================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ---------------TO ---------------.
COMMISSION FILE NUMBER: 000-24647
--------------
TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0328533
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2952 BUNKER HILL LANE
SANTA CLARA, CALIFORNIA 95054
(408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, par value $0.001 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
March 24, 2000 as reported on the Nasdaq National Market, was approximately
$4,571,171,656. Shares of Common Stock held by each officer and director and by
each person known to the Company who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 24, 2000, registrant had outstanding 28,972,171 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Shareholders to
be filed by April 28, 2000.Report on Form 8-K dated December 27, 1999.
================================================================================
The Registrant hereby amends Item 3 contained in the Registrant's Report on
Form 10-K for the year ended December 31, 1999 to include certain information
on events subsequent to March 30, 1999.
The Registrant hereby amends Item 8 contained in the Registrant's Report on
Form 10-K for the year ended December 31, 1999 to amend certain information
contained in Notes 11 and 13 of the Notes to Consolidated Financial Statements.
The Registrant hereby amends Item 10, Item 11, Item 12 and Item 13 contained
in the Registrant's Report on Form 10-K for the year ended December 31, 1999 to
include the information required by these Items.
Except for such changes, no other changes are made to the Registrant's Report
of Form 10-K for the year ended December 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
In September 1999, Imedia Corporation, now our subsidiary, was named
as a defendant in Evergreen Canada Israel Management Ltd. v.
Imedia Corporation, a case filed in San Francisco Superior Court
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 of any
claim brought by any Person who was a prospective investor in Imedia and
was not a securityholder 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 April 13, 2000, a lawsuit against us and certain of our
officers and directors, entitled Birnbaum v. Terayon Comm. Systems,
Inc., was filed in the United States District Court for the Central
District of California. The plaintiff purports to be suing on behalf
of a class of shareholders who purchased or committed 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. 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TERAYON COMMUNICATION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors...................
Consolidated Balance Sheets........................................
Consolidated Statements of Operations...............................
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
Consolidated Statements of Cash Flows.................................
Notes to Consolidated Financial Statements...........................
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Terayon Communication Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Terayon Communication Systems, Inc. as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders'
equity (net capital deficiency), and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Terayon Communication Systems, Inc. at December
31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
San Jose, California
January 17, 2000
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------- ----------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $32,398 $14,342
Short-term investments................................ 80,594 14,538
Accounts receivable, less allowance for doubtful
accounts of $1461 in 1999 and $594 in 1998........... 14,015 2,090
Accounts receivable from related parties.............. 7,281 1,549
Inventory............................................. 4,991 3,950
Other current assets.................................. 4,161 1,856
---------- ----------
Total current assets.................................... 143,440 38,325
Property and equipment, net............................. 6,157 3,593
Officer note receivable................................. -- 100
Intangibles and other assets............................ 151,639 128
---------- ----------
Total assets............................................ $301,236 $42,146
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $13,217 $8,600
Accrued payroll and related expenses.................. 5,938 2,475
Deferred revenues..................................... 4,541 --
Warranty reserves..................................... 2,685 1,064
Other accrued liabilities............................. 4,668 1,735
Current portion of long-term debt..................... 12 --
Current portion of capital lease obligations.......... 5 29
---------- ----------
Total current liabilities........................... 31,066 13,903
Long-term debt.......................................... 31 --
Long-term portion of capital lease obligations.......... 6 10
Other long-term obligations............................. 480 130
Deferred tax liability.................................. 10,998 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none................... -- --
Common stock, $.001 par value:
Authorized shares--45,000,000
Issued and outstanding shares--24,479,379 in 1999 and
16,458,121 in 1998................................... 24 16
Additional paid in capital............................ 408,854 114,594
Accumulated deficit................................... (148,381) (84,301)
Deferred compensation................................. (1,553) (2,184)
Stockholders' notes receivable........................ (6) (22)
Accumulated other comprehensive income................. (283) --
---------- ----------
Total stockholders' equity.......................... 258,655 28,103
---------- ----------
Total liabilities and stockholders' equity.......... $301,236 $42,146
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product revenues....................... $57,345 $19,150 $1,021
Related party product revenues......... 39,664 12,546 617
Contract consulting and technology
development revenues.................. -- -- 480
---------- ---------- ----------
Total revenues....................... 97,009 31,696 2,118
Cost of goods sold:
Cost of product revenues............... 46,215 22,296 3,904
Cost of related party product revenues. 25,829 12,222 2,558
---------- ---------- ----------
Total cost of goods sold............. 72,044 34,518 6,462
---------- ---------- ----------
Gross profit (loss)...................... 24,965 (2,822) (4,344)
Operating expenses:
Research and development............... 17,579 10,685 11,319
Cost of product development assistance
agreement........................... 35,147 -- --
In-process research and development... 14,600 -- --
Sales and marketing.................... 15,727 6,947 4,468
General and administrative............. 7,476 3,223 2,546
Goodwill amortization.................. 3,524 -- --
---------- ---------- ----------
Total operating expenses............. 94,053 20,855 18,333
---------- ---------- ----------
Loss from operations..................... (69,088) (23,677) (22,677)
Interest income.......................... 5,101 808 396
Interest expense......................... (93) (359) (268)
---------- ---------- ----------
Net loss................................. (64,080) (23,228) (22,549)
Series F convertible preferred
stock dividend.......................... -- 23,910 --
---------- ---------- ----------
Net loss applicable to common
stockholders............................ ($64,080) ($47,138) ($22,549)
========== ========== ==========
Historical basic and diluted net loss
per share applicable to common
stockholders............................ ($3.11) ($5.25) ($5.26)
========== ========== ==========
Shares used in computing historical
basic and diluted net loss per share
applicable to common stockholders....... 20,630 8,986 4,289
========== ========== ==========
Pro forma basic and diluted net loss
per share applicable to common
stockholders............................ ($3.41) ($2.07)
========== ==========
Shares used in computing pro forma
basic and diluted net loss per share
applicable to common stockholders....... 13,804 10,873
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Convertible Addi- Stock- Accumulated Stockholders'
Preferred Stock Common Stock tional Deferred holders' Other Equity
---------------------------------------- Paid-In Accumulate Compen- Notes Comprehensive(Net Capital
Shares Amount Shares Amount Capital Deficit sation Receivable Income Deficiency)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996.................. 6,322,174 25,989 4,138,799 90 -- (14,614) -- (60) 11,405
Exercise of options
for cash to purchase
common stock.......... -- -- 481,648 140 -- -- -- -- -- 140
Net cash proceeds from
issuance of Series D
preferred stock....... 808,987 9,818 -- -- -- -- -- -- -- 9,818
Unearned compensation
related to stock
options............... -- -- -- 228 -- -- (228) -- -- --
Amortization of
unearned compensation. -- -- -- -- -- -- 12 -- -- 12
Net loss applicable to
common stockholders
and comprehensive net
loss applicable to
common stockholders... -- -- -- -- -- (22,549) -- -- -- (22,549)
-----------------------------------------------------------------------------------------------------------
Balance at December 31,
1997.................. 7,131,161 35,807 4,620,447 458 -- (37,163) (216) (60) -- (1,174)
Net cash proceeds from
issuance of Series D
preferred stock ...... 114,089 1,454 -- -- -- -- -- -- -- 1,454
Conversion of advance
from related party to
Series D preferred
stock ................ 153,846 2,000 -- -- -- -- -- -- -- 2,000
Net cash proceeds from
issuance of preferred stock
and a warrant ....... 384,615 844 -- 4,089 -- -- -- -- -- 4,933
Dividends on Series F
convertible preferred
stock ................ -- -- -- 23,910 -- -- -- -- -- 23,910
Value of preferred stock
warrant issued to
Series D preferred
stockholder .......... -- 19 -- -- -- -- -- -- -- 19
Exercise of options for
cash to purchase common
stock ................ -- -- 205,276 56 -- -- -- -- -- 56
Exercise of option for
note receivable to
purchase common stock
...................... -- -- 24,375 9 -- -- -- (9) -- --
Value of common stock
warrant .............. -- -- -- 35 -- -- -- -- -- 35
Cash proceeds from
payment on a
stockholder note
receivable ........... -- -- -- -- -- -- -- 47 -- 47
Unearned compensation
related to stock
options .............. -- -- -- 1,849 -- -- (1,849) -- -- --
Transfer to additional
paid in capital
as a result of
reincorporation....... -- (40,116) -- (30,401) 70,517 -- -- -- -- --
Conversion of preferred
stock into common
stock upon the initial
public offering ...... (7,783,711) (8) 7,783,711 8 -- -- -- -- -- --
Issuance of common
stock in connection
with the initial
public offering, net
of issuance costs..... -- -- 3,000,000 3 35,133 -- -- -- -- 35,136
Conversion of
redeemable preferred
stock to common stock
upon the initial
public offering ...... -- -- 576,924 -- 7,500 -- -- -- -- 7,500
Conversion of
redeemable common
stock upon the initial
public offering ...... -- -- 10,000 -- 13 -- -- -- -- 13
Exercise of common
stock warrant for cash -- -- 50,000 -- 500 -- -- -- -- 500
Issuance of common stock
in legal settlement to
an employee .......... -- -- 13,000 -- 169 -- -- -- -- 169
Exercise of options
for cash to purchase
common stock.......... -- -- 174,388 -- 222 -- -- -- -- 222
Unearned compensation
related to stock
options............... -- -- -- -- 540 -- (540) -- -- --
Amortization of
unearned compensation
related to stock
options............... -- -- -- -- -- -- 421 -- -- 421
Net loss applicable to
common stockholders
and comprehensive net
loss applicable to
common stockholders... -- -- -- -- -- (47,138) -- -- -- (47,138)
-----------------------------------------------------------------------------------------------------------
Balance at December
31, 1998.............. -- $ -- 16,458,121 $16 $114,594 ($84,301) ($2,184) ($22) -- $28,103
Issuance of common
stock , net of issuance
costs................. -- - 2,101,946 2 75,123 -- -- -- -- 75,125
Exercise of options
for cash to purchase
common stock.......... -- - 963,993 1 2,486 -- -- -- -- 2,487
Exercise of common
stock warrant for cash -- - 3,000,000 3 19,497 -- -- -- -- 19,500
Cash proceeds from
payment on a
stockholder note
receivable ........... -- - -- - -- -- -- 16 -- 16
Amortization of
unearned compensation
related to stock...... -- - -- - -- -- 631 -- -- 631
Issuance of warrant to
purchase common stock -- - -- - 35,587 -- -- -- -- 35,587
Issuance of common stock
for Employee Stock
Purchase Plan........ -- - 101,163 - 1,170 -- -- -- -- 1,170
Compensation expense related
to option acceleration for
terminated employees. -- - -- - 856 -- -- -- -- 856
Compensation expense for
common stock issued in
exchange for services -- - -- - 61 -- -- -- -- 61
Compensation expense for
common stock issued in lieu
of bonus............. -- - 596 - 25 -- -- -- -- 25
Acquisition of Imedia
Corporation........... -- - 857,407 1 106,737 -- -- -- -- 106,738
Acquisition of Radwiz
Limited.............. -- - 996,153 1 52,718 -- -- -- -- 52,719
Comprehensive income:
Increase in unrealized gain
on short-term
investments......... -- - -- - -- -- -- -- (283) (283)
Net loss applicable to
common stockholders. -- - -- - -- (64,080) -- -- -- (64,080)
-------------
Comprehensive income... (64,363)
-----------------------------------------------------------------------------------------------------------
Balance at December
31, 1999.............. -- - 24,479,379 $24 $408,854 ($148,381) ($1,553) ($6) ($283) $258,655
===========================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss applicable to common stockholders...... ($64,080) ($47,138) ($22,549)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 2,121 1,992 1,563
Amortization of intangible assets............. 6,089 -- --
In-process research and development.......... 14,600 -- --
Amortization of unearned compensation related
to stock options............................. 631 421 12
Loss on disposal of fixed assets.............. 33 -- --
Compensation expense for common stock issued
in exchange for consuting services.......... 61 -- --
Value of common and preferred stock warrants
issued....................................... 35,587 54 --
Series F convertible preferred stock
dividend..................................... -- 23,910 --
Issuance of common stock to an employee....... 25 -- --
Option acceleration related to a
terminated employee......................... 856 -- --
Changes in operating assets and liabilities:
Accounts receivable.......................... (11,925) (1,516) (574)
Accounts receivable from related parties..... (5,732) (1,187) (362)
Inventory.................................... (1,041) (2,628) (1,322)
Other current assets......................... (2,305) (1,166) (391)
Accounts payable............................. 4,617 6,368 1,550
Accrued payroll and related expenses......... 3,463 1,423 482
Deferred revenues............................ 4,541 -- --
Warranty reserves............................ 1,621 528 536
Other accrued liabilities.................... 2,933 914 540
Deferred revenue............................. -- (95) (330)
Deferred rent................................ 5 4 24
Other noncurrent liabilities................. -- -- (24)
--------- --------- ---------
Net cash used in operating activities........... (7,900) (18,116) (20,845)
--------- --------- ---------
Investing activities:
Purchases of short-term investments............. (217,323) (32,959) (10,995)
Proceeds from sales and maturities of
short-term investments......................... 150,984 18,839 15,085
Purchases of property and equipment............. (4,718) (1,970) (2,606)
Officer note receivable......................... 100 -- --
Purchase of developed technology................ (1,850) -- --
Purchase of other assets........................ (508) -- 15
Cash received from Imedia acquisiton............ 202 -- --
Cash received from Radwiz acquisition........... 2,457 -- --
Cash paid for acquisition of Radwiz............. (250)
Pre-acquisition loan to Imedia.................. (1,800) -- --
--------- --------- ---------
Net cash provided by (used in) investing
activities..................................... (72,706) (16,090) 1,499
--------- --------- ---------
Financing activities:
Principal payments on capital leases............ (28) (70) (144)
Principal payments on long-term debt............ -- (2,812) (909)
Proceeds from long-term debt.................... 43 -- 1,654
Increase in other noncurrent liabilities....... 355 -- 0
Exercise of options and warrant to purchase
common stock................................... 21,983 778 140
Advance from related party...................... -- -- 2,000
Proceeds from issuance of preferred stock....... -- 6,387 9,818
Proceeds from issuance of redeemable preferred
stock.......................................... -- 7,500 --
Principal payments on redeemable common
stockholder and common stockholder notes
receivable..................................... 16 60 --
Proceeds from issuance of common stock.......... 76,293 35,136 --
--------- --------- ---------
Net cash provided by financing activities.... 98,662 46,979 12,559
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 18,056 12,773 (6,787)
Cash and cash equivalents at beginning of year.. 14,342 1,569 8,356
--------- --------- ---------
Cash and cash equivalents at end of year........ $32,398 $14,342 $1,569
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash paid for interest.......................... $0 $359 $268
Supplemental noncash investing and financing
activities:
Exercise of option for note receivable to
purchase redeemable common stock............... $ -- $ -- $13
Exercise of option for note receivable to
purchase common stock.......................... $ -- $9 $ --
Conversion of advance from related party to
Series D preferred stock....................... $ -- $2,000 $ --
Issuance of common stock in legal settlement to
an employee.................................... $ -- $169 $ --
Conversion of preferred stock to common stock... $ -- $8 $ --
Conversion of redeemable preferred stock to
common stock .................................. $ -- $7,500 $ --
Conversion of redeemable common stock to common
stock ......................................... $ -- $13 $ --
Acquisition of Imedia Corporation............... $106,737 $ -- $0
Acquisition of Radwiz Ltd....................... $52,468 $ -- $0
</TABLE>
See accompanying notes.
<PAGE>
1. Organization and Summary of Significant Accounting Policies
Description of Business
Terayon Communication Systems, Inc. (the Company) was incorporated
under the laws of the state of California on January 20, 1993 for the
purpose of developing, producing, and marketing broadband access system
products. In October 1997, the Company changed its legal name from
Terayon Corporation. In July 1998, the Company reincorporated in the
State of Delaware.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries Imedia Corporation ("Imedia")
and Radwiz, Ltd. ("Radwiz"), and its majority owned subsidiaries,
Terayon Communication Systems Europe and Terayon do Brasil. The minority
interests in net losses of Terayon Communication Systems Europe and
Terayon do Brasil were insignificant for all periods presented. All
material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation.
Advertising Expenses
The Company accounts for advertising costs as expense in the period
in which they are incurred. Advertising expense for the years ended
December 31, 1999, 1998 and 1997 was not significant.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents. Investments with an original maturity at the time of
purchase of over three months are classified as short-term investments
regardless of maturity date as all investments are classified as
available-for-sale and can be readily liquidated to meet current
operational needs. The Company accounts for investments in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". Management
determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet
date. The Company's short-term investments, which consist primarily of
commercial paper, U.S. government and U.S. government agency obligations
and fixed income corporate securities, are classified as available-for-
sale and are carried at amortized cost which approximates fair market
value. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization, as well as any interest on the securities,
is included in interest income. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold
is based on the specific identification method. The Company had no
investments in equity securities at either December 31, 1999 or December
31, 1998.
Concentrations of Credit Risk, Customer, Supplier, and Product
The Company operates in one business segment, the development and
sale of broadband access systems, which it sells primarily to customers
within the cable and communications industries, including related
parties (see Note 15). The Company performs ongoing credit evaluations
of its customers and generally requires no collateral. A relatively
small number of customers and resellers account for a significant
percentage of the Company's revenues. The Company expects that the sale
of its products to a limited number of customers and resellers may
continue to account for a high percentage of revenues for the
foreseeable future.
Currently, the Company relies on single source suppliers of materials
and labor for the significant majority of its product inventory but is
actively pursuing additional supplier alternatives. As a result, should
the Company's current suppliers not produce and deliver inventory for
the Company to sell on a timely basis, operating results may be
adversely impacted.
Substantially all of the Company's revenues have been attributable to
sales of the TeraLink and the TeraPro. These products are expected to
account for a significant part of the Company's revenues for the
foreseeable future. As a result, a decline in demand for or failure to
achieve broad market acceptance of the TeraLink or the TeraPro would
adversely affect operating results.
In addition, market acceptance of the Company's products may be
affected by the emergence and evolution of industry standards. While the
Company expects its products to become compliant with industry
standards, its inability to do so may adversely affect operating
results.
The Company invests its excess cash in debt instruments of
governmental agencies, and corporations with credit ratings of AA/AA- or
better or A1/P1 or better, respectively. The Company has established
guidelines relative to diversification and maturities that attempt to
maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or
market. The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Finished goods.................... $3,201 $3,355
Work-in-process................... 583 170
Raw materials..................... 1,207 425
---------- ----------
$4,991 $3,950
========== ==========
</TABLE>
During the year ended December 31, 1998 the Company was required to
purchase inventory components from its previous contract manufacturer
that were subsequently sold to its current contract manufacturer. As a
result of the transition to the Company's current contract manufacturer,
the Company recorded a charge of approximately $1,300,000. A portion of
the charge consisted of approximately $750,000 of raw material
components that were deemed obsolete due to a design change in the
Company's bill of materials. The charge also consisted of a write down
of approximately $550,000 for parts repurchased from the Company's
previous contract manufacturer and then resold to the Company's current
contract manufacturer, as the Company's current contract manufacturer
could purchase the related parts at a lower cost than the Company had
valued the inventory. Therefore, the Company wrote down the inventory to
the lower of cost or market as part of selling the inventory to its
current contract manufacturer.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Property and equipment are depreciated
for financial reporting purposes using the straight-line method over the
estimated useful lives of three to five years. Leasehold improvements
are amortized using the straight-line method over the shorter of the
useful lives of the assets or the terms of the leases. The
recoverability of the carrying amount of property and equipment is
assessed based on estimated future undiscounted cash flows and if an
impairment exists the charge to operations is measured as the excess of
the carrying amount over the fair value of the assets. Based upon this
method of assessing recoverability, no asset impairment occurred in any
of the years presented.
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Software and computers............ $7,729 $4,411
Furniture and equipment........... 7,410 3,567
Leasehold improvements............ 459 197
Automobiles....................... 165 --
---------- ----------
15,763 8,175
Accumulated depreciation and
amortization..................... (9,606) (4,582)
---------- ----------
Property and equipment, net....... $6,157 $3,593
========== ==========
</TABLE>
Intangibles and Other Assets
Intangibles and other assets consisted of the following at December
31, 1999 (in thousands):
<TABLE>
<S> <C>
Developed technology, gross..................... $56,850
Goodwill, gross................................. 87,942
Other intangibles, gross........................ 10,450
-----------
155,242
Accumulated amortization of intangible assets... (6,089)
-----------
Intangibles, net................................ 149,153
Other Assets................................... 2,486
-----------
Total intangibles and other assets........ $151,639
===========
</TABLE>
Revenue Recognition
The Company sells it products directly to broadband access service
providers, system resellers and distributors. Revenues related to
product sales are generally recognized when the products are shipped to
the customer. A provision is made for estimated product returns as
product shipments are made. The Company's existing agreements with its
system resellers and distributors do not contain price protection
provisions and do not grant return rights beyond those provided by the
Company's standard warranty. The Company has also performed some
research and product development work under best efforts technology
development agreements. Due to technological risk factors, the costs of
these agreements were expensed as incurred and were included in cost of
goods sold in prior years. Revenues under technology development
agreements are recognized when applicable customer milestones have been
met, including deliverables and, in any case, not in excess of the
amount that would be recognized using the percentage-of-completion
method. The Company met milestones under an agreement in the fourth
quarter of the year ended December 31, 1997 and recognized the related
revenue (see Note 4).
Warranty Reserves
The Company's products generally carry a one-year warranty that
includes factory and on-site repair services as needed for replacement
of parts. Estimated expenses for warranty obligations are accrued as
revenue is recognized. Reserve estimates are adjusted periodically to
reflect actual experience.
Stock-Based Compensation
As described in Note 10, the Company has elected to account for its
employee stock plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion
No. 25), and to adopt the disclosure-only provisions as required under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123).
Comprehensive Income
The Company has adopted Statement of Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 requires that all
items required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of net unrealized gain on short-
term investments for the year ended December 31, 1999. The Company's
comprehensive net loss was the same as its net loss for the years ended
December 31, 1998 and 1997.
Segments of an Enterprise
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 superseded
Statement of Financial Accounting Standards No. 14, "Financial Reporting
for Segments of a Business Enterprise". FAS 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports. FAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 did not affect the Company's
results of operations or financial position, and did not affect the
disclosure of segment information (see Note 12).
Net Loss Per Share Applicable to Common Stockholders
Historical basic and diluted net loss per share applicable to common
stockholders was computed using the weighted average number of common
shares outstanding. Options, warrants, restricted stock and preferred
stock were not included in the computation of historical diluted net
loss per share applicable to common stockholders because the effect
would be antidilutive.
Pro forma net loss per share applicable to common stockholders was
computed as described above and also gives effect, even if antidilutive,
to common equivalent shares from preferred stock that automatically
converted upon the closing of the Company's initial public offering
(using the as-if-converted method).
A reconciliation of shares used in the calculation of historical and
pro forma basic and diluted net loss per share applicable to common
stockholders follows (in thousands, except per share data):
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss.................................. ($64,080) ($23,228) ($22,549)
Series F convertible preferred stock
dividend (note 10)....................... -- 23,910 --
---------- ---------- ----------
Net loss applicable to common
stockholders............................. ($64,080) ($47,138) ($22,549)
========== ========== ==========
Shares used in computing historical
basic and diluted net loss per share
applicable to common stockholders........ 20,630 8,986 4,289
Historical basic and diluted net loss
per share applicable to common
stockholders............................. ($3.11) ($5.25) ($5.26)
========== ========== ==========
Shares used in computing historical
basic and diluted net loss per share
applicable to common stockholders........ 8,986 4,289
Adjustment to reflect the effect of the
assumed conversion of weighted average
shares of convertible preferred stock
outstanding applicable to common
stockholders............................. 4,818 6,584
---------- ----------
Shares used in computing pro forma
basic and diluted net loss per share
applicable to common stockholders........ 13,804 10,873
========== ==========
Pro forma basic and diluted net loss
per share applicable to common
stockholders............................ ($3.41) ($2.07)
========== ==========
</TABLE>
Options to purchase 4,442,269 and 2,691,234 shares of common stock
were outstanding at December 31, 1999 and 1998, respectively, and
warrants to purchase 2,036,159 and 3,019,191 shares of common stock were
outstanding at December 31, 1999 and 1998, respectively, but were not
included in the computation of diluted net loss per share, since the
effect would be antidilutive.
Impact of Recently Issued Accounting Standard
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. FAS 133 was
effective for fiscal years beginning after September 15, 1999. In July
1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -Deferral of the Effective Date of
FASB Statement No. 133" (FAS 137). FAS 137 defers for one year the
effective date of FAS 133 which will now apply to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company believes
that the adoption of FAS 137 will not have a significant impact on the
Company's operating results or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation
and disclosure of revenue in the financial statements of public
companies. Changes in the Company's revenue recognition policy
resulting from SAB 101 would be reported as a change in accounting
principle and would result in a cumulative adjustment in the second
quarter to reflect the deferral of revenue for shipments previously
recognized as revenue that did not meet the revenue recognition criteria
established by SAB 101. The Company currently cannot determine the
effect, if any, that SAB 101 will have on the Company's financial
statements. Management believes that SAB 101, to the extent it is
applicable to the Company, will not effect the underlying strength or
weakness of the Company's business operations as measured by the dollar
value of the Company's shipments and cash flows.
2. Fair Value of Financial Instruments
The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Short-term investments Cost Gains Losses Value
- ------------------------------------ ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Commercial paper.................... $30,027 $ -- $ -- $30,027
Government agency obligations....... 41,780 -- (255) 41,525
Fixed income corporate securities.. 9,070 -- (28) 9,042
---------- ---------- ---------- ----------
Total............................. $80,877 $ -- ($283) $80,594
========== ========== ========== ==========
<CAPTION>
December 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Short-term investments Cost Gains Losses Value
- ------------------------------------ ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Commercial paper.................... $8,426 $ -- $ -- $8,426
Government agency obligations....... 6,112 -- -- 6,112
---------- ---------- ---------- ----------
Total............................. $14,538 $ -- $ -- $14,538
========== ========== ========== ==========
</TABLE>
Realized gains and losses were insignificant for each of the three
years in the period ended December 31, 1999.
3. Officer Note Receivable
In March 1996, the Company loaned an officer $100,000 pursuant to a
promissory note. The note was paid in full in 1999.
4. Technology Development Agreement
On January 4, 1995, the Company entered into a Development and
Production Agreement with a telecommunications systems manufacturer (the
Manufacturer), whereby the Company agreed to develop an enabling
technology for use with certain manufacturer technology (the Product).
Pursuant to the agreement, the Manufacturer is obligated to purchase
certain minimum quantities of the Product, and the Company has agreed to
provide the Product to the Manufacturer on favorable pricing terms for a
period of four years following completion of the Product. In addition,
the Company has agreed that for the first three months following the
completion of the Product, the Company will not sell the Product to any
third party for use in the carrying of voice-over coaxial cables.
In accordance with the agreement, the Company will receive funding
from the Manufacturer totaling $1,000,000. These payments were
originally received upon the completion of certain milestones set forth
in the agreement. As of December 31, 1997, approximately $480,000 of
cash advances had been received under the agreement. In the fourth
quarter of the year ended December 31, 1997, the Company delivered the
Product under the agreement and recognized the $480,000 as revenue. In
March 1998, the agreement was amended, and the Company is to receive the
remaining payments (in addition to normal Product billings) over a
certain number of future unit shipments to the Manufacturer.
5. Commitments
The Company leases its facilities and certain equipment under
operating leases. The operating lease for the Company's facilities
expire in 2002 and 2003. Rental expense was approximately $1,013,000,
$853,000, and $850,000 for the years ended December 31, 1999, 1998, and
1997, respectively. In October 1999, the Company subleased the
facilities formerly occupied by Imedia Corporation to a third party
through 2003. Sublease rental income was approximately $57,400 for the
period from September 16, 1999 (acquisition date) to December 31, 1999.
The Company leases certain equipment under noncancelable lease
agreements that are accounted for as capital leases. Equipment under
capital lease arrangements and included in property and equipment
aggregated approximately $34,600 and $452,000 at December 31, 1999 and
1998, respectively. Related accumulated amortization was approximately
$29,300 and $375,000 at December 31, 1999 and 1998, respectively.
Amortization expense related to assets under capital leases is included
in depreciation expense. In addition, the capital leases are secured by
the related equipment and the Company is required to maintain liability
and property damage insurance.
Future minimum lease payments under noncancelable operating leases
and capital leases are as follows (in thousands):
Future minimum lease payments under noncancelable operating leases and
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
---------------------
Operating Capital
Leases Leases
---------- ----------
<S> <C> <C>
2000...................................... $1,972 $6
2001...................................... 2,015 7
2002...................................... 957
2003...................................... 99 --
---------- ----------
Total minimum payments.................... $5,043 13
==========
Less amount representing interest......... 2
----------
11
Less current portion...................... 5
----------
$6
==========
</TABLE>
Future minimum sublease payments to be received under noncancelable
subleases are approximately $878,000.
Unconditional Purchase Obligations
The Company has unconditional purchase obligations to a few of its
suppliers that support the Company's ability to manufacture its
products. The obligations require the Company to purchase minimum
quantities of the suppliers' products at a specified price. At December
31, 1999, the Company had approximately $48,829,000 of unconditional
purchase obligations ($10,281,000 at December 31, 1998).
Royalties
The Company has purchased, through its acquisition of Radwiz Ltd.,
certain technology that was developed by Radwiz and a former sister
company utilizing funding provided by the Israeli Chief Scientist of the
Ministry of Industry and Trade ("OCS"). The purchase of the technology
was approved by the OCS. As a condition for this approval, the Company
has committed to pay royalties to the Government of Israel on proceeds
from sales of products based on this technology. Royalty rates are 3% -
5%. Royalties are payable from the commencement of sales of products
based on the technology until the cumulative amount of the royalties
paid and accrued by the Company equals 100% of the dollar amount
received. The Company's total obligation for royalties, based on
royalty-bearing Government participations received or accrued, net of
royalties paid or accrued, totaled approximately $5,900,000 at December
31, 1999.
6. Debt Obligations
The Company has a credit agreement with a bank to provide a line of
credit in an amount of $2,500,000. At December 31, 1999, the Company
had an unused standby letter of credit of $150,000 outstanding against
the line of credit and $2,350,000 was available under the line of
credit.
The credit agreement provides for interest at a rate equal to prime
(8.5% at December 31, 1999) and matures one year from the date of the
agreement. At December 31, 1999, there were no outstanding borrowings
under this credit agreement and approximately $2,500,000 was available.
Outstanding borrowings under the credit agreement are secured by
certain Company assets. The credit agreement contains affirmative and
negative covenants and requires, among other things, that the Company
maintain its primary banking relationship with the bank. The credit
agreement also limits, among other things, the Company's ability to
incur additional debt, to pay cash dividends, or to purchase or sell
certain assets. Finally, the agreement restricts the Company to a
minimum tangible net worth and prohibits certain acquisitions, mergers,
consolidations, or similar transactions without the prior consent of the
bank.
In 1999, Radwiz borrowed approximately $43,000 from an Israeli bank.
The borrowing bore interest at LIBOR plus 1.25% and was paid in full
subsequent to December 31, 1999.
The Company incurred interest expense related to the debt
obligations of approximately $22,000, $256,000, and $205,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
7. Accrued Severance Pay
Radwiz is subject to Israeli law and labor agreements, under which
Radwiz is required to make severance payments to dismissed employees and
employees leaving its employment in certain other circumstances.
Radwiz's severance pay liability to its employees, which is calculated
on the basis of the salary of each employee for the last month of the
reported year multiplied by the years of such employee's employment is
included in the Company's consolidated balance sheet on the accrual
basis, and is partially funded by a purchase of insurance policies in
Radwiz's name. At December 31, 1999, approximately $329,000 for accrued
severance pay was included in other long-term obligations.
Approximately $165,000 relating to the amounts funded by the purchase of
insurance policies was included in other assets at December 31, 1999.
8. Contingencies
The Company received letters from two individuals claiming that the
Company's technology infringes patents held by these individuals. The
Company has reviewed the allegations made by these individuals and,
after consulting with its patent counsel, the Company does not believe
that its technology infringes any valid claim of these individuals'
patents. If the issues are submitted to a court, the court could find
that the Company's products infringe these patents. In addition, these
individuals may continue to assert infringement. If the Company is found
to have infringed these individuals' patents, it could be subject to
substantial damages and/or an injunction preventing it from conducting
its business. In addition, other third parties may assert infringement
claims against the Company in the future. An infringement claim, whether
meritorious or not, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. These royalty or licensing
agreements may not be available on terms acceptable to the Company or at
all. The Company has reviewed the allegations made by these individuals
and management does not believe that the outcome will have a material
adverse effect on the Company's financial position, results of
operations, or cash flows.
In September 1999, Imedia Corporation, now a subsidiary of the
Company, was named as a defendant in a case alleging that Imedia
breached its term sheet agreement with the Plaintiffs by negotiating
with the Company while a no shop provision was in place and refusing to
allow 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 the Company's
common stock to be issued to the former shareholders of Imedia were
placed in escrow to indemnify the Company 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
securityholder 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 the Company's common stock on the closing date.
The case is in its initial stages, and no trial date has been
established. The Company has reviewed the allegations made by the
Plaintiffs and management does not believe that the outcome will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
In the normal course of business, the Company from time to time
receives inquiries with regard to various legal proceedings. In the
opinion of management, any liability resulting from these inquiries has
been accrued and will not have a material adverse effect on the
Company's financial position or results of operations.
9. Public Offerings
In August 1998, the Company completed its initial public offering and
issued 3,000,000 shares of its common stock to the public at a price of
$13.00 per share. The Company received net proceeds of approximately
$35,136,000 in cash. Upon the closing of the offering, all of the
outstanding shares of convertible preferred stock, redeemable
convertible preferred stock, and redeemable common stock outstanding
were converted into an aggregate of 8,360,635 shares of common stock.
In January 1999, the Company completed a public offering of 3,250,000
shares of common stock, of which 1,750,000 shares were offered by the
Company and 1,500,000 shares were offered by existing stockholders. The
public offering resulted in proceeds to the Company of approximately
$62,500,000, net of underwriting discounts, commissions, and other
offering costs. In February 1999, the underwriters purchased an
additional 487,500 shares of common stock as a result of the exercise of
the over-allotment option, of which 351,946 and 135,554 shares of common
stock were purchased from the Company and certain existing stockholders,
respectively. This additional sale of common stock resulted in
additional proceeds of approximately $12,700,000 to the Company.
10. Redeemable Stock
In 1998, the Company issued 384,616 shares of Series D redeemable
convertible preferred stock resulting in proceeds of approximately
$5,000,000 and also issued 192,308 shares of Series F redeemable
convertible preferred stock resulting in proceeds of approximately
$2,500,000. The Series D and F redeemable preferred stockholders had
options ("Put Rights") to sell the Company some or all of the Series D
and F redeemable convertible preferred stock at $13.00 per share. The
Put Rights expired upon the completion of the Company's initial public
offering in August 1998.
In conjunction with the Series D redeemable convertible preferred
stock agreement, the Company issued a warrant to purchase 38,462 shares
of Series D convertible preferred stock. The Company recorded expense of
$19,000 to reflect the value of the warrant. In August 1998, the Company
completed its initial public offering (see Note 9) which caused the
termination of the unexercised warrant.
In September 1997, the Company issued redeemable common stock to an
employee in return for a full recourse note receivable for $13,000. The
note bore an interest rate of 5.81% per annum and was due in September
1998. The note was paid in full in January 1998. Pursuant to the stock
purchase agreement, the employee had the option to sell some or all of
his shares to the Company on or after September 22, 1998 at a purchase
price of $13.00 per share (the "Put Price"). Such option expired upon
the earlier of (a) September 22, 2003 or (b) the completion of the
Company's initial public offering of shares of its common stock. In
August 1998, the Company completed its initial public offering (see Note
9) which caused the termination of the option and the conversion of the
redeemable common stock into the Company's common stock. The Company
expensed approximately $88,000 and $29,000 for the years ended December
31, 1998 and 1997, respectively, representing the difference between the
common stock's per share price and the Put Price over the option's
vesting period.
11. Stockholders' Equity
Common Stock
In 1998, the Company's stockholders approved an increase in the
authorized number of common shares from 20,000,000 shares to 30,000,000
shares.
In 1999, the Company's stockholders approved an increase in the
authorized number of common shares from 30,000,000 to 45,000,000.
Preferred Stock
In 1998, the Company's Certificate of Incorporation was amended to
authorize 5,000,000 shares of preferred stock which the Board of
Directors has the authority to fix or alter the designation, powers,
preferences and rights of the shares of each such series and
qualifications, limitations or restrictions to any unissued series of
preferred stock.
Delaware Reincorporation
In July 1998, the Company's stockholders approved the Company's
reincorporation in Delaware. The par value of the preferred and common
stock is $.001 per share. The Company's reincorporation has been
reflected in the consolidated financial statements. The change resulted
in the transfer of $40,116,000 from convertible preferred stock and
$30,401,000 from common stock to additional paid-in capital.
Common Stock Warrants
In conjunction with a Series F convertible preferred stock financing
in April 1998, the Company issued a warrant to purchase 3,000,000 shares
of the Company's common stock at an exercise price of $6.50 per share to
Shaw Communications, Inc. (the "Shaw Warrant"). The Shaw Warrant is
exercisable at any time prior to December 31, 2003. In addition, the
Company issued a warrant (the "Anti-Dilution Warrant") to purchase an
indeterminate number of shares of common stock. The Anti-Dilution
Warrant is exercisable at the option of Shaw Communications, Inc.
("Shaw") during the period that Shaw owns equity securities of the
Company (purchased in April 1998) and in the event the Company issues
new equity securities at below the current market price as defined in
the Anti-Dilution Warrant. The aggregate exercise price is $1.00. In
June 1998, the Company issued certain equity securities that, as of
December 31, 1998, require the Company to issue an additional 19,191
shares of common stock pursuant to the Anti-Dilution Warrant. In 1999,
the Company issued certain equity securities that, as of December 31,
1999, require the Company to issue an additional 16,968 shares of common
stock pursuant to the Anti-Dilution Warrant. The Company recorded
expenses of approximately $439,000 for the year ended December 31, 1999
relating to shares issuable pursuant to the Anti-Dilution Warrant.
The Company recorded a dividend of $23,910,000 in the quarter ended
June 30, 1998, representing the fair value of the Shaw Warrant under
EITF No. 96-13, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock." The Company's
accounting conclusion with respect to the Shaw Warrant issued in
connection with the sale of the convertible preferred stock (the "Shaw
Financing") is based on management's conclusion that the sale of
convertible preferred stock was, in substance, a financing transaction
and not the issuance of equity instruments in exchange for goods or
services.
In March 1999, Shaw purchased 1,500,000 shares of the Company's
common stock at $6.50 per share and in November 1999 Shaw purchased an
additional 1,500,000 shares of the Company's common stock at $6.50 per
share, resulting in net proceeds to the Company of $19.5 million. The
shares were purchased pursuant to the exercise of a warrant to purchase
3,000,000 shares of the Company's common stock issued to Shaw in 1998.
In June 1998, the Company issued a warrant to purchase 50,000 shares
of the Company's common stock at $10.00 per share. The Company recorded
an expense of $35,000 to reflect the value of the warrant in the year
ended December 31, 1998. The warrant was exercised in August 1998.
On March 18, 1999, the Company entered into a one-year Product
Development Assistance Agreement ("Development Agreement") with Rogers
Communications Inc. Under the terms of the Development Agreement, Rogers
will provide the Company assistance with the characterization and
testing of the Company's subscriber-end and head-end voice over cable
equipment. In addition, Rogers will provide the Company technology to
assist the Company in connection with its efforts to develop high
quality, field proven technology solutions that are DOCSIS (1.0, 1.1 and
1.2)-compliant and packet cable-compliant. In consideration of Rogers
entering into the Development Agreement, the Company issued Rogers two
fully vested and non-forfeitable warrants, each to purchase 1,000,000
shares of common stock. One warrant has an exercise price of $1.00 per
share and one warrant has an exercise price of $37.00 per share. The
warrants may be exercised in full or in part through March 31, 2000.
The fair value of the two warrants was approximately $45,000,000 and
will be a noncash charge included in operations over the term of the
Product Development Assistance Agreement. As a result of the
Development Agreement, the Company's results for 1999 include a noncash
charge of $35.1 million. Subsequent to December 31, 1999, Rogers
exercised the warrants on a cashless basis resulting in the issuance of
1,843,809 shares of the Company's common stock and no proceeds to the
Company.
Common Stock Reserved
Common stock reserved for issuance is as follows:
<TABLE>
<CAPTION>
December 31,
1999
-----------
<S> <C>
Common stock options............... 6,803,514
Common stock warrants.............. 2,033,879
Employee stock purchase plan....... 598,837
-----------
9,436,230
===========
</TABLE>
Stock-Based Compensation
In March 1995 and February 1997, the Board of Directors approved a
stock option plan and an equity incentive plan, respectively, that
authorized the grant of options to purchase shares of the Company's
common stock. In June 1998, the Company's Board of Directors authorized
the adoption of the amended 1997 Equity Incentive Plan, increasing the
aggregate number of shares authorized for issuance under the 1997 Plan
to 3,300,000 shares (2,250,000 additional shares). However, each year on
January 1, starting with January 1, 1999, the aggregate number of shares
that are available for issuance under the 1997 Plan will automatically
be increased to a number equal to 5% of the Company's outstanding shares
of common stock on such date. In addition, in June 1998, the Company's
Board of Directors authorized the adoption of the 1998 Non-Employee
Directors' Stock Option Plan, pursuant to which 200,000 shares of the
Company's common stock have been reserved for future issuance to non-
employee directors of the Company. In October 1999, the Company's Board
of Directors authorized the adoption of the 1999 Non-Officers Equity
Incentive Plan, pursuant to which 3,000,000 shares of the Company's
common stock have been reserved for future issuance to non-officer
employees of the Company. At December 31, 1999, the total authorized
number of shares under the 1995, 1997, 1998 and 1999 plans was
2,114,747, 3,300,000, 200,000 and 3,000,000 respectively. The plans are
administered by the Board of Directors and provide for incentive stock
options or nonqualified stock options to be issued to employees,
directors, and consultants of the Company. Prices for incentive stock
options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less
than 85% of the fair value of the common stock at the date of grant.
Options are immediately exercisable and vest over a period not to exceed
five years from the date of grant. Any unvested stock issued is subject
to repurchase by the Company at the original issuance price upon
termination of the option holder's employment. Unexercised options
expire ten years after the date of grant.
In March and July 1997, the Board of Directors authorized grants of
common stock options outside the Company's stock option plans. The
options are for 70,000 shares of common stock and generally vest over a
three-year period in six equal installments occurring every six months.
In May and June 1998, the Board of Directors authorized additional
grants of 70,000 shares of common stock outside the Company's stock
option plans.
During the years ended December 31, 1998 and 1997, the Company
recorded aggregate deferred compensation of approximately $2,389,000 and
$228,000, respectively, representing the difference between the grant
price and the deemed fair value of the Company's common stock options
granted during these periods. The amortization of deferred compensation
is being charged to operations and is being amortized over the vesting
period of the options, which is typically five years. For the years
ended December 31, 1999,1998 and 1997, the amortized expense was
approximately $631,000,$421,000 and 12,000, respectively.
The following is a summary of additional information with respect to
the 1995 Stock Option Plan, the 1997 Equity Incentive Plan, the 1998
Non-Employee Directors' Stock Option Plan, the 1999 Non-Officer Equity
Incentive Plan and option grants made outside the plans:
<TABLE>
<CAPTION>
Options
Outstanding
and Exercisable
-----------------------
Weighted-
Options Number Average
Available of Exercise
for Grant Shares Price
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996........ 121,578 1,886,950 $0.31
Options authorized................ 1,120,000 -- $ --
Options granted................... (1,304,050) 1,304,050 $1.71
Options exercised................. -- (481,648) $0.30
Options canceled.................. 372,168 (372,168) $0.56
----------- -----------
Balance at December 31, 1997........ 309,696 2,337,184 $1.05
Options authorized................ 2,520,000 -- $ --
Options granted................... (1,185,081) 1,185,081 $9.45
Options exercised................. -- (404,039) $0.69
Options canceled.................. 426,992 (426,992) $2.79
----------- -----------
Balance at December 31, 1998........ 2,071,607 2,691,234 $4.54
Options authorized................ 3,000,000 -- --
Options granted................... (3,913,284) 3,913,284 $44.00
Options exercised................. (963,993) $3.46
Options canceled.................. 469,356 (469,356) $11.67
Options Repurchased............... 4,666 $0.50
----------- -----------
Balance at December 31, 1999........ 1,632,345 5,171,169 $33.56
=========== ===========
</TABLE>
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------
Weighted-
Average
Weighted- Remaining
Number Average Contractual
of Exercise Life
Range of Exercise Prices Shares Price (in Years)
- ------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 0.10 -- $ 0.50........... 311,076 $0.39 6.25
$ 0.51 -- $ 1.25........... 199,941 $1.25 7.35
$ 1.26 -- $ 3.00........... 62,962 $2.49 7.72
$ 3.01 -- $6.83........... 474,255 $6.31 8.35
$6.84 -- $13.00........... 461,739 $10.70 9.04
$13.01 -- $32.75........... 721,693 $29.04 9.32
$32.76 -- $66.88........... 2,939,503 $49.37 9.82
-----------
Total.................... 5,171,169
===========
</TABLE>
At December 31, 1999, approximately 109,000 shares of common stock
outstanding were subject to repurchase by the Company. Common stock
subject to repurchase represents any unvested shares of common stock
held by an optionholder which, upon termination of the optionholder's
employment, may be repurchased by the Company. Such shares are subject
to repurchase at their original issuance price.
In June 1998, the Board of Directors approved, and the Company
adopted, the 1998 Employee Stock Purchase Plan (the "ESPP"), which is
designed to allow eligible employees of the Company to purchase shares
of common stock at semiannual intervals through periodic payroll
deductions. An aggregate of 700,000 shares of common stock has been
reserved for the ESPP, and 101,163 shares have been issued through
December 31, 1999. The Purchase Plan is implemented in a series of
successive offering periods, each with a maximum duration of 24 months.
Eligible employees can have up to 15% of their base salary deducted that
is to be used to purchase shares of the common stock on specific dates
determined by the Board of Directors (up to a maximum of $25,000 per
year based upon the fair market value of the shares at the beginning
date of the offering). The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value
of the common stock on the commencement date of each offering period or
the specified purchase date.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock plans because, as
discussed below, the alternative fair value accounting provided for
under FAS 123 requires the use of valuation models that were not
developed for use in valuing employee stock instruments. Under APB
Opinion No. 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss is required under FAS 123
and is calculated as if the Company had accounted for its employee stock
options granted during the years ended December 31, 1999, 1998 and 1997
and for its ESPP shares to be issued under the fair value method of FAS
123. The fair value for employee stock options granted was estimated at
the date of grant based on the Black-Sholes model using the following
weighted average assumptions: risk-free interest rates 6.70%, 5.39%, and
5.75% for 1999, 1998, and 1997, respectively; no dividend yield, a
volatility factor of .80 (no volatility factor of the expected market
price of the Company's common stock for options granted prior to the
Company's initial public offering in August 1998 as the minimum value
method was used); and a weighted average expected life of the option of
five years. The fair value for employee stock purchase plan shares to be
issued was estimated using the following weighted average assumptions:
risk-free interest rate of 6.71 and 5.19% for 1999 and 1998,
respectively, no dividend yield, a volatility factor of .80, and a
weighted average expected life of the shares of six months.
As discussed above, the valuation models used under FAS 123 were
developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition,
valuation models require the input of highly subjective assumptions,
including the expected life of the option. Because the Company's
employee stock options have characteristics significantly different from
those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
instruments.
For purposes of pro forma disclosures, the estimated fair value of
the options granted and ESPP shares to be issued is amortized to expense
over their respective vesting periods. Had compensation cost for the
Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent
with the method of FAS 123, the Company's net loss applicable to common
stockholders and net loss per share applicable to common stockholders
would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss applicable to
common stockholders............... ($75,321) ($47,997) ($22,627)
========== ========== ==========
Pro forma basic and diluted net
loss per share applicable to
common stockholders............... ($3.65) ($5.34) ($5.28)
========== ========== ==========
</TABLE>
The pro forma impact of options granted and ESPP shares to be issued
on the net loss applicable to common stockholders for the years ended
December 31, 1998 and 1997 is not representative of the effects on net
income (loss) for future years, as future years will include the effects
of options vesting as well as the impact of multiple years of stock
option grants.
The options' weighted average grant date fair value, which is the
value assigned to the options under FAS 123, was $28.31, $3.20, and
$0.41,for options granted during 1999, 1998, and 1997,respectively. The
weighted average grant date fair value of ESPP shares to be issued was
$8.40 and $7.70 for the year ended December 31, 1999 and 1998.
Stockholders' Notes Receivable
In February 1993, the Company issued common stock to a founder in
return for a full recourse note receivable for $12,500. The note bore
interest rate of 7.04% per annum and was paid in 1999.
During June and December 1995, two officers of the Company were
provided cash advances totaling approximately $81,000 for the purpose of
purchasing the Company's Series A preferred stock. The final payment of
the full recourse notes was paid in 1998.
In January 1998, the Company issued common stock to an employee in
exchange for a full recourse note receivable for $9,000. The note bears
interest at 5.7% and is payable in three equal annual payments
commencing in January 1999.
12. Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the fiscal years
ended December 31, 1999, 1998, and 1997.
The reconciliation of income tax expense (benefit) attributable to net
loss applicable to common stockholders computed at the U.S. federal
statutory rates to income tax expense (benefit) for the fiscal years
ended December 31, 1999, 1998, and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision (benefit) at U.S.
statutory rate...................... ($21,788) ($16,027) ($7,667)
Goodwill amortization................. $1,198 -- --
In-process research and development... $4,964 -- --
Loss for which no tax benefit is
currently recognizable.............. 15,626 7,898 7,667
Nondeductible preferred stock dividend -- 8,129 --
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets as
of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards............ $18,700 $18,448
Tax credit carryforwards.................... 2,200 1,956
Capitalized research and development........ 1,020 1,776
Deferred warrant expense................... 13,970 --
Deferred revenue......................... 1,800 --
Other, net.................................. 4,780 2,364
---------- ----------
Total deferred tax assets................. 42,470 24,544
Deferred Tax Liabilities
Acquired intangibles........................ (10,998) --
Valuation allowance.......................... (31,472) (24,544)
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
</TABLE>
Realization of deferred tax assets is dependent on future earnings,
if any, the timing and the amount of which are uncertain. Accordingly, a
valuation allowance, in an amount equal to the net deferred tax asset as
of December 31, 1999 and 1998, has been established to reflect these
uncertainties. The change in the valuation allowance was a net increase
of approximately $6,928,000, $8,159,000, $10,329,000 and for the years
ended December 31, 1999, 1998, and 1997, respectively.
As of December 31, 1999, the Company had federal and California net
operating loss carryforwards of approximately $52,200,000 and
$22,500,000, respectively. The Company also had federal and California
research and development tax credit carryforwards of approximately
$1,325,000 and $1,056,000, respectively. The net operating loss and
credit carryforwards will expire at various dates beginning in the years
2000 through 2019, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
full utilization.
13. Segments of an Enterprise and Related Information
The Company operates in one business segment, the sale of broadband
access systems, which it sells primarily to customers within the cable
and communications industries. The TeraPro and TeraLink are sold
together as part of an entire system, and the Company accordingly does
not report revenue derived from these components.
The Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM) because he has final authority over
resource allocation decisions and performance assessment. The CODM does
not receive discrete financial information about the individual
components.
Four of the Company's customers, Shaw Communications, Inc., Rogers
Cable Inc., United Pan-Europe Communications and Sumitomo Corporation,
accounted for 24%, 17%, 14% and 11%, respectively, of total revenues for
the year ended December 31, 1999. Three of the Company's customers, Shaw
Communications, Inc., Cablevision Systems Corporation and Sumitomo
Corporation accounted for 40%, 16% and 14%, respectively, of total
revenues for the year ended December 31, 1998. No other customer
accounted for more than 10% of revenues during these years.
Total net export revenues to regions outside of the United States
were approximately $81,411,000 and $23,383,000 for the years ended
December 31, 1999 and 1998, respectively. Revenues by geographic region
were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
United States................................. $15,598 $8,313
Canada........................................ 41,008 13,032
Europe and Israel............................. 24,746 4,387
Asia.......................................... 12,755 4,614
South America................................. 2,902 1,350
---------- ----------
Total revenues.............................. $97,009 $31,696
========== ==========
</TABLE>
14. 401(k) Profit Sharing Plan and Trust
During 1995, the Company adopted a 401(k) Profit Sharing Plan and
Trust that allows eligible employees to make contributions subject to
certain limitations. The Company may make discretionary contributions
based on profitability as determined by the Board of Directors. No
amount was contributed by the Company to the plan during the years ended
December 31, 1999, 1998, and 1997.
15. Related Party Transactions
During the year ended December 31, 1997, the Company recognized
revenue of approximately $617,000 in connection with product shipments
made to Sumitomo Corporation, a significant stockholder in the Company
as of December 31, 1997. During the year ended December 31, 1998,
Sumitomo Corporation's ownership interest was diluted as a result of
subsequent Company financings, including the Company's initial public
offering, and Sumitomo is no longer considered a related party. Accounts
receivable from Sumitomo Corporation totaled approximately $362,000 at
December 31, 1997.
During the year ended December 31, 1998, the Company recognized
revenue of $12,546,000 in connection with product shipments made to Shaw
Communications, Inc., a significant stockholder (see Note 11) with a
position on the Company's Board of Directors as of December 31, 1998.
Accounts receivable from Shaw Communications, Inc. totaled approximately
$1,549,000 at December 31, 1998.
On March 18, 1999, the Company entered into a Supply Agreement with
Rogers Cablevision Limited ("Rogers Cablevision"), a subsidiary of
Rogers Communications. Under the Supply Agreement, the Company agreed
to make available to Rogers Cablevision its current TeraLink Gateway and
TeraLink 1000 Master Controller, and TeraPro Cable Modems and specified
software. The Company also committed to certain product pricing and
specifications. Under the terms of the Supply Agreement, Rogers retains
the right to return to the Company all product purchased until certain
conditions are met by the Company. Accordingly, the Company does not
recognize revenue on shipments to Rogers until the milestones have been
achieved or Rogers has waived the right to return the product. For the
year ended December 31, 1999, Rogers waived their right to return
certain product purchased and the Company recognized approximately
$17,100,000 in revenues from sales to Rogers. The Company also had
deferred revenues from Rogers of approximately $4,500,000 at December
31, 1999. Subsequent to year end Rogers waived all remaining rights of
return under the Supply Agreement; accordingly, the only rights of
return available to Rogers are those provided under Terayon's standard
warranty policy.
The Supply Agreement and the Development Agreement (see Note 11) do
not constitute a commitment by either Rogers Cablevision or Rogers
Communications to purchase or deploy any particular volume or quantity
of the Company's product. No such commitment will be made unless Rogers
Cablevision or Rogers Communications issues a purchase order to the
Company.
During the year ended December 31, 1999, the Company recognized
revenue of $39,664,000 in connection with product shipments made to Shaw
and Rogers, significant shareholders (see Note 11) with positions on the
Company's Board of Directors as of December 31, 1999. Accounts
receivable from these parties totaled approximately $7,281,000 at
December 31, 1999.
During the year ended December 31, 1999, the Company incurred
approximately $200,000 of expense related to consulting services
performed by a member of the Company's Board of Directors.
16. Business Combinations
Imedia Corporation
In July 1999, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") to acquire Imedia Corporation
("Imedia"), a California corporation. Imedia produces routing and re-
multiplexing systems for digital video that enable cable operators to
select and customize their program lineup for viewer preferences, while
maximizing video capacity and quality over standards-based set-top
boxes. The Imedia acquisition was completed on September 16, 1999 (the
"Closing Date").
In accordance with the Agreement, the shareholders, vested
optionholders and warrantholders are entitled to receive shares of the
Company's common stock in varying amounts in a series of up to three
stock payments, the last of which will occur on or before the 18-month
anniversary of the Closing Date. The aggregate number of shares of the
Company's common stock issued under the Agreement will depend, among
other things, on the performance of the Company's common stock over the
period during which the payments are to be made. In no event, shall the
number of shares issued exceed 3,000,000 shares, adjusted for any
splits, combinations, stock dividends and the like. The Agreement also
provides for the payment by the Company of certain Additional
Consideration in the form of cash or additional shares of the Company's
common stock in the event that certain pricing conditions are not
satisfied. The total value of the consideration that will ultimately
be paid, as measured by certain valuation formulae and based upon an
average of the price of the Company's common stock as reported on the
Nasdaq National Market, is not to exceed $99,000,000 nor be less than
$69,000,000. The holders of unvested Imedia options also will receive
options to purchase the Company's common stock, the fair value of which
will be included in the purchase price. The Company issued 827,407
shares of common stock and 172,477 options and warrants to purchase
common stock to the vested optionholders and warrantholders of Imedia on
the Closing Date. In addition, the unvested optionholders of Imedia
options also received options to purchase the Company's common stock,
the fair value of which was included in the purchase price. Subsequent
to year end, the valuation formulae specified in the Agreement were
satisfied, and, accordingly, the Company's obligation to issue
additional common stock or options and warrants to purchase common stock
beyond those issued at the Closing Date was eliminated. As a result, no
additional consideration will be issued in the future to the former
stockholders, optionholders and warrantholders of Imedia.
The acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated to the assets acquired and
liabilities assumed based on a determination from an independent
appraisal of their respective fair values. The approximate purchase
based upon the valuation formulae was determined as $99,000,000. The
consolidation of the assets and liabilities significantly affected the
Company's balance sheet at December 31, 1999, as depicted in the
following tables:
Approximate purchase price (in thousands):
<TABLE>
<S> <C>
Approximate purchase price (in thousands):
Purchase price........................................ $106,347
Estimated transaction and other direct costs.......... 2,631
--------------
$108,978
==============
</TABLE>
Purchase price allocation:
<TABLE>
<S> <C>
Purchase price allocation:
Historical net tangible assets of
Imedia at September 16, 1999..... ($355)
Forgiveness of Imedia note payable.. 1,000
----------
$645
<CAPTION>
Amortization
Life of Intangibles
-----------------------
<S> <C> <C> <C>
Intangible assets acquired:
Developed technology................ 27,000 6 years 4,500
Assembled workforce................. 2,500 2 1,250
Trademark........................... 4,000 6 667
In-process research and development. 11,000 --
Goodwill............................ 63,833 6 10,639
----------
$108,978
==========
</TABLE>
Tangible assets of Imedia principally include cash, accounts
receivable and property and equipment. Liabilities principally include
accounts payable and accrued liabilities. At the Closing Date, the
Company forgave Imedia's note payable obligation of $1,000,000.
To determine the value of the developed technology, the expected
future cash flow attributed to all existing technology was discounted,
taking into account risks related to the characteristics and application
of the technology, existing and future markets and assessments of the
life cycle stage of the technology. The analysis resulted in a
valuation of approximately $27,000,000 for developed technology that had
reached technological feasibility and therefore was capitalizable. The
developed technology is being amortized on a straight-line basis over a
six year period.
The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting and hiring
costs and training costs for each category of employee. The analysis
yielded a valuation of approximately $2,500,000 for the assembled
workforce. The asset is being amortized on a straight line basis over a
two year period. The goodwill allocation is approximately $63,833,000.
The value of the in-process research and development was determined
based on the expected cash flow attributed to the in-process projects,
taking into account revenue that is attributable to previously developed
technology, the level of effort to date in the in-process research and
development, the percentage of completion of the project and the level
of risk associated with the in-process technology. The projects
identified as in-process are those that were underway at Imedia at the
time of the acquisition and will, after the Closing Date, require
additional effort in order to establish technological feasibility.
These projects have identifiable technological risk factors that
indicate that even though successful completion is expected, it is not
assured. The value of the in-process research and development was
determined as approximately $11,000,000.
In-process technology acquired consists primarily of major additions
to Imedia's core technology, which is related to Imedia's planned
development of new features. The majority of the intended functionality
of these new features is not supported by Imedia's current technology.
Intended new features include offering high quality video service over
the Internet and multiplexing data with video. The Company expects that
in-process technology will be successfully developed and that initial
benefits from these projects will begin in calendar 2001.
Notwithstanding the Company's expectations, there remain significant
technical challenges that must be resolved in order to complete the in-
process technology.
Radwiz Ltd.
In October 1999, the Company entered into a Share Purchase Agreement
to acquire Radwiz Ltd., an Israeli company. Radwiz produces
communication access systems based on high-speed IP routing, integrated
with telephony. Radwiz's systems include both central office Digital
Subscriber Line Access Multiplexers (DSLAMs) and customer premises
equipment for small office, home office (SOHO) business broadband
services. The Radwiz acquisition was completed on November 22, 1999.
In accordance with the Agreement, the shareholders and vested
optionholders received cash and shares of the Company's common stock and
options to purchase shares of the Company's common stock. The aggregate
number of shares of the Company's common stock to be issued under the
Radwiz Agreement will depend, among other things, on the performance of
the Company's common stock over the period between the closing of the
merger and the twelve month anniversary. The Company paid $250,000 in
cash and issued 873,582 shares of Terayon common stock to the former
shareholders of Radwiz and issued options to purchase 72,571 shares of
Terayon common stock to the vested optionholders of Radwiz on the
Closing Date. In addition, the unvested optionholders of Radwiz options
also received options to purchase the Company's common stock, the fair
value of which was included in the purchase price.
The purchase price was allocated to the assets acquired and
liabilities assumed based on a determination from an independent
appraisal of their respective values. The approximate purchase price was
determined to be $52,700,000. This represents the minimum purchase
price, as specified in the Agreement, to be issued to the shareholders
and vested optionholders of Radwiz ($50,000,000,) plus the value of the
options issued to unvested optionholders of Radwiz ($2,700,000) based on
the market value of the Company's common stock on the date the
acquisition was announced. Proceeds to be received from the Radwiz
optionholders upon exercise of their options are not significant. The
consolidation of the assets and liabilities significantly affected the
Company's balance sheet at December 31, 1999, as depicted in the
following tables.
Approximate purchase price (in thousands):
<TABLE>
<S> <C>
Approximate purchase price (in thousands):
Purchase price........................................ $52,667
Estimated transaction and other direct costs.......... 902
--------------
$53,569
==============
</TABLE>
Purchase price allocation:
<TABLE>
<S> <C>
Purchase price allocation:
Historical net tangible assets of
Radwiz at November 22, 1999....... $3,058
<CAPTION>
Amortization
Life of Intangibles
-----------------------
<S> <C> <C> <C>
Intangible assets acquired:
Developed technology................ 29,850 6 years 4,975
Assembled workforce................. 2,800 2 1,400
Trademark........................... 1,150 6 192
In-process research and development. 3,600 --
Goodwill............................ 24,109 6 4,018
Deferred tax liability.............. (10,998)
----------
$53,569
==========
</TABLE>
Tangible assets of Radwiz principally include cash, accounts
receivable, inventory and property and equipment. Liabilities
principally include accounts payable and accrued liabilities.
To determine the value of the developed technology, the expected
future cash flow attributed to all existing technology was discounted,
taking into account risks related to the characteristics and
applications of the technology, existing and future markets, and
assessments of the life cycle stage of technology. The analysis resulted
in a valuation of approximately $29,850,000 for developed technology
that had reached technological feasibility and therefore was
capitalizable. The developed technology is being amortized on a straight
line basis over a six year period.
The value of the assembled workforce was derived by estimating the
costs to replace the existing employees, including recruiting and hiring
costs and training costs for each category of employee. The analysis
yielded a valuation of approximately $2,800,000 for the assembled
workforce. The asset is being amortized on a straight-line basis over a
two year period.
The goodwill allocation is approximately $24,100,000.
The value of the in-process research and development was determined
based on the expected cash flow attributed to the in-process projects,
taking into account revenue that is attributable to previously developed
technology, the level of effort to date in the in-process research and
development, the percentage of completion of the project and the level
of risk associated with the in-process technology. The projects
identified as in process at Radwiz are those that will be underway at
the time of the acquisition of Radwiz and would, after consummation of
the acquisition, require additional effort to establish technological
feasibility. These projects have identifiable technological risk factors
that indicate that even though successful completion is expected, it is
not assured. The value of the in-process research and development was
determined as approximately $3,600,000. In-process technology acquired
in the transaction consists primarily of additions to Radwiz's core
technology, which is related to Radwiz's planned development of new
features. The majority of the intended functionality of these new
features is not supported by Radwiz's current technology. Intended new
features include offering: end-to-end carrier quality of service;
allowing access via an ATM network; and, providing ISDN line
functionality.
The Company expects that the in-process technology will be
successfully developed, and that initial benefits from these projects
will begin in calendar 2000. Notwithstanding the Company's expectation
that the in-process technology will be successfully developed, there
remain significant technical challenges that must be resolved in order
to complete the in- process technology.
The following selected unaudited pro forma combined results of
operations of the Company, Imedia and Radwiz for the year ended December
31, 1999 and 1998 have been prepared assuming that the acquisitions
occurred at the beginning of the period presented. The following
selected unaudited pro forma financial information is not necessarily
indicative of the results that would have occurred had the acquisition
been completed at the beginning of the period indicated nor is it
indicative of future operating results (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Revenues.....................................$102,280 $34,754
Net loss applicable to common stockholders...($75,422) ($59,796)
Net loss per share applicable to common
stockholders............................... ($2.92) ($5.60)
Shares used in calculation of net loss per
share applicable to common stockholders.... 25,832 10,687
</TABLE>
The net loss applicable to common stockholders and net loss per share
applicable to common stockholders in 1999 does not include the in-
process research and development charges of approximately $11,000,000
and $3,600,000 for Imedia and Radwiz, respectively.
17. Subsequent Events (Unaudited)
In October 1999, the Company entered into a Share Purchase Agreement
(the "Telegate Agreement") to acquire Telegate Ltd, an Israeli company.
Telegate produces telephony and data access platforms that are deployed
by service providers to deliver efficient carrier-class voice services
over cable. Telegate also provides in-home networking capability for
telephony and data, based on the Digital Enhanced Cordless Telephony
(DECT) standard. In general, the Telegate shareholders and vested
optionholders will receive a total of 2,200,000 shares and options to
purchase shares of the Company's common stock and a cash payment equal
to Telegate's net cash balance at closing minus $2,000,000. The total
purchase price is estimated to be approximately $144,950,000. The
transaction was completed on January 2, 2000. We expect to account for
the acquisition as a purchase transaction.
The following selected unaudited pro forma combined results of
operations of the Company, Imedia, Radwiz and Telegate for the year
ended December 31, 1999 and 1998 have been prepared assuming that the
acquisitions occurred at the beginning of the period presented. The
following selected unaudited pro forma financial information is not
necessarily indicative of the results that would have occurred had the
acquisition been completed at the beginning of the period indicated nor
is it indicative of future operating results (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Revenues.....................................$111,424 $38,323
Net loss applicable to common stockholders...($84,696) ($65,806)
Net loss per share applicable to common
stockholders............................... ($3.02) ($5.11)
Shares used in calculation of net loss per
share applicable to common stockholders.... 28,032 12,887
</TABLE>
The net loss applicable to common stockholders and net loss per share
applicable to common stockholders in 1999 does not include the in-
process research and development charges of approximately $11,000,000
and $3,600,000 for Imedia and Radwiz, respectfully.
In February 2000, the Company entered into an Asset Purchase
Agreement (the "ANE Agreement") to acquire certain assets and assume
certain liabilities of the Access Network Electronics Division (ANE) of
Tyco Electronics Corporation, a subsidiary of Tyco International Ltd.
ANE produces DSL (Digital Subscriber Line) systems that provide multiple
phone lines over the existing copper telephony network. In general, we
will issue shares of our common stock at closing valued at approximately
$85,000,000 based on the volume weighted average of the per share sales
price of the Company's common stock as reported on the Nasdaq National
Market for the ten consecutive trading days prior to the closing date.
In addition, the Company has agreed to establish an employee retention
program for purposes of retaining the certain identified employees of
ANE. The retention program provides for up to 3 annual payments to the
identified employees in a total amount of approximately $4,500,000
provided the employees remain employed by the Company. The retention
payments will be charged to expense over the employees' respective
periods of service. The transaction is subject to customary closing
conditions and is expected to close in the second quarter of 2000. We
expect to account for the acquisition as a purchase transaction.
In February 2000, the Company also entered into a Share Purchase
Agreement (the "Combox Agreement") to acquire Combox Ltd ("Combox"), an
Israeli company. Combox is a manufacturer of broadband data systems and
satellite communications based on international standards. Combox's
cable data access systems conform to the growing EuroModem international
specification, based on the Digital Video Broadcasting (DVB) standard.
In general, the Combox shareholders will receive a total of 775,000
shares of the Company's common stock. The total purchase price is
estimated to be approximately $92,000,000 based on the fair market value
of the Company's common stock on the days immediately preceding and
following the date the acquisition was announced. In addition, the
Company will issue options to purchase common stock of the Company to
the vested and unvested optionholders of Combox options. The
transaction is subject to customary closing conditions and is expected
to close in the second quarter of 2000. We expect to account for the
acquisition as a purchase transaction.
In February 2000, the Company's board of directors approved a two-
for-one split of the Company's outstanding shares of common stock to be
effected in the form of a stock dividend. The stock split is pending
stockholder approval of an increase in the Company's authorized shares
and therefore the changes in the capital structure resulting from the
split have not been given retroactive effect in the Company's
consolidated financial statements as of December 31, 1999.
In March 2000, the Company and Telegate, now a subsidiary of the
Company, entered into an Asset Purchase Agreement ("Internet Telecom
Agreement") under which Telegate agreed to purchase certain assets of
Internet Telecom Ltd. ("Internet Telecom"), an Israeli company.
Internet Telecom is a supplier of PacketCable and other standards-based,
voice-over-IP ("Internet Protocol") systems and technologies. In
general, Telegate will acquire the assets of Internet Telecom in
exchange for shares of the Company sock valued at approximately $44.0
million based on the fair market value of the Company's stock on the
days immediately preceding and following the announcement of the
acquisition and a cash payment estimated at approximately $2,000,000.
The transaction is subject to customary closing conditions and is
expected to close in the second quarter. We expect to account for the
transaction as a purchase transaction.
In March 2000, Rogers Communications purchased 1,843,109 shares of
the Company's common stock. The stock was purchased pursuant to two
warrants to purchase common stock issued to Rogers Communications in
connection with the Product Development Assistance Agreement (note 10).
The shares were purchased on a net exercise basis and resulted in no
proceeds to the Company.
In March 2000, the Company entered into a Share Purchase Agreement
to acquire Ultracom Ltd. ("Ultracom"), an Israeli company. Ultracom is a
supplier of broadband systems-on-silicon. In general the Ultracom
shareholders and vested optionholders will receive shares and option of
the Company's tock valued at approximately $30,000,000 based on the
closing price of the Company's common stock as reported by Nasdaq on the
fifth business day prior to the Closing and a cash payment estimated at
approximately $2,300,000. The Company will also assume the unvested
Ultracom options, the value of which will be included in the purchase
price. The transaction is subject to customary closing conditions and
is expected to close in the second quarter. We expect to account for
the transaction as a purchase transaction.
<PAGE>
PART III
ITEM 10. Directors and Officers of the Registrant
Our directors and executive officers and their ages as of March
10, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
----------------------------- ------------- ------------
<S> <C> <C>
Dr. Zaki Rakib(2)............. 41 Chief Executive Officer
Shlomo Rakib.................. 43 Chairman of the Board
Chief Technical Officer
Dennis J. Picker.............. 52 Chief Operating Officer
Ray M. Fritz.................. 54 Chief Financial Officer
Michael D'Avella............. 41 Director
Alek Krstajic................ 36 Director
Christopher Schaepe..(1)(2).. 36 Director
Lewis Solomon..(1)........... 66 Director
Mark Stevens..(2)............ 40 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
The Board of Directors is divided into three classes, each having
a three-year term. Mr. Krstjic, Mr. Solomon and Mr. Stevens are Class
I directors, whose terms expire in 2002. Mr. D'Avella and Mr. Shlomo
Rakib are Class II directors, whose terms expire in 2000. Mr. Schaepe
and Dr. Zaki Rakib are Class III directors, whose terms expire in 2001.
Zaki Rakib co-founded Terayon in 1993 and has served as Chief
Executive Officer since January 1993 and as a director since February
1995. From January 1993 to July 1998, Dr. Rakib also served as Chief
Financial Officer of the Company. Prior to co-founding the Company,
Dr. Rakib served as Director of Engineering for Cadence Design Systems,
an electronic design automation software company, from 1990 to 1994.
Prior to joining Cadence, Dr. Rakib was Vice President of Engineering
at Helios Software, which was acquired by Cadence in 1990. Dr. Rakib
serves on the board of a privately held company. Dr. Rakib holds B.S.,
M.S. and Ph.D. degrees in engineering from Ben-Gurion University in
Israel. Dr. Rakib is the brother of Shlomo Rakib, the Company's
Chairman of the Board, President and Chief Technical Officer and a
director of the Company.
Shlomo Rakib co-founded Terayon in 1993 and has served as
Chairman of the Board and President since January 1993 and as Chief
Technical Officer since February 1995. Prior to co-founding the
Company, Mr. Rakib served as Chief Engineer at PhaseCom, Inc., a
communications products company, from 1981 to 1993, where he pioneered
the development of data and telephony applications over cable.
Mr. Rakib is the inventor of several patented technologies in the area
of data and telephony applications over cable. Mr. Rakib holds a
B.S.E.E. degree from Technion University in Israel. Mr. Rakib is the
brother of Zaki Rakib, the Chief Executive Officer and a director of
the Company.
Dennis J. Picker has served as Chief Operating Officer since
February 1998 and served as Vice President from October 1997 to
February 1998 and Vice President, Engineering from May 1996 to October
1997. From 1994 to April 1996, Mr. Picker was Director of the Cable
Data Products Business Unit of Motorola, Inc., an electronics company.
Mr. Picker holds a B.S. degree in electrical engineering from the
University of Pennsylvania and a M.S. degree in electrical engineering
from Northwestern University.
Ray M. Fritz has served as the Company's Chief Financial Officer
since July 1999. Prior to joining the Company, Mr. Fritz was Vice
President of Finance and Operations and Chief Financial Officer of
GigaLabs Inc., a provider of high performance input/output switching
solutions, from December 1997 to July 1999. From August 1994 until
August 1997, Mr. Fritz was with Clarify, Inc., a provider of front
office automation systems, as its Vice President, Finance and
Operations and Chief Financial Officer. From May 1990 to August 1994,
he served as Director, Finance of Synopsys, Inc., an electronic design
automation company, and from April 1986 to May 1990, Mr. Fritz served
as Vice President and Controller of LSI Logic Corporation, a
semiconductor company. Prior to that, he held a variety of finance
positions with Xerox Corporation, The Singer Company and Shell Oil
Company. Mr. Fritz holds a B.S. degree in finance/business
administration from Benedictine College, a M.B.A. degree from Atlanta
University and a M.S. degree in tax from Golden Gate University.
Michael D'Avella has served as a director of the Company since
April 1998. Mr. D'Avella is the Senior Vice President, Planning for
Shaw Communications Inc., a diversified communications company and a
leading cable operator in Canada. Mr. D'Avella has held a variety of
senior management positions at Shaw since 1991. Prior to that, he held
positions with the Canadian Cable Television Association and Telesat
Canada. He is a director of Canadian Satellite Communications Inc., a
distributor of satellite based broadcast signals and provider of
satellite communications for businesses, and GT Group Telecom Inc., a
broadband services company, and several privately held companies.
Mr. D'Avella holds a B.A. degree in economics and planning from the
University of Toronto in Canada.
Alek Krstajic has served as a director of the Company since July
1999. Mr. Krstajic is the Senior Vice President Interactive Services,
Sales and Product Development for Rogers Cable Inc., and has
held a variety of senior management positions at Rogers since 1994.
Mr. Krstajic is a director of several privately held companies. Mr. Krstajic
holds a B.A. degree in economics from the University of Toronto in
Canada and attended the executive educational program at Wharton School
of Business at the University of Pennsylvania.
Christopher J. Schaepe has served as a director of the Company
since March 1995. Mr. Schaepe is a Managing Director of Weiss, Peck &
Greer, L.L.C., a technology-focused venture capital firm, which he
joined in 1991. Previously, Mr. Schaepe served in corporate finance
and capital markets roles for three years at Goldman, Sachs & Company
after his employment as a software engineer at IBM Corporation. He is
a director of Galileo Technology Ltd., a communications semiconductor
company, Quantum Effect Devices, Inc., a communications microprocessor
supplier, and several privately held companies. Mr. Schaepe holds B.S.
and M.S. degrees in computer science from the Massachusetts Institute
of Technology and an M.B.A. degree from Stanford Business School.
Lewis Solomon has served as a director of the Company since March
1995. Mr. Solomon has been a principal of G&L Investments, a
consulting firm, since 1989 and currently serves as the Co-Chairman of
the Board of Broadband Services, Inc. From 1983 to 1988, he served as
Executive Vice President at Alan Patricof Associates, a venture capital
firm focused on high technology, biotechnology and communications
industries. Prior to that, Mr. Solomon served in various capacities
with General Instrument Corp., most recently as Senior Vice President.
From April 1986 to January 1997, he served as Chairman of the Board of
Cybernetic Services, Inc., an LED systems manufacturer, which commenced
a Chapter 7 bankruptcy proceeding in April 1997. Mr. Solomon serves on
the boards of Anadigics, Inc., a manufacturer of integrated circuits;
Anacomp, Inc., a manufacturer of data storage systems; and Artesyn
Technologies, Inc., a power supply and power converter supply company.
Mr. Solomon also serves on the boards of several privately held
companies.
Mark A. Stevens has served as a director of the Company since
March 1995. Mr. Stevens has been a General Partner of Sequoia Capital,
a venture capital investment fund, since March 1993. Mr. Stevens
currently serves on the Board of Directors of NVidia Corporation, a
graphics software and processor company, Medicalogic, Inc., an on-line
health enterprise company, MP3.com, Inc., an on-line music services
provider and retail company and several privately held companies.
Prior to joining Sequoia in 1989, he held technical sales and marketing
positions at Intel Corporation. Mr. Stevens holds a B.S.E.E. degree, a
B.A. degree in economics and an M.S. degree in computer engineering
from the University of Southern California and an M.B.A. degree from
Harvard Business School.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16(a)"), requires the Company's directors and executive
officers, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file with the SEC initial
reports of ownership and report of changes in ownership of common stock
and other equity securities of the Company. Officers, directors and
greater than 10 percent stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies
of such reports furnished to the Company and written representations
that no other reports were required, during the fiscal year ended
December 31, 1999, all Section 16(a) filing requirements applicable to
its directors, officers and greater than 10 percent beneficial owners
were complied with except that Mr. Schaepe and Mr. Krstajic each filed
late one report covering one transaction.
ITEM 11. Executive Compensation
Compensation of Directors
Mr. Solomon receives $2,000 per month for his service as a member
of the Board of Directors and Mr. D'Avella receives $3,000 per month
for his services as a member of the Board of Directors. No other
director of the Company receives cash for services provided as a
director. Certain directors have been granted options to purchase
Common Stock in the past. In the fiscal year ended December 31, 1998,
the total compensation paid to non-employee directors was $48,000. The
members of the Board of Directors are also eligible for reimbursement
for their expenses incurred in connection with attendance at Board of
Directors and Committee meetings in accordance with Company policy.
Each non-employee director of the Company also receives non-
discretionary automatic stock option grants under the Directors' Plan.
Only non-employee directors of the Company who are not employees of or
consultants to the Company or of any affiliate of the Company (a "Non-
Employee Director") are eligible to receive options under the
Directors' Plan. Options granted under the Directors' Plan are
intended by the Company not to qualify as incentive stock options under
the Code. The Directors' Plan is administered by the Board, unless the
Board delegates administration to a Committee comprised of members of
the Board.
The aggregate number of shares of Common Stock that may be issued
pursuant to options granted under the Directors' Plan is 200,000
shares. Pursuant to the terms of the Directors' Plan, after August
1998, each person who is elected or appointed for the first time to be
a Non-Employee Director automatically shall, upon the date of his or
her initial election or appointment to be a Non-Employee Director by
the Board or stockholders of the Company, be granted an option to
purchase 30,000 shares of Common Stock. In addition, on the day
following each Annual Meeting of Stockholders of the Company ("Annual
Meeting"), commencing with the Annual Meeting in 1999, each person who
is then serving as a Non-Employee Director automatically shall be
granted an option to purchase 12,500 shares of Common Stock, which
amount shall be prorated for any Non-Employee Director who has not
continuously served as a Non-Employee Director for the 12-month period
prior to the date of such Annual Meeting. In addition, on the day
following each Annual Meeting, commencing with the Annual Meeting in
1999, each Non-Employee Director who is then serving as a member of a
committee of the Board of Directors automatically shall be granted, for
each such committee, an option to purchase 3,000 shares of Common Stock
of the Company, which amount shall be prorated for any Non-Employee
Director who has not continuously served as a member of such committee
for the 12-month period prior to the date of such Annual Meeting.
The exercise price of the options granted under the Directors'
Plan will be equal to the fair market value of the Common Stock on the
date of grant. No option granted under the Directors' Plan may be
exercised after the expiration of 10 years from the date it was
granted. Options granted under the Directors' Plan vest and become
exercisable as to 33% of the shares on the first anniversary of the
date of grant and 1/36th of the shares monthly thereafter. Options
granted under the Directors' Plan generally are non-transferable.
However, an optionee may designate a beneficiary who may exercise the
option following the optionee's death. An optionee whose service
relationship with the Company or any affiliate (whether as a Non-
Employee Director of the Company or subsequently as an employee,
director, or consultant of either the Company or an affiliate) ceases
for any reason may exercise vested options for the term provided in the
option agreement (3 months generally, 12 months in the event of
disability and 18 months in the event of death).
In the event of certain changes in control of the Company, all
outstanding awards under the Directors' Plan either will be assumed or
substituted for by any surviving entity. If the surviving entity
determines not to assume or substitute for such awards, the vesting and
time during which such options may be exercised shall be accelerated
prior to such event and the options will terminate if not exercised
after such acceleration and at or prior to such event. Unless
terminated sooner by the Board of Directors, the Directors' Plan will
terminate in June 2008.
During the last fiscal year, the Company granted options covering
46,500, 25,000 and 30,000 shares to non-employee directors of the
Company at exercise prices per share of $45.25, $42.52 and $48.50,
respectively. The exercise prices were also the respective fair market
values of such Common Stock on the date of grant (based on the closing
sale price reported on the Nasdaq National Market for the date of
grant). As of March 10, 2000, no options had been exercised under the
Directors' Plan.
Directors who are employees of the Company do not receive
separate compensation for their services as directors.
Compensation of Executive Officers
Summary of Compensation
The following table shows for the fiscal years ended December 31,
1999, 1998 and 1997, compensation awarded or paid to, or earned by, the
Company's Chief Executive Officer and its other four most highly
compensated executive officers at December 31, 1999 (the "Named
Executive Officers"):
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation Awards
-------------------------------------------------------
Other Securities
Name and Annual Underlying LTIP All Other
Principal Salary Bonus Compensa- Options/ PayoutCompensa-
Position Year ($) ($) tion($) SARs (#) ($) tion ($)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Zaki Rakib 1999 232,500 66,000 -- -- -- --
Chief Executive 1998 172,500 -- -- -- -- --
Officer 1997 150,000 12,500 -- -- -- --
Shlomo Rakib 1999 232,500 45,000 -- -- -- --
President and 1998 172,500 -- -- -- -- --
Chief Technical 1997 150,000 12,500 -- -- -- --
Officer
Dennis Picker 1999 181,250 40,000 -- 10,000 -- --
Chief Operating 1998 153,000 -- -- 40,000 -- --
Officer 1997 129,000 31,800 75,166(1) -- -- --
Ray M. Fritz 1999 175,416 43,333 -- 20,000 -- --
Chief Financial 1998 74,079 -- -- 180,000 -- --
Officer 1997 -- -- -- -- -- --
Brian Bentley 1999 99,192 -- 84,574(2) -- -- --
Vice President 1998 125,650 -- 93,974(2) 10,000 -- --
Worldwide Sales(31997 -- -- -- -- -- --
</TABLE>
(1) Consists of reimbursement to Mr. Picker for travel costs of which
$35,140 was attributable to tax gross-up payments made by the
Company.
(2) Represents sales commissions earned in 1998 and 1999.
(3) Mr. Bentley is no longer an employee of the Company.
Stock Option Grants And Exercises
The Company grants options to its executive officers under its
1995 Stock Option Plan (the "1995 Plan") and its 1997 Equity Incentive
Plan (the "1997 Plan," together with the 1995 Plan, the "Plans"). As
of March 10, 2000, options to purchase a total of 386,182 shares and
2,902,502 shares were outstanding under the 1995 Plan and the 1997
Plan, respectively, and options to purchase 181,186 shares and 880,990
shares remained available for grant under the 1995 Plan and the 1997
Plan, respectively.
The following tables show for the fiscal year ended December 31,
1999, certain information regarding options granted to, exercised by,
and held at year-end by, the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential
--------------------------------------Realizable Value
Number of % of Total at Assumed Annual
Securities Options Rates of Stock Price
UnderlyingGranted toExercise Appreciation
Options Employees or Base Expira- for Option Term (4)
Granted in Fiscal Price tion ---------------------
Name (#) (1) Year (2) ($/Sh)(3) Date 5% ($) 10% ($)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dr.Zaki Rakib -- -- -- -- --
Shlomo Rakib -- -- -- -- --
Dennis Picker 10,000 0.25% 37.375 04/04/09 235,049 470,099
Ray M. Fritz 20,000 0.50% 37.375 04/04/09 595,661 1,171,777
Brian Bentley -- -- -- -- -- --
</TABLE>
(1) Options vest at a rate 50% on the first anniversary of the
vesting commencement date and 1/24th each month thereafter. The term
of each option granted is generally the earlier of (i) 10 years or
(ii) 90 days after termination of the optionee's services to the
Company.
(2) Based on an aggregate of 3,876,448 options granted to employees,
consultants and directors of the Company, including the Named
Executive Officers, during the fiscal year ended December 31, 1999.
(3) The exercise price per share of each option was equal to the fair
market value of the Common Stock on the date of grant as determined
by the Board of Directors after consideration of a number of
factors, including, but not limited to, the development life cycle
of the Company's products, the Company's financial performance,
market conditions, the preferred rights and privileges of shares of
equity securities sold to or purchased by outside investors, and
third-party appraisals.
(4) The potential realizable value is calculated based on the terms
of the option at its time of grant (10 years). It is calculated
assuming that the fair market value of the Company's Common Stock on
the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option is exercised
and sold on the last day of its term for the appreciated stock
price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARS
Options/SARS at FY_End ($)
Shares at FY-End Exercisable/
Name Acquired on Value Exercisable/ Unexerciable
Exercise(#)Realized($)Unexerciable (1)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Dr.Zaki Rakib -- -- -- --
Shlomo Rakib -- -- -- --
Dennis Picker 181,699 7,388,851 73,034 (2) 3,971,983
Ray M. Fritz 10,000 664,063 153,001 (3) 7,532,665
Brian Bentley 59,786 2,416,173 -- --
</TABLE>
(1) Value is based upon the closing price of $62.8125 of the
Company's on December 31, 1999 on the Nasdaq National Market.
(2) As of December 31, 1999, 133,001 shares of common stock are
currently exercisable upon the early exercise of options vesting
through May 2003 and 20,000 shares are not currently exercisable
under options vesting through April 2001.
(3) As of December 31, 1999, 28,001 shares are currently
exercisable upon the early exercise of options vesting through May
2001, 35,033 shares of currently exercisable upon the early exercise
of options vesting through May 2003 and 10,000 are not currently
exercisable under options vesting through April 2001.
Employment Agreements
In February 1993, the Company entered into an employment
agreement with Shlomo Rakib to serve as President and Chairman of the
Board of Directors. The employment agreement is for a specified
duration of seven years, but it is terminable at will or without cause
at any time upon written notice. In February 1993, the Company also
entered into an employment agreement with Zaki Rakib to serve as Chief
Executive Officer and Chief Financial Officer. The employment
agreement is not for a specified term and is terminable at will or
without cause at any time upon written notice. Both employment
agreements further provide that the Company's Board of Directors will
set each executive's salary in accordance with the payroll policies of
the Company as constituted from time to time.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION (2)
The Compensation Committee of the Board of Directors
("Committee") consists of Dr. Zaki Rakib, the Company's Chief Executive
Officer, and Messrs. Schaepe and Stevens are not currently officers nor
employees of the Company. The Committee is responsible for
establishing the Company's compensation programs for all employees,
including executives. Dr. Rakib is not present during the discussion
of his compensation. For executive officers, the Committee evaluates
performance and determines compensation policies and levels.
COMPENSATION PHILOSOPHY
The goals of the compensation program are to align compensation
with business objectives and performance and to enable the Company to
attract, retain and reward executive officers and other key employees
who contribute to the long-term success of the Company and to motivate
them to enhance long-term stockholder value. Key elements of this
philosophy are:
* The Company pays competitively compared to leading
technology companies with which the Company competes for
talent. To ensure that pay is competitive, the Company
regularly compares its pay practices with these companies
and establishes its pay parameters based on this review.
* The Company maintains annual incentive opportunities
sufficient to provide motivation to achieve specific
operating goals and to generate rewards that bring total
compensation to competitive levels.
* The Company provides significant equity-based incentives
for executives and other key employees to ensure that they
are motivated over the long term to respond to the
Company's business challenges and opportunities as owners
and not just as employees.
Philosophy Regarding Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Internal Revenue Code (the "Code") limits the
Company to a deduction for federal income tax purposes of no more than
$1 million of compensation paid to certain Named Executive Officers in
a taxable year. Compensation above $1 million may be deducted if it is
"performance-based compensation" within the meaning of the Code.
The Compensation Committee has determined that stock options
granted under the Company's 1997 Equity Incentive Plan with an exercise
price at least equal to the fair market value of the Company's common
stock on the date of grant shall be treated as "performance-based
compensation."
Base Salary. The Committee annually reviews each executive
officer's base salary. When reviewing base salaries, the Committee
considers individual and corporate performance, levels of
responsibility, prior experience, breadth of knowledge and competitive
pay practices.
Long-Term Incentives. The Company's long-term incentive program
consists of the 1995 Stock Option Plan, the 1997 Equity Incentive Plan
and the 1999 Non-Officer's Plan. The option programs utilize vesting
periods (generally five years) to encourage key employees to continue
in the employ of the Company. Through option grants, executives
receive significant equity incentives to build long-term stockholder
value. Grants are made at 100% of fair market value on the date of
grant. Executives receive value from these grants only if the value of
the Company's Common Stock appreciates over the long-term. The size of
option grants is determined based on competitive practices at leading
companies in the technology industry and the Company's philosophy of
significantly linking executive compensation with stockholder
interests. In 1999, the Committee granted stock options to particular
executives that will vest over a two-year period. These grants were
intended to provide incentive to maximize stockholder value over the
next several years. The Committee believes this approach creates an
appropriate focus on longer term objectives and promotes executive
retention.
CHIEF EXECUTIVE OFFICER COMPENSATION
Dr. Rakib's base salary at the beginning of 1999 Chief Executive
Officer was $172,500. Following the Committee's review of compensation
paid by leading technology companies, the Committee set Dr. Rakib's
base annual salary through 1999 at $250,000. In setting this amount,
the Committee took into account (i) its belief that Dr. Rakib is the
Chief Executive Officer of a leading technology company with
significant and broad-based experience in the broadband equipment
industry, (ii) the scope of Dr. Rakib's responsibility, and (iii) the
Board's confidence in Dr. Rakib to lead the Company's continued
development.
OTHER EXECUTIVE OFFICERS' COMPENSATION
In April 1999, the Committee established the base salary ranges
for other executive officers based on data regarding executive
compensation of the Company's competitors, including published survey
information, each executive officer's base salary for prior years, past
performance, the scope of such officer's responsibility and other
information available to the Committee. In April 1999, the Committee
established bonus compensation formulas for each level of upper
management based on individual and Company-wide performance criteria.
The Committee also awarded stock options to certain executive officers
to provide additional incentives.
COMPENSATION COMMITTEE
Dr. Zaki Rakib
Christopher J. Schaepe
Mark A. Stevens
Compensation Committee Interlocks and Insider
Participation
Prior to February 1998, the Company did not have a Compensation
Committee of the Board of Directors, and the entire Board participated
in all compensation decisions, except that Messrs. Rakib did not
participate in decisions relating to their respective compensation. In
February 1998, the Board formed the Company's Compensation Committee to
review and recommend to the Board compensation and benefits for the
Company's executive officers and administer the Company's stock
purchase and stock option plans. Each of the Company's directors, or
an affiliated entity, holds securities of the Company. In January
1999, the Compensation Committee created a Non-Officer Stock Option
Committee of the Board of Directors, which consists of Dr. Zaki Rakib.
The function of the Non-Officer Stock Option Committee is to grant
options to purchase shares of common stock to eligible persons who are
not officers of the Company subject to Section 16 of the Securities
Exchange Act of 1934, as amended.
Performance Measurement Comparison (1)
The following graph shows the total stockholder return of an
investment of $100 in cash on August 17, 1998 for the Company's Common
Stock and an investment of $100 in cash on August 31, 1998 for (i) the
Standards & Poor's 500 Index (the "S&P 500") and (ii) the Nasdaq
Telecommunication Stocks Index (the "Nasdaq Telecom"). All values
assume reinvestment of the full amount of all dividends and are
calculated as of last day of each month:
Comparison of 19 Month Cumulative Total Return on Investment
<TABLE>
<CAPTION>
Nasdaq
Company S&P 500 Telecom
---------------------------
<S> <C> <C> <C>
August 1998 100 100 100
September 1998 97 106 113
October 1998 92 115 123
November 1998 236 122 130
December 1998 279 129 155
January 1999 314 135 179
February 1999 239 130 179
March 1999 308 135 194
April 1999 311 141 204
May 1999 247 137 207
June 1999 430 145 206
July 1999 301 140 201
August 1999 277 140 192
September 1999 376 136 191
October 1999 337 145 226
November 1999 477 148 235
December 1999 483 156 271
January 2000 823 148 274
February 2000 2,038 146 299
</TABLE>
(1) This Section is not "soliciting material," is not deemed "filed"
with the SEC and is not to be incorporated by reference in any filing
of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or
after the date hereof and irrespective of any general incorporation
language in any such filing.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of March 10, 2000 by: (i)
all those known by the Company to be beneficial owners of more than
five percent of its Common Stock; (ii) each director; (iii) each of the
executive officers named in the Summary Compensation Table; and (iv)
all current executive officers and directors of the Company as a group.
Unless otherwise noted, the address for the individuals listed below
is: c/o Terayon Communication Systems, Inc., 2952 Bunker Hill Lane,
Santa Clara, California 95054.
<TABLE>
<CAPTION>
Beneficial Ownership
----------------------
Number of Percent of
Beneficial Owner Shares Total
---------------- ---------- ----------
<S> <C> <C>
Shaw Communications, Inc. (2)..... 3,036,159 10.5%
630 Third Avne., S.W., Suite 900
Calgary, Alberta T2P 4L4
Rogers Communications Inc. ....... 1,843,809 6.4%
333 Bloor Street East
Toronto, Ontaria M4W 1G9
Dr. Zaki Rakib.................... 1,600,000 5.5%
Shlomo Rakib...................... 1,600,000 5.5%
Michael D'Avella (2) (3).......... 3,057,509 10.6%
Alek Krstajic (4)................. 1,843,809 6.4%
Christopher J. Schaepe(5)......... 121,496 *
Mark A. Stevens (6)............... 75,741 *
Lewis Solomon..................... 30,000 *
Brian Bentley (7).................
Ray M. Fritz (8).................. 144,829 *
Dennis Pkcker (9)................. 123,118 *
All executive officers and
directors as a group
(9 persons) (10)................ 8,485,695 29.2%
</TABLE>
* Less than one percent.
(1) This table is based upon information supplied by officers,
directors and principal stockholders and Schedules 13D and 13G
filed with the Securities and Exchange Commission. Unless
otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that
all of the stockholders named in the table have sole voting power
and dispositive power with respect to all shares of stock shown as
beneficially owned by them. Applicable percentages are based on
28,911,824 shares outstanding on March 10, 2000. In computing the
number of shares indicated as beneficially owned by a person and
the percentage of ownership of that person, shares of Common Stock
subject to options held by that person that are exercisable within
60 days are deemed outstanding. These shares, however, are not
deemed outstanding for the purpose of computing the percentage of
ownership of any other person.
(2) Shares beneficially owned includes 36,159 shares issuable pursuant
to a warrant exercisable within 60 days of March 10, 2000.
(3) Shares beneficially owned includes 3,036,159 shares held by Shaw
Communications Inc. Mr. D'Avella, a director of the Company, is
the Senior Vice President, Planning for Shaw. Also includes 20,350
shares issuable upon early exercise of options vesting through
April 2001, of which 8,601 will be fully vested and no longer
subject to repurchase within 60 days of March 10, 2000. Mr.
D'Avella may be deemed to have voting and investment power over the
shares held by Shaw. He disclaims beneficial ownership as to all
shares held by Shaw.
(4) Shares beneficially owned includes 1,843,809 shares held by Rogers
Communications Inc. Mr. Krstajic, a director of the Company, is
Senior Vice Prsident, Interactive Services, Sales and Product
Development for Rogers Cable Inc. Mr. Krstajic may be deemed to have voting and
investment power over the shares held by Rogers. He disclaims
beneficial ownership as to all shares held by Rogers.
(5) Shares beneficially owned includes 112,584 shares held by entities
associated with Weiss, Peck & Greer, LLC., 5,000 of which are
subject to repurchase by the Company within 60 days of March 10,
2000. Christopher J. Schaepe, a director of the Company, is a
General Partner of WPG Venture Partners III, L.P., the fund
investment advisory member of the entities associated with Weiss,
Peck & Greer. Mr. Schaepe may be deemed to have voting and
investment power over the shares held by the entities associated
with Weiss, Peck & Greer. He disclaims beneficial ownership except
to the extent of his pecuniary interest therein.
(6) 5,000 of these shares are subject to repurchase by the Company
within 60 days of March 10, 2000.
(7) Mr. Bentley is no longer an employee of the Company.
(8) Shares beneficially owned includes 133,001 shares issuable upon the
early exercise of options, 16,001 of which will be fully vested and no
longer subject to repurchase within 60 days of March 10, 2000.
Also includes 10,833 additional shares of which Mr. Fritz has an
option to acquire.
(9) Shares beneficially owned includes 15,332 shares subject to
repurchase by the Company within 60 days of March 10, 2000 and
28,001 shares are issuable upon early exercise of options vesting
through May 2001. Includes 35,033 shares issuable upon the early
exercise of options vesting through May 2003, of which 10,366
shares will be fully vested and no longer subject to repurchase
within 60 days of March 10, 2000. Also includes 5,417 additional
shares of which Mr. Picker has an option to acquire.
(10) Shares beneficially owned includes (i) 216,385 shares issuable upon
the early exercise of options vesting through July 2003, 34,958 of
which will be fully vested and no longer subject to repurchase
within 60 days of March 10, 2000, (ii) 25,332 shares subject to
repurchase by the Company within 60 days of March 10, 2000 (iii)
16,250 additional shares of which all directors and officers as a
group have options to acquire within 60 days of March 10, 2000 and
(iv) 36,159 shares issuable pursuant to warrants exercisable within
60 days of March 10, 2000.
ITEM 13. Certain Relationship and Related Transactions
Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed
on its behalf by the undersigned, thereunto due authorized, in County of
Santa Clara, State of California, on the 28th day of April, 2000.
TERAYON COMMUNICATION SYSTEMS, INC.
/s/ Ray M. Fritz
By___________________________________
Ray M. Fritz
Chief Financial Officer
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated January 17, 2000, included in the
Annual Report on Form 10-K of Terayon Communication Systems, Inc. for the year
ended December 31, 1999, with respect to the consolidated financial statements,
as amended, inlcuded in the Form 10-K/A.
/s/ Ernst & Young LLP
San Jose, California
April 27, 2000
