequency design, are in high demand. We may not be able to
continue to attract and retain the qualified personnel necessary for the
development of our business. We do not have "key person" insurance coverage for
the loss of any of our employees. Any officer or employee of our company can
terminate his or her relationship with us at any time. Our employees generally
are not bound by noncompetition agreements with us.
Our Business Is Subject to the Risks of Product Returns, Product Liability and
Product Defects.
Products as complex as ours frequently contain undetected errors or
failures, especially when first introduced or when new versions are released.
Despite testing, errors may occur. The occurrence of errors could result in
product returns and other losses to our company or our customers. This
occurrence also could result in the loss of or delay in market acceptance of our
products. Due to the recent introduction of our products, we have limited
experience with the problems that could arise with this generation of products.
Our purchase agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims. However, the
limitation of liability provision contained in our purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries. We have
not experienced any product liability claims to date, but the sale and support
of our products entails the risk of such claims. In addition, any failure by our
products to properly perform could result in claims against us by our customers.
We maintain insurance to protect against certain claims associated with the use
of our products, but our insurance coverage may not adequately cover any claim
asserted against us. In addition, even claims that ultimately are unsuccessful
could result in our expenditure of funds in litigation and management time and
resources.
We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights in
our products. Our pending patent applications may not be granted. Even if they
are granted, the claims covered by the patents may be reduced from those
included in our applications. Any patent might be subject to challenge in court
and, whether or not challenged, might not be broad enough to prevent third
parties from developing equivalent technologies or products. We have entered
into confidentiality and invention assignment agreements with our employees, and
we enter into non-disclosure agreements with some of our suppliers, distributors
and appropriate customers so as to limit access to and disclosure of our
proprietary information. These statutory and contractual arrangements may not
prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. In addition, the
laws of some foreign countries might not protect our products or intellectual
property rights to the same extent as do the laws of the United States.
Protection of our intellectual property might not be available in every country
in which our products might be manufactured, marketed or sold.
Upon the completion and acceptance of the DOCSIS cable modem specification
that incorporates our S-CDMA technology, we have agreed to contribute some
aspects of our S-CDMA technology to the DOCSIS intellectual property pool.
We would contribute our technology pursuant to a proposed license agreement
with CableLabs that we would execute at that time. Under the terms of the
proposed license agreement, we would grant to CableLabs a
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license for some aspects of our S-CDMA technology that are essential for
compliance with the DOCSIS cable modem standard. This license would allow
CableLabs to utilize and incorporate the licensed technology for the limited
use of making and selling products or systems that comply with the DOCSIS
cable modem specification. As a party to the license agreement, we would have
access to the DOCSIS intellectual property pool and would have the right to
develop products that comply with the DOCSIS cable modem specification. As a
result, any of our competitors who join the DOCSIS intellectual property pool
will have access to some aspects of our technology and will not be required to
pay us any royalties or other compensation. Further, some of our competitors
have been successful in reverse engineering the technology of other companies,
and our contribution to the DOCSIS intellectual property pool would expose
some aspects of our technology to those competitors. If a competitor is able
to duplicate the functionality and capabilities of our technology, we could
lose all or some of the time-to-market advantage we might otherwise have.
Under the terms of the proposed license agreement, if we sue certain parties
to the proposed license agreement on claims of infringement of any copyright
or patent right or misappropriation of any trade secret, those parties may
terminate our license to the patents or copyrights they contributed to the
DOCSIS intellectual property pool. If a termination like this were to occur,
we would continue to have access to some aspects of the DOCSIS intellectual
property pool, but we would not be able to develop products that fully comply
with the DOCSIS cable modem specification. Because of these terms, we may find
it difficult to enforce our intellectual property rights against certain
companies. Under the terms of proposed license agreement, CableLabs may
sublicense the DOCSIS intellectual property pool if the sublicensee complies
with certain conditions. The sublicensee's rights to some of the DOCSIS
intellectual property pool could be terminated if it sues certain companies
for infringement of any copyright, patent right or trade secret.
We expect that developers of cable modems increasingly will be subject to
infringement claims as the number of products and competitors in our industry
segment grows. We have received letters from two individuals claiming that our
technology infringes patents held by these individuals. We have reviewed the
allegations made by these individuals and, after consulting with our patent
counsel, we do not believe that our technology infringes any valid claim of
these individuals' patents. If the issues are submitted to a court, the court
could find that our products infringe these patents. In addition, these
individuals may continue to assert infringement. If we are found to have
infringed these individuals' patents, we could be subject to substantial damages
and/or an injunction preventing us from conducting our business. In addition,
other third parties may assert infringement claims against us in the future. An
infringement claim, whether meritorious or not, could be time consuming, result
in costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements may not
be available on terms acceptable to us or at all. Litigation also may be
necessary to enforce our intellectual property rights.
Our Business Is Subject to Communications Industry Regulations.
Our business and our customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the Federal Communications
Commission extends to the communications industry, including our broadband
access products. The FCC has promulgated regulations that, among other things,
set installation and equipment standards for communications systems. Although
FCC regulations and other governmental regulations have not materially
restricted our operations to date, future regulations applicable to our business
or our customers could be adopted by the FCC or other regulatory bodies. For
example, FCC regulatory policies affecting the availability of cable services
and other terms on which cable companies conduct their business may impede our
penetration of certain markets. In addition, regulation of cable television
rates may affect the speed at which cable operators upgrade their cable
infrastructures to two-way HFC. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards for such products and services. This process generally
involves extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past, and may in the future, cause the cancellation, postponement or
rescheduling of the installation of communications systems by our customers.
If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which our products do not comply,
we will be unable to offer products in those countries until our products comply
with those standards or specifications. In addition, we may have to incur
substantial costs to comply with those standards or specifications. For
instance, should the DAVIC standards for ATM-based digital video be established
internationally, we will need to conform our cable modems to compete. Further,
many countries do not have regulations for installation of cable modem systems
or for upgrading existing cable network systems to accommodate our products.
Whether we currently operate in a country without these regulations or enter
into the
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market in a country these regulations do not exist, new regulations
could be proposed at any time. The imposition of regulations like this could
place limitations on a country's cable operators' ability to upgrade to support
our products. Cable operators in these countries may not be able to comply with
these regulations, and compliance with these regulations may require a long,
costly process. For example, we experienced delays in product shipments to a
customer in Brazil due to delays in certain regulatory approvals in Brazil.
Similar delays could occur in other countries in which we market or plan to
market our products. In addition, our customers in certain parts of Asia, such
as Japan, are required to obtain licenses prior to selling our products, and
delays in obtaining required licenses could harm our ability to sell products to
these customers.
Our Business Is Subject to Other Regulatory Approvals and Certifications.
In the United States, in addition to complying with FCC regulations, our
products are required to meet certain safety requirements. For example, we are
required to have our products certified by Underwriters Laboratory in order to
meet federal requirements relating to electrical appliances to be used inside
the home. Outside the United States, our products are subject to the regulatory
requirements of each country in which the products are manufactured or sold.
These requirements are likely to vary widely. We may be unable to obtain on a
timely basis or at all the regulatory approvals that may be required for the
manufacture, marketing and sale of our products. In addition to regulatory
compliance, some cable industry participants may require certification of
compatibility.
Our Stock Price Has Been and Is Likely to Continue to Be Volatile.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
. Actual or anticipated variations in quarterly operating results;
. Announcements of technological innovations;
. New products or services offered by us or our competitors;
. Changes in financial estimates by securities analysts;
. Conditions or trends in the broadband access services industry;
. Changes in the economic performance and/or market valuations of Internet,
online service or broadband access service industries;
. Changes in the economic performance and/or market valuations of other
Internet, online service or broadband access service companies;
. Our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. Additions or departures of key personnel;
. Sales of common stock; and
. Other events or factors that may be beyond our control.
In addition, the stock markets in general, and the Nasdaq National Market
and the market for broadband access services and technology companies in
particular, have experienced extreme price and volume fluctuations recently.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices and
multiples are substantially above historical levels. These trading prices and
multiples may not be sustained. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation often has been instituted against that company. Litigation like
this, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
intend to retain any future earnings to support operations and to finance the
growth and development of our business and we do not anticipate paying cash
dividends for the foreseeable future.
WHERE YOU CAN GET MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy
these reports, proxy statements and other information at the SEC's public
reference rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C., as well
as at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, NY
10048. You can request copies of these documents by writing to the SEC and
paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference rooms. Our SEC
filings are also available at the SEC's web site at "http://www.sec.gov." In
addition, you can read and copy our SEC filings at the office of the National
Association of Securities Dealers, Inc. at 1735 "K" Street, Washington, D.C.
20006.
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934:
. Annual Report on Form 10-K for the year ended December 31, 1998;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999;
. Quarterly Report on Form 10-Q for the quarter ended September 30, 1999;
. Current Report on Form 8-K, filed October 1, 1999 and amended on Form 8-
K/A, filed October 4, 1999;
. Current Report on Form 8-K, filed on December 13, 1999 and amended on Form
8-K/A, filed December 27, 1999; and
. The description of the common stock contained in our Registration Statement
on Form 8-A, as filed on July 20, 1998 with the SEC.
You may request a copy of these filings at no cost, by writing or telephoning us
at the following address:
Terayon Communication Systems, Inc.
2952 Bunker Hill Lane
Santa Clara, CA 95054
(408) 727-4400
This prospectus is part of a Registration Statement we filed with the SEC.
You should rely only on the information incorporated by reference or provided in
this prospectus and the Registration Statement. We have authorized no one to
provide you with different information. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of the document.
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SELLING STOCKHOLDERS
In our acquisition of Telegate Ltd. that we consummated in January 2000,
we issued to all of the selling stockholders shares of our common stock, and
we agreed to register all of those shares for resale. We also agreed to use
reasonable efforts to keep the registration statement effective until the
earliest of the date the shares of common stock offered under this prospectus
have been sold to the public and the date two years from the date of
effectiveness of this prospectus. Our registration of the shares of common
stock does not necessarily mean that the selling stockholders will sell all or
any of the shares.
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of January 20, 2000, by each of the selling
stockholders.
The information provided in the table below with respect to each selling
stockholder has been obtained from that selling stockholder. Except as otherwise
disclosed below, none of the selling stockholders has, or within the past three
years has had, any position, office or other material relationship with us.
Because the selling stockholders may sell all or some portion of the shares of
common stock beneficially owned by them, we cannot estimate the number of shares
of common stock that will be beneficially owned by the selling stockholders
after this offering. In addition, the selling stockholders may have sold,
transferred or otherwise disposed of, or may sell, transfer or otherwise dispose
of, at any time or from time to time since the date on which they provided the
information regarding the shares of common stock beneficially owned by them, all
or a portion of the shares of common stock beneficially owned by them in
transactions exempt from the registration requirements of the Securities Act of
1933.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated
by the Commission under the Securities Exchange Act of 1934. Unless otherwise
noted, each person or group identified possesses sole voting and investment
power with respect to shares, subject to community property laws where
applicable. Percentage ownership is based on outstanding shares of our common
stock as of January 20, 2000.
<TABLE>
<CAPTION>
Shares Being
Selling Stockholder Number Percentage Owned Offered
- ------------------- -------- ---------------- -----------
<S> <C> <C> <C>
ECI Telecom Ltd. 643,770 2% 643,770
Aryt Industries Ltd. 204,620 * 204,620
Aryt Holdings (1997) Ltd. 40,856 * 40,856
General Instrument Corporation 152,678 * 152,678
Yozma Venture Capital Ltd. 36,448 * 36,448
Ehud Iloni 143,858 * 143,858
Hapoalim Nechasim (Menayot) Ltd. 33,122 * 33,122
Coin Street Holdings (II) Limited 123,521 * 123,521
ABS GE Capital Giza Fund, L.P. 46,160 * 46,160
BTIP Israel LLC 33,718 * 33,718
ABS Giza Alpinvest Fund, L.P. 17,045 * 17,045
The Giza Equity Fund Limited Partnership 2,867 * 2,867
Vertex Investment (III) Ltd. 82,565 * 82,565
Vertex Yozma LP 30,662 * 30,662
Vertex Discount LP 19,835 * 19,835
Yozma II (B.V.I.) L.P. 47,070 * 47,070
Yozma II (Israel) Limited Partnership 27,614 * 27,614
P.C.M. Venture Capital L.P. 25,104 * 25,104
The Challenge Fund-Etgar L.P. 66,473 * 66,473
Channon International Holdings N.V. 66,389 * 66,389
Kost, Levary & Forer Trust Company (1992) Ltd.,
for the Option Holders holding vested options
under the Plan 169,442 * 169,442
David Schapiro in trust for the Parties
to the Escrow Agreement 33,000 * 33,000
Reserve 2,172 * 2,172
Escrow(1) 151,011 * 151,011
--------- --------------- -----------
Total 2,200,000 2,200,000
</TABLE>
* Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.
1. 102,561 shares in the name of Zvika Schecter are held in escrow by State
Street Bank and Trust Company of California N.A. on behalf of the selling
shareholders and 48,450 shares in the name of ECI Telecom Ltd. are held in
escrow by State Street Bank and Trust Company of California N.A. pursuant to
an Escrow Agreement among the parties.
17
<PAGE>
PLAN OF DISTRIBUTION
The shares of common stock may be sold from time to time by the selling
stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. Selling stockholders may also sell shares to cover certain
short sales of the Company's Common Stock. As used in this prospectus, "selling
stockholders" includes donees, pledgees, transferees and other successors in
interest selling shares received from a selling stockholder after the date of
this prospectus as a gift, pledge, partnership distribution or other non-sale
transfer. Upon Terayon being notified by a selling stockholder that a donee,
pledgee, transferee or other successor in interest intends to sell more than 500
shares, a supplement to this prospectus will be filed. The selling stockholders
may offer their shares of common stock in one or more of the following
transactions:
. on any national securities exchange or quotation service on which the
common stock may be listed or quoted at the time of sale, including the
Nasdaq National Market,
. in the over-the-counter market,
. in private transactions,
. through options,
. by pledge to secure debts and other obligations or
. a combination of any of the above transactions.
If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.
The shares of common stock described in this prospectus may be sold from
time to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933. Any profits on the resale of shares of common
stock and any compensation received by any underwriter, broker/dealer or agent
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933. We have agreed to indemnify each selling stockholder against
certain liabilities, including liabilities arising under the Securities Act of
1933. The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in the sale of shares of common stock described
in this prospectus against certain liabilities, including liabilities arising
under the Securities Act of 1933.
Any shares covered by this prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares they hold. The selling stockholders may transfer, devise or gift such
shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common
stock must be offered or sold only through registered or licensed brokers or
dealers. In addition, in certain jurisdictions, the shares of common stock may
not be offered or sold unless they have been registered or qualified for sale or
an exemption is available and complied with.
Under the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock may not simultaneously engage in market-making
activities with respect to the common stock for five business days prior to the
start of the distribution. In addition, each selling stockholder and any other
person participating in a distribution will be subject to the Securities
Exchange Act of 1934, which may limit the timing of purchases and sales of
common stock by the selling stockholders or any such other person. These factors
may affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.
All expenses of this registration, estimated at approximately $150,492,
will be paid by us. These expenses include the SEC's filing fees and fees under
state securities or "blue sky" laws .
18
<PAGE>
LEGAL MATTERS
For the purpose of this offering, Cooley Godward LLP, San Francisco,
California, is giving an opinion as to the validity of the common stock offered
by this prospectus.
EXPERTS
The consolidated financial statements and schedule of Terayon Communication
Systems, Inc. appearing in Terayon Communication Systems, Inc.'s Annual Report
(Form 10-K) for the year ended December 31, 1998, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their reports thereon included
therein and incorporated herein by reference. Such consolidated financial
statements and schedule are incorporated herein by reference in reliance upon
such reports given on the authority of such firm as experts in accounting and
auditing.
The audited historical financial statements of Imedia Corporation,
incorporated in this Prospectus by reference to the Terayon Communication
Systems, Inc.'s Current Report on Form 8-K/A filed October 4, 1999, have
been so incorporated in reliance on the report (which contains an explanatory
paragraph relating to Imedia Corporation's ability to continue as a going
concern as described in note 2 to the financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Telegate Ltd., appearing in Terayon
Communication Systems, Inc.'s Current Report on Form 8-K/A dated November 22,
1999, have been audited by Kost Forer & Gabbay (a member of Ernst & Young
International), independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference. Such financial statements
are incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Radwiz Ltd., appearing in Terayon
Communication Systems, Inc.'s Current Report on Form 8-K/A dated November 22,
1999, have been audited by Luboshitz Kasierer (Member Firm of Arthur Andersen),
independent public accountants, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, if any, all of which will be paid by the
registrant, in connection with the distribution of the common stock being
registered. All amounts are estimated, except the SEC registration fee:
<TABLE>
<S> <C>
SEC registration fee............................ $59,241.60
Accounting fees................................. 20,000
Legal fees and expenses......................... 36,250
Miscellaneous................................... 15,000
Printing and engraving.......................... 20,000
Total........................................... $150,492
</TABLE>
Item 15. Indemnification of Officers and Directors.
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Registrant provide that (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law, (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law, (iii) to the fullest extent permitted by the
Delaware General Corporation Law, the Registrant is required to advance all
expenses incurred by its directors and executive officers in connection with a
legal proceeding (subject to certain exceptions), (iv) the rights conferred in
the Bylaws are not exclusive, (v) the Registrant is authorized to enter into
indemnification agreements with its directors, officers, employees and agents
and (vi) the Registrant may not retroactively amend the Bylaws provisions
relating to indemnity.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes legally
obligated to pay (including expenses of a derivative action) in connection with
any proceeding, whether actual or threatened, to which any such person may be
made a party by reason of the fact that such person is or was a director or
officer of the Registrant or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Registrant. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
Item 16. Exhibits and Financial Statement Schedules.
Exhibit
<TABLE>
<CAPTION>
Number Description of Document
<S> <C>
* 5.1 Opinion of Cooley Godward LLP.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Kost Forer & Gabbay (a member of Ernst & Young International),
Independent Auditors.
23.4 Consent of Luboshitz Kasierer (Member Firm of Arthur Andersen),
Independent Public Accountants.
*23.5 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).
*24.1 Power of Attorney. Reference is made to the signature page.
</TABLE>
* Previously Filed.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of
II-1
<PAGE>
any action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe it meets all of
the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Clara, State of California, on
the 11th day of February 2000.
TERAYON COMMUNICATION SYSTEMS, INC.
By: /s/ Zaki Rakib
------------------------
Zaki Rakib
Chief Executive Officer and Director
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Zaki Rakib Chief Executive Officer and Director (Principal February 11, 2000
- -----------------------------------------
Dr. Zaki Rakib Executive Officer)
* Chief Financial Officer (Principal Financial and February 11, 2000
- -----------------------------------------
Ray M. Fritz Accounting Officer)
* Chairman of the Board of Directors February 11, 2000
- -----------------------------------------
Shlomo Rakib
* Director February 11, 2000
- -----------------------------------------
Michael D'Avella
* Director February 11, 2000
- -----------------------------------------
Alek Krstajic
* Director February 11, 2000
- -----------------------------------------
Christopher J. Schaepe
* Director February 11, 2000
- -----------------------------------------
Lewis Solomon
* Director February 11, 2000
- -----------------------------------------
Mark Stevens
* By: /s/ Zaki Rakib
-----------------------------------
Attorney-in-fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Document
* 5.1 Opinion of Cooley Godward LLP.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.3 Consent of Kost Forer & Gabbay (a member of Ernst & Young International),
Independent Auditors.
23.4 Consent of Luboshitz Kasierer (Member Firm of Arthur Andersen),
Independent Public Accountants.
*23.5 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).
*24.1 Power of Attorney. Reference is made to the signature page.
*Previously Filed.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 1 to the Registration Statement (Form S-3 No. 333-95357) and related
Prospectus of Terayon Communication Systems, Inc. for the registration of
2,200,000 shares of its common stock and to the incorporation by reference
therein of our reports dated January 15, 1999, with respect to the consolidated
financial statements and schedule of Terayon Communication Systems, Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1998,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
San Jose, California
February 7, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of Terayon Communication Systems, Inc. of our report dated
February 12, 1999 relating to the financial statements of Imedia Corporation
which appears in the Current Report on Form 8-K/A of Terayon Communication
Systems, Inc. filed on October 4, 1999. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
February 7, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Registration Statement (Form S-3) and related Prospectus of Terayon
Communications Systems, Inc. for the registration of 2,200,000 shares of its
common stock and to the incorporation by reference therein of our report dated
March 16, 1999 (except for Note 1c, as to which the date is June 30, 1999), with
respect to the financial statements of Telegate Ltd. included in Terayon
Communication Systems, Inc.'s Current Report on Form 8-K dated November 22,
1999, filed with the Securities and Exchange Commission.
/s/ Kost Forer and Gabbay
Certified Public Accountants (Israel)
A Member of Ernst & Young International
Tel-Aviv, Israel
February 7, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Terayon
Communication Systems, Inc. for the registration of 2,200,000 shares of its
common stock and to the incorporation by reference therein of our report dated
June 23, 1999, with respect to the consolidated financial statements of Radwiz
Ltd. included in Terayon Communication Systems, Inc.'s Current Report on Form
8-K dated November 22, 1999, filed with the Securities and Exchange Commission.
/s/ Luboshitz Kasierer
Member Firm of Arthur Andersen
Tel-Aviv, Israel
February 7, 2000
