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SECURITIES EXCHANGE AND COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 23, 2000
Terayon Communication Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
000-24647 77-0328533
(Commission File No.) (I.R.S. Employer Identification No.)
2952 Bunker Hill Lane
Santa Clara, CA 95054
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 727-4400
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Item 5
Forms 10(K) and 10(Q)
The Company hereby amends Form 10-K filed on March 30, 2000 and Forms 10-Q
filed on May 15, 2000 and August 14, 2000 and any amendments filed thereon to
revise the following sections, as applicable. The sections entitled Business,
Legal Proceedings and Management's Discussion and Analysis of Financial
Condition and Results of Operations - Litigation - should be deleted and
replaced with the following sections.
The section entitled Business should be deleted and replaced with the
following section:
BUSINESS
Overview
We develop, market and sell broadband access systems that enable cable
operators and other providers of broadband access services to cost effectively
deploy reliable broadband access services over cable, copper wire utilizing DSL
and wireless systems. We have substantial development and marketing resources
focused on cable operators. However, through internal development and recent
acquisitions of complementary technology and businesses, we also are focusing on
service providers that offer broadband access through existing copper wire
infrastructures and wireless systems.
Our primary product is the TeraComm system, which is based on our patented
S-CDMA technology. Our S-CDMA technology enables reliable two-way broadband data
communications over both pure coaxial and hybrid fiber/coax cable infrastructure
and is designed to enable cable operators to maximize the capacity and
reliability of broadband data services over any cable plant. In furtherance of
our strategy to provide a complete portfolio of broadband products, we have
recently completed several acquisitions of complementary broadband technologies,
including digital video management systems, DSL and wireless.
We sell our broadband access products to cable operators and other providers
of broadband access services through direct sales forces in North America, South
America Europe and Asia. We also distribute our products via distributors and
systems integrators. Companies currently using or distributing our TeraComm
system include Rogers, Shaw, TCA Cable TV (a subsidiary of Cox Communications,
Inc.), UPC and Crossbeam, a wholly owned subsidiary of Sumitomo. Companies
currently using our DSL products include major ILEC's (Incumbent Local Exchange
Carriers) in the U.S. including SBC, Bell Atlantic, Bell South, U.S. West and
GTE and CLEC's (Competitive Local Exchange Carriers) including PAC-West Telecom,
Incorporated.
Industry Background
Demand for Broadband Access
In recent years, the volume of bandwidth intensive data, voice and video
traffic across cable infrastructures, the Internet, corporate intranets and
other public networks has increased dramatically. This demand has been driven by
the proliferation of residential and commercial users that are accessing
networks for a variety of applications, including voice, video and data
communication via the Internet, electronic commerce, telecommuting and
interactive television. For example, International Data Corporation, estimates
that the number of worldwide Internet users will increase from approximately 200
million at the end of 2000 to over one billion by the end of 2005. IDC estimates
that the number of homes in the United States with broadband access will
increase from two million at the end of 1999 to 20 million by the end of 2003.
The rapid evolution of broadband has resulted in cable operators, providers of
telephone services and other service providers seeking to provide a bundle of
voice, data and video services to their residential and commercial subscribers
over existing and new infrastructures.
Despite significant advances in the performance of computer processors and
data backbone networks, high speed data transmission has been limited by the
existing local access network infrastructure (also
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known as the last mile), which is not optimized for distribution of data-
intensive multimedia content. Users of dial-up analog modems with maximum data
rates of only 56 Kbps often experience frustration, as they encounter frequent
and lengthy delays or complete failures in transmission. In response to the
growing demand for increased bandwidth, service providers are now deploying new
broadband access technologies, such as DSL, cable modems and wireless devices,
that can deliver performance that is from 50 to 100 times faster than analog
modems. According to industry analysts, the market for broadband access
equipment is expected to increase from approximately $4 billion at the end of
1999 to approximately $11 billion in 2004.
Emergence of Broadband Technologies
As residential and commercial demand for increased bandwidth and faster access
continues to grow, particularly for applications such as streaming audio and
video, IP telephony and interactive two-way video, service providers are
investing in enabling infrastructure and technologies. Various technologies
have emerged to address the need for broadband access across cable, copper wire
and wireless platforms or networks.
Cable operators market high speed cable modems that use the existing
television cable plant to provide subscribers access to the Internet, digital
video, telephony and other broadband services. Similarly, telephone companies
offer comparable services using DSL technology over the existing copper wire
infrastructure. Wireless operators also are establishing high speed Internet
access using both terrestrial and satellite systems to connect subscribers to
voice, video and data services. The competition between cable operators,
telephone companies and emerging wireless service providers is expected to
intensify as the demand for broadband access grows. Cable operators benefit from
the fact that the cable infrastructure passes over 95% of the homes in the
United States and a large number of small businesses. In addition, the cable
infrastructure has the potential to offer a wide range of broadband services,
such as digital TV, Internet access and IP telephony. Similarly, DSL providers
benefit from the fact that existing copper lines reach a substantial majority of
U.S. homes. Wireless, in contrast, does not depend on existing cable or
telephone line infrastructure and can be quickly deployed in homes and
businesses that otherwise might not have broadband access, particularly for
international markets. Although the market for broadband access services is
becoming increasingly competitive, industry analysts expect each platform to
experience significant growth over the next five years.
Challenges in Deploying Broadband Access Services
Service providers must overcome numerous challenges in order to successfully
meet the increasing demand for broadband access services. Among other things,
these service providers must do the following:
. provide end-users with a broad range of bundled services;
. capitalize on available bandwidth to provide a variety of services;
. rapidly deploy services to their customers; and
. provide reliable and cost-effective access.
The Terayon Solution
Our products are designed to enable cable operators and other providers of
broadband access services to cost-effectively deploy reliable broadband services
over cable, DSL and wireless systems. Until recently, our development and
marketing efforts were focused primarily on cable operators. As a result of
some recent acquisitions of complementary technology and businesses, we also are
focusing on providers of broadband services using existing telephone, DSL and
wireless systems.
Our products offer cable operators and other broadband providers the following
advantages:
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Enable enriched set of bundled services. Our broadband access platforms are
designed to enable service providers to deliver a broad range of voice, video
and data services over either a cable, DSL or wireless network. Service
providers are able to reduce their total network costs because they can deliver
additional services without investing in separate network infrastructures. In
addition, because our broadband access platforms facilitate the bundling of
voice, video and data services, service providers are better able to increase
their revenues and differentiate themselves by offering tailored services and a
single point of contact to customers.
Maximize bandwidth utilization. Our broadband access platforms allow cable
operators, telecommunications carriers and other providers of broadband services
to optimize utilization of the available bandwidth for data access, digital
video, and voice services. For example, through our proprietary S-CDMA
technology, cable operators can maximize the use of the upstream return path
using the lowest frequency ranges of the upstream spectrum, where noise is
typically too severe to operate. This use of the upstream spectrum is key to
delivering efficient interactive data services. Our Cherrypicker digital video
management systems allow cable operators to flexibly manage bandwidth by
allowing them to customize digital video programming for their target
demographics.
Enable rapid time to market of new services. Our broadband access products are
designed to enable service providers to achieve rapid time to market and offer
additional voice, video and data services as they become available, by
leveraging existing plant and infrastructure. The rapid deployment of broadband
services is a key competitive advantage to our customers.
Provide reliable and cost effective solutions. Our solutions are designed to
provide a high degree of reliability in a cost-effective manner. Our cable modem
system allows cable operators to deploy data services over a wide variety of
plant conditions, thus reducing ongoing maintenance costs and minimizing service
problems. Due to their reliability, our DSL systems enable service providers to
deliver mission-critical services, such as toll-quality local and long distance
voice over DSL to their customers. Wireless systems are the most cost-effective
means for delivering broadband access services to customers who cannot otherwise
access existing cable and telephone infrastructure, particularly in rural areas
and developing countries.
Strategy
Our objective is to be the leading provider of broadband systems to cable
operators, providers of telephone services and other service providers seeking
to provide broadband services to residential and commercial end users. Key
elements of our strategy are as follows:
Build a complete portfolio of broadband products. We are building a complete
portfolio of broadband products to support high-speed delivery of voice, video
and data services over cable, copper wire and wireless infrastructures through
internal development efforts and strategic acquisitions. Until recently our
internal development efforts have focused on developing our proprietary S-CDMA
technology for cable modems and extending this technology to a standards-based
environment. Our future development efforts will be focused on the development
of new technologies for the delivery of voice, video and data over any broadband
medium. In furtherance of this strategy, during the last year we have made
several acquisitions of broadband technologies including digital video
management systems, DSL and wireless.
Supply leading broadband service providers worldwide. We target the largest
broadband service providers in each major geographic area worldwide. Three of
the largest North American cable operators, Rogers, Shaw and TCA Cable TV (a
subsidiary of Cox Communications, Inc.) are deploying our TeraComm cable modem
system. In Japan, through our partner Sumitomo, we have established ourselves as
a market leader. In Europe, Our TeraComm system is being deployed by UPC, one of
Europe's largest broadband communications companies. We market our DSL products
to leading providers of telephony services throughout the world. The acquisition
of ANE provides us with a strong customer presence in the U.S. communications
market. Our customers include the major U.S. ILECs (Incumbent Local Exchange
Carriers), including SBC, Bell Atlantic, Bell South, U.S. West and GTE.
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Increase presence in existing and new markets. We intend to increase our
presence in new and existing markets throughout North America, Europe, Asia and
South America. We currently sell our products in over 20 countries worldwide. As
part of our effort to increase our market penetration and to capitalize on new
opportunities, we plan to continue to expand our sales, marketing and customer
support capabilities through both our direct sales and marketing staff as well
as our relationships with distributors. We believe that a physical presence in
key customer locations provides an important advantage in developing and
maintaining our new and existing customer relationships.
Extend technology leadership and advance industry standards. A significant
element of our strategy is to advance industry standards and to extend our
technology leadership through the development of innovative new technologies. We
intend to leverage our engineering capabilities to expand the features and
functionality of broadband products. We will strive to use our technology
leadership to achieve a significant time-to-market advantage over competing
broadband access suppliers by offering advanced features, such as IP telephony
and videoconferencing. In addition, we intend to apply S-CDMA to additional
applications such as wireless communications and Local Multipoint Distribution
Systems. We will continue to participate in industry standards organizations and
activities for DOCSIS, DVB, MPEG and PacketCable.
Provide superior customer service and support. We believe that our ability to
provide consistent high quality service and support is a key factor in
attracting and retaining customers. We provide our customers with technical
support and training through customer support representatives and
representatives of distributors. We offer service and support to our customers
24 hours a day, seven days a week.
Products
Our current portfolio of products complements our strategy to be the leading
provider of broadband systems to cable television operators, providers of
telephone services and other service providers seeking to provide broadband
access services to residential and commercial users.
Product Family Product
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Cable Systems Terayon S-CDMA Products
TeraLink 1000 S-CDMA Master Controller
TeraLink S-CDMA Gateway
TeraPro S-CDMA Cable Modem
TeraView Network Management Software
Terayon DOCSIS Products
TeraLink 2000 DOCSIS CMTS
TeraJet DOCSIS Cable Modem
Terayon DVB Cable Products
UCMT-2000 Interactive Network Adaptor
UCM-220 Cable Modem
HAS-2000 High Availability Server
Multigate Telephony System
Video Systems CherryPicker 500
CherryPicker 7000
CherryPicker 1000
CherryPicker AdSplicer
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DSL Systems Miniplex DSL Systems
IPTL Converged Voice and Data Services
System Highlink
Mainsail IMAP (Integrated Multi Service Platform)
Wireless Products SatStream--Satellite modem
NetStream--Broadband Satellite IP Gateway
WebStream--Broadband Satellite IP Gateway
HAS-2000--High Availability Server
Cable Systems
Our TeraComm system enables cable operators to cost-effectively deploy
reliable two-way broadband access services. The TeraComm system is comprised of
the TeraPro cable modem, the TeraLink 1000 Master Controller, the TeraLink
Gateway and the TeraView Element Management and Provisioning Software. The
price of a TeraComm system is dependent on a number of variables, including a
customer's basic cable system architecture, the type of routing equipment a
customer intends to use, the level and quality of service that a cable operator
desires to provide and the volume of products purchased by a customer.
TeraPro Cable Modem. The TeraPro cable modem is a data communications device
installed in a subscriber's home or business. The TeraPro cable modem connects
to the subscriber's PC via a standard 10BaseT Ethernet connector and to the
cable network via a standard coaxial cable connector. The TeraPro cable modem
automatically configures itself without user intervention, thus minimizing modem
installation time. In addition, the configuration software for the TeraPro cable
modem is downloaded remotely, allowing centralized software upgrades directly
from the headend management system.
The TeraPro cable modem delivers full two-way communication over the cable
network, with data rates of up to 14 Mbps per 5 MHz channel in both the upstream
and the downstream direction. The TeraPro cable modem operates at full capacity
at an SNR as low as 13dB, and gradually adjusts throughput to provide
transmission at an SNR as low as -13dB. This feature will permit the TeraPro
cable modem to operate across any portion of the 5 to 42 MHz upstream RF
spectrum.
TeraLink 1000 Master Controller. The TeraLink 1000 Master Controller is a data
channel controller and multiplexer located at the cable headend system or
distribution hub. The TeraLink 1000 Master Controller provides control,
management and data transport functions for TeraPro cable modems connected to
the cable network. It offers dynamic bandwidth management, high speed traffic
concentration, access control to data networking resources and data service
quality and integrity.
The TeraLink 1000 Master Controller is a single channel, rack-mountable
controller that supports up to 2,000 cable modems per channel. Additional
TeraLink 1000 Master Controllers can be added to scale service as performance
and subscriber needs grow. The TeraLink 1000 Master Controller, with the
TeraLink Gateway, provides a 100 BaseT interface for direct connectivity to a
private backbone or any vendor's router or switch. Alternatively, the TeraLink
1000 Master Controller, with its built-in ATM OC-3 interface, can be connected
via an ATM switch, or directly to Cisco's 7500 series routers.
TeraLink Gateway. The TeraLink Gateway is a rack-mountable edge concentrator
providing end-user clients with broadband access to a remote IP backbone (e.g.,
Internet) as well as efficient communication between modems. The TeraLink
Gateway includes an ATM OC-3 interface for connectivity to up to two TeraLink
1000 Master Controllers or an ATM switch. It also provides a 10/100 BaseT
Ethernet/Fast Ethernet auto-sense interface to a headend backbone or any IP
router including the Cisco Universal Broadband Router. The TeraLink Gateway also
includes a separate 10 BaseT interface, which may be connected to a separate
management network or the headend network. The TeraLink Gateway supports up to
2,000 cable modems per RF channel when connected to a TeraLink 1000 Master
Controller. When used with the TeraLink Gateway, the TeraPro cable modems behave
as an extension of the TeraLink Gateway, providing maximum bandwidth and
privacy.
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TeraView Element Management and Provisioning Software. The TeraView Element
Management and Provisioning Software is a Windows 95 and Windows NT
standards-based software application installed at the headend system or the
network operations center. The TeraView software allows cable operators to
configure, control, monitor and maintain multiple channels of the TeraComm
system.
Multigate Telephony and Data Access Systems. We produce telephony and data
access systems for deployment of efficient carrier-class voice services over
cable. Our systems also provide in-home networking capability for telephony and
data, based on the Digital Enhanced Cordless Telephony ("DECT") standard. Our
systems support voice, high-speed data, and Integrated Service Digital Network
("ISDN") services for the business telecommuting market and the SOHO market.
Video Systems
CherryPicker Digital Video Management Systems. CherryPicker Digital Video
Management Systems are scalable, open platforms that enable cable, satellite and
terrestrial operators to deliver customized digital programming. Patented
statistical re-multiplexing technology gives operators ultimate control over
programming and allows them to create customized video of programming by
selecting feeds (grooming) from a vast array of sources. The CherryPicker helps
operators maximize their available bandwidth while enabling them to provide
program offerings that target specific local demographics.
DSL Systems
Digital Subscriber Line Systems (xDSL). We produce communications access
systems based on high-speed IP routing, integrated with telephony. Our
innovative systems include both central office DSLAMs (Digital Subscriber Line
Access Multiplexers) and customer premise equipment for SOHO business broadband
services. These systems deliver high-capacity, symmetric voice and data
services to the business market, with high density port aggregation at the
central office site for maximum cost efficiency.
Wireless Products
Our wireless products provide high-speed Internet connectivity to the
subscriber's PC via a standard digital television services antenna. Our
SatStream Satellite modem offers residential and commercial subscribers with
connectivity to the Internet via satellite digital television services.
Customers
We market our products to providers of broadband access services that seek to
provide broadband access services to both residential and commercial end users.
Our target market is the largest broadband service providers in each major
geographic area worldwide.
Our principal customers for cable, DSL and wireless systems include the
following:
Cable DSL
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Rogers SBC
Shaw Bell Atlantic
TCA Cable TV (a subsidiary of Cox Bell South
Communications) U.S. West
Crossbeam (a subsidiary of Sumitomo) GTE
UPC PAC-West
Digital Video Systems Wireless Systems
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Cox Communications Shiron
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Time Warner Teleo
Adelphia Gilat Sat
KBI e-Sat
Adaptive
Three customers (two of which are related party customers) accounted for
approximately 51% of our revenues for the six months ended June 30, 2000. 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.
Research and Development
We believe that our future success will depend on our ability to enhance our
existing products and to develop and introduce new products that meet a wide
range of evolving broadband access service providers and end user needs. In
addition, to address competitive and pricing pressures, we expect that we will
have to reduce the unit cost of manufacturing our products through design and
engineering changes.
We currently are designing and developing a DOCSIS system that includes S-CDMA
advanced PHY capabilities, which will include a cable modem and an accompanying
headend controller. These products are in the early stages of development and
we do not anticipate commercial availability of these products until late 2000
or early 2001. We also are developing a common multimedia platform for current
and advanced transmission of data, voice and video over existing broadband
infrastructures, including cable, DSL and wireless. These products are in the
early stages of development, and we do not anticipate commercial availability of
these products until late 2001.
On March 18, 1999, we entered into a one-year Product Development Assistance
Agreement ("Development Agreement") with Rogers. Under the terms of the
Development Agreement, Rogers is obligated to provide assistance with the
characterization and testing of our subscriber-end and head-end voice-over-cable
equipment. In addition, Rogers is obligated to provide technology to assist us
in connection with our efforts to develop high quality, field proven technology
solutions that are DOCSIS-compliant and PacketCable-compliant.
Sales and Marketing
We have direct sales forces in North America, South America, Europe and Asia.
We also distribute our products via distributors and systems integrators. We
have signed a distribution agreement with Sumitomo under which Crossbeam is
distributing the TeraComm system to several of Japan's leading cable operators.
In January 2000, we signed a distribution agreement with BARCO Communication
Systems, for the sale of our CherryPicker systems to cable television operators
worldwide. In June 2000, we signed a distribution agreement with NEC, for the
sale of our IPTL DSL access system throughout Asia and Central and South
America.
We market our products directly to providers of broadband access services
through our sales force, key distribution and technology partners, as well as
other marketing vehicles such as industry press, trade shows and the Web.
Through our marketing efforts, we strive to educate providers on the
technological and business benefits of our system solution, as well as our
ability to provide quality support and service to the customer. We participate
in the major trade shows and industry events for the broadband access industry
in the United States and we are expanding our presence in other markets through
joint participation at local events with our international sales and marketing
partners. Industry referrals and reference accounts are significant marketing
tools we develop and utilize.
Customer Service and Technical Support
We believe that our ability to provide consistently high quality service and
support will be a key factor in attracting and retaining customers. Our TSS
(Technical Services and Support) organization,
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located in North America, Europe, South America and Asia, offers support 24
hours a day, seven days per week. Prior to deployment of our systems, each
customer's needs are assessed and proactive solutions are implemented, including
various levels of training, periodic management and coordination meetings, and
problem escalation procedures. We place a strong emphasis on technical training
for our customers. Initial training is offered at no cost, both at our
headquarters in Santa Clara and on our customers' premises.
In addition to our TSS organization, we have developed sophisticated tools for
remote diagnosis and monitoring of the TeraComm systems deployed by cable
operators. These tools allow us to monitor cable operators' installations of
the TeraLink 1000 Master Controller to suggest solutions proactively before
problems become noticeable to end users. We are developing a Web-based
knowledge system to provide cable operators with access to the latest technical
support information.
Manufacturing
We outsource the majority of the materials procurement, printed circuit board
assembly, and product assembly and testing to turnkey contract manufacturers.
Currently, we contract with Solectron, located in Milpitas, California, and
CalComp Electronics, located in Thailand, for the manufacture of the majority of
our products. In addition, we also manufacture our products at subcontractors
located in the U.S. and Israel. We have a limited in-house manufacturing
capability at our Santa Clara headquarters. This facility currently is used for
the assembly and final testing of TeraLink 1000 Master Controllers and TeraLink
Gateways. We also use this facility for pilot production of new product
designs, sample testing of products received from volume manufacturers,
developing the manufacturing process and documentation for new products in
preparation for outsourcing. We also perform repair operations for some of our
products returned from customers with our in-house manufacturing resources.
Our future success will depend in significant part on our ability to obtain
high volume manufacturing at low costs. As volume increases, we plan to engage
additional contract manufacturers, to procure additional manufacturing
facilities and equipment, to modify existing inventory procedures, to
substantially increase our personnel and to revise our quality assurance and
testing practices.
Subcontractors supply our contract manufacturers with both standard components
and subassemblies manufactured to our specifications. We depend upon certain
key suppliers for a number of the components for our products. For example, we
currently rely on Philips Semiconductor, Inc. (formerly VLSI Technology, Inc.)
for our S-CDMA ASIC, which is used in our headend and cable modem products. In
addition, all of our products contain one or more components that currently only
are available from a single source.
Competition
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, Com21, Matsushita, Motorola, Nortel, Vyyo, RCA,
Samsung, Scientific-Atlanta, Sony, 3Com, Toshiba and Zenith, and there are many
other potential market entrants. 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. Our direct competitors in the DSL arena include ECI
Telecom, Charles Industries, ADC, Copper Mountain, Accelerated Networks,
Integral Access and VINA Technologies. Our direct competitors in the video
arena are Cisco and Harmonic, while our direct competitors in the voice arena
are Nortel, TelLabs, ADC and Alcatel. Our direct competitors in wireless are
Hughes, Marconi, NEC and Scientific-Atlanta.
The principal competitive factors in the broadband access market include
product performance, features and reliability, price, size and stability of
operations, breadth of product line, sales and distribution capability,
technical support and service, relationships with providers of broadband access
services, standards compliance, and general industry and economic conditions.
Some of these factors are outside of our control. The existing conditions in
the broadband access market could change rapidly and significantly
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as a result of technological changes, and the development and market acceptance
of alternative technologies could decrease the demand for our products or render
them obsolete. In addition, these companies and other competitors could
introduce broadband access products that will be less costly or provide superior
performance or achieve greater market acceptance than our products.
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.
The market for our products may be impacted by the development of other
technologies that enable the provisioning of broadband access services and the
deployment of services over other media. Widespread acceptance of other
technologies or deployment of services over media not supported by our products
could materially limit acceptance of our broadband access systems. Broadband
access services supported by our products and technology may fail to gain
widespread commercial acceptance by providers of broadband access services and
end users.
Intellectual Property
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 without taking a license
from us. 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.
In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
version of the DOCSIS cable modem specification based in part on our S-CDMA
technology. In September 1999, CableLabs indicated that it intended to proceed
with the advanced PHY work on two parallel tracks: one for the development of a
prototype based on our S-CDMA technology and one for the inclusion of Advanced
TDMA technology, as proposed by other companies. In February 2000, CableLabs
further clarified the status of the advanced PHY project regarding a separate
release that will include TDMA technologies. In addition, CableLabs reiterated
that it is continuing to work with us on the development of a DOCSIS
specification that could include our S-CDMA technology. To that end, we have
indicated to CableLabs that we would contribute some aspects of our S-CDMA
technology to the DOCSIS intellectual property pool if and when a DOCSIS
specification is approved that includes our S-CDMA technology. We would
contribute our technology pursuant to a license agreement with CableLabs that we
would execute at that time, and which contains the terms that CableLabs has
established for the inclusion of any intellectual property from any source in
the DOCSIS specifications. Under the terms of the proposed license agreement,
we would grant to CableLabs a royalty-free license for those aspects of our S-
CDMA technology that are essential for compliance with the DOCSIS cable modem
standard. So-called "implementation know how" is not covered by this license-
only those aspects of the technology that are essential to implementing a
compliant product. CableLabs would have the right to extend royalty-free
sublicenses to companies that wish to build DOCSIS-compatible products. These
sublicenses would allow participating companies to utilize and incorporate the
essential portions of the S-CDMA technology on a royalty-free basis for the
limited use of making and selling products or systems that comply with the
DOCSIS cable modem specification Terayon has already joined the DOCSIS
intellectual property pool and, as a result, we have a royalty-free sublicense
that allows us to ship DOCSIS-compatible products which contain intellectual
property submitted by other companies. The scope of this license would not
extend to the use of the S-CDMA technology in other areas; only for products
that comply with the
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DOCSIS specifications. As a result, any of our competitors who join or have
joined the DOCSIS intellectual property pool will have access to some aspects of
our technology without being required to pay us any royalties or other
compensation. If and when we submit S-CDMA to the DOCSIS Intellectual Property
pool, we are in no way restricted from entering into royalty-bearing license
agreements with companies that wish to use the S-CDMA technology for purposes
other than implementing DOCSIS compatible products, or that do not wish to enter
into the DOCSIS intellectual property pool. Further, some of our competitors
have been successful in reverse engineering the technology of other companies,
and the inclusion of S-CDMA in a future DOCSIS specification would expose some
aspects of our technology to those competitors. DOCSIS specifications are
available on an open basis once they are approved, not only to companies that
are members of the DOCSIS IP Pool. 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. Also, even if we were to be removed from the IP pool, we would
not be prevented from developing and selling products that fully comply with the
DOCSIS specifications, but we would not be able to do this with the benefit of a
royalty-free license, which would increase the cost of our products, assuming we
were able to obtain a license agreement for the required technology. Because of
these terms, we may find it difficult to enforce our intellectual property
rights against certain companies, even in areas that are not directly related to
DOCSIS specifications and products.
We anticipate 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.
We pursue the registration of our trademarks in the United States and have
applications pending to register several of our trademarks. However, the laws of
certain foreign countries might not protect our products or intellectual
property rights to the same extent as the laws of the United States. This means
that effective trademark, copyright, trade secret and patent protection might
not be available in every country in which our products might be manufactured,
marketed or sold.
Employees
As of October 2,2000, we had 813 employees, of which 416 were in the research
and development group, 218 were in marketing, sales and customer support, 81
were in operations and 98 were in general and administrative functions. None of
our employees is represented by a union. We believe that our relations with our
employee are good.
Properties.
Our headquarters are located in an approximately 60,000 square foot leased
facility located in Santa Clara, California. The current lease for the Santa
Clara facility expires in March 2002. We have sales offices in Atlanta,
Georgia; Sao Paulo, Brazil; and Brussels, Belgium. In addition, we lease
approximately
<PAGE>
82,000 square feet in Tel Aviv pursuant to an agreement that expires in 2005. It
is our intention to consolidate the operations of our Israeli operations in this
space. We believe that our existing facilities are adequate to meet our needs
for the immediate future and that our future growth can be accommodated by
leasing additional or alternative space near our current facilities.
Legal Proceedings
In September 1999, Imedia, now our subsidiary, was named as a defendant in a
case alleging that Imedia breached its term sheet agreement with the plaintiffs
by negotiating with us while a no-shop provision was in place and refusing to
allowing the plaintiffs to invest in Imedia. The plaintiffs are seeking damages
in excess of $12.0 million. As part of the terms of the Imedia Agreement and
Plan of Merger and Reorganization, shares of our common stock to be issued to
the former shareholders of Imedia were placed in escrow to indemnify us for any
damages that are directly or indirectly suffered as a result any claim brought
by any person who was a prospective investor in Imedia and was not a security
holder of Imedia on the closing date of the Imedia acquisition. The value of the
escrowed shares was approximately $10.0 million based on the market value of our
common stock on the closing date. The case is in its initial stages, and no
trial date has been established. We have reviewed the allegations made by the
plaintiffs and we do not believe that the outcome will have a negative impact on
our financial position, results of operations or cash flows.
On or about September 5, 2000, we received a draft amended complaint
("Complaint") in a matter captioned Evergreen Canada Israel Management, Ltd. v.
Imedia Corporation, case no. 306185, pending in the Superior Court of the State
of California for the City and County of San Francisco. The Complaint alleges
"Intentional Interference with Prospective Economic Advantage" against us,
claiming that we "formed and operated a conspiracy to deprive plaintiffs of the
opportunity to invest in Imedia", a company that we acquired in 1999.
Plaintiffs argue that, prior to our purchase of the Imedia shares, we knew of an
alleged, pre-existing financing agreement between plaintiffs and Imedia that
contained a "no shop" clause, prohibiting Imedia from seeking or obtaining
financing from any other sources, including (apparently, in plaintiffs' view) a
prohibition against Imedia selling it own stock.
The Company has been served with the Complaint, and a responsive pleading is
due on or before October 30, 2000. The matter is currently in its preliminary
stages. We intend to vigorously defend the lawsuit.
In April 2000, a lawsuit against us and certain of our officers and directors,
entitled Birnbaum v. Terayon Communication Systems, Inc., was filed in the
United States District Court for the Central District of California. The venue
for the lawsuit has been moved to the Northern District of California. The
plaintiff purports to be suing on behalf of a class of stockholders who
purchased or obligated themselves to purchase our securities during the period
from February 2, 2000 to April 11, 2000. The complaint alleges that the
defendants violated the federal securities laws by issuing materially false and
misleading statements and failing to disclose material information regarding our
technology. Several other lawsuits similar to the Birnbaum suit have since been
filed. On August 24, 2000, the lawsuits against us and other named individual
defendants were consolidated in the U.S. District Court of the Northern District
of California and lead plaintiffs and lead plaintiffs' counsel was appointed
pursuant to the Private Securities Litigation Reform Act. On September 21,
2000, plaintiffs filed a Consolidated Class Action Complaint for violation of
federal securities laws. The consolidated complaint contains allegations nearly
identical to the Birnbaum suit. The lawsuits seek an unspecified amount of
damages, in addition to other forms of relief. We consider the lawsuits to be
without merit and we intend to defend vigorously against these allegations.
However, the litigation could prove to be costly and time consuming to defend,
and there can be no assurances about the eventual outcome.
The section entitled Legal Proceedings and Management's Discussion and
Analysis of Financial Condition and Results of Operations - Litigation - should
be deleted and replaced with the following section:
In September 1999, Imedia, now our subsidiary, was named as a defendant in a
case alleging that Imedia breached its term sheet agreement with the plaintiffs
by negotiating with us while a no-shop
<PAGE>
provision was in place and refusing to allowing the plaintiffs to invest in
Imedia. The plaintiffs are seeking damages in excess of $12.0 million. As part
of the terms of the Imedia Agreement and Plan of Merger and Reorganization,
shares of our common stock to be issued to the former shareholders of Imedia
were placed in escrow to indemnify us for any damages that are directly or
indirectly suffered as a result any claim brought by any person who was a
prospective investor in Imedia and was not a security holder of Imedia on the
closing date of the Imedia acquisition. The value of the escrowed shares was
approximately $10.0 million based on the market value of our common stock on the
closing date. The case is in its initial stages, and no trial date has been
established. We have reviewed the allegations made by the plaintiffs and we do
not believe that the outcome will have a negative impact on our financial
position, results of operations or cash flows.
On or about September 5, 2000, we received a draft amended complaint
("Complaint") in a matter captioned Evergreen Canada Israel Management, Ltd. v.
Imedia Corporation, case no. 306185, pending in the Superior Court of the State
of California for the City and County of San Francisco. The Complaint alleges
"Intentional Interference with Prospective Economic Advantage" against us,
claiming that we "formed and operated a conspiracy to deprive plaintiffs of the
opportunity to invest in Imedia", a company that we acquired in 1999.
Plaintiffs argue that, prior to our purchase of the Imedia shares, we knew of an
alleged, pre-existing financing agreement between plaintiffs and Imedia that
contained a "no shop" clause, prohibiting Imedia from seeking or obtaining
financing from any other sources, including (apparently, in plaintiffs' view) a
prohibition against Imedia selling it own stock.
The Company has been served with the Complaint, and a responsive pleading is
due on or before October 30, 2000. The matter is currently in its preliminary
stages. We intend to vigorously defend the lawsuit.
In April 2000, a lawsuit against us and certain of our officers and directors,
entitled Birnbaum v. Terayon Communication Systems, Inc., was filed in the
United States District Court for the Central District of California. The venue
for the lawsuit has been moved to the Northern District of California. The
plaintiff purports to be suing on behalf of a class of stockholders who
purchased or obligated themselves to purchase our securities during the period
from February 2, 2000 to April 11, 2000. The complaint alleges that the
defendants violated the federal securities laws by issuing materially false and
misleading statements and failing to disclose material information regarding our
technology. Several other lawsuits similar to the Birnbaum suit have since been
filed. On August 24, 2000, the lawsuits against us and other named individual
defendants were consolidated in the U.S. District Court of the Northern District
of California and lead plaintiffs and lead plaintiffs' counsel was appointed
pursuant to the Private Securities Litigation Reform Act. On September 21, 2000,
plaintiffs filed a Consolidated Class Action Complaint for violation of federal
securities laws. The consolidated complaint contains allegations nearly
identical to the Birnbaum suit. The lawsuits seek an unspecified amount of
damages, in addition to other forms of relief. We consider the lawsuits to be
without merit and we intend to defend vigorously against these allegations.
However, the litigation could prove to be costly and time consuming to defend,
and there can be no assurances about the eventual outcome.
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Terayon Communication Systems, Inc.
Dated: October 23, 2000 By: /s/ Zaki Rakib
---------------
Chief Executive Officer and Secretary
