<PAGE>
SECURITIES EXCHANGE AND COMMISSION
Washington, D. C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 18, 2000
Terayon Communication Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
(Commission File No.) (I.R.S. Employer Identification No.)
2952 Bunker Hill Lane
Santa Clara, CA 95054
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 727-4400
<PAGE>
Item 2. Acquisition or Disposition of Assets.
A. ComBox Ltd.
On April 18, 2000 (the "ComBox Closing Date"), the registrant,
Terayon Communication Systems, Inc. ("Terayon"), acquired ComBox Ltd.
("ComBox"), pursuant to that certain Share Purchase Agreement (the "ComBox
Agreement") between and among Terayon, the shareholders of ComBox and ComBox
dated February 3, 2000 (the "ComBox Acquisition"). ComBox develops, markets and
sells broadband data systems and satellite communications technology.
Pursuant to the ComBox Agreement, Terayon acquired all outstanding
shares of capital stock of ComBox, and ComBox became a wholly-owned subsidiary
of Terayon on April 18, 2000 (the "Effective Time"). As consideration for the
ComBox Acquisition, the former shareholders of ComBox received an aggregate of
One Million Five Hundred Forty Seven Thousand Seven Hundred Seventy (1,547,770)
shares of Terayon common stock and approximately Two Hundred Fifty Thousand
dollars in a cash payments as described in the ComBox Agreement attached hereto
as Exhibit 2.1. The ComBox Acquisition is intended to be accounted for as a
"purchase" under the requirements of Opinion 16 of the Accounting Principles
Board of the American Institute of Certified Public Accountants ("AICPA") and
the related published interpretations of the AICPA, the Financial Accounting
Standards Board and the rules and regulations of the Securities and Exchange
Commission.
B. Internet Telecom Ltd.
On April 18, 2000, Terayon through its wholly owned subsidiary
Telegate Ltd. ("Telegate") acquired all outstanding assets of Internet Telecom
Ltd. ("Internet Telecom"), pursuant to that certain Asset Purchase Agreement
(the "Internet Telecom Agreement") between and among Telegate, Terayon and
Internet Telecom dated March 12, 2000 (the "Internet Telecom Acquisition").
Internet Telecom develops, markets and supplies PacketCable and other standards-
bases, voice-over-Internet Protocol systems and technologies.
Under the Internet Telecom Agreement, Telegate will acquire all
outstanding assets of Internet Telecom. As consideration for the Internet
Telecom Acquisition, Internet Telecom and certain former employees of Internet
Telecom currently employed by Telegate will receive an aggregate of Three
Hundred Seventy Seven Thousand Three Hundred Eighty (377,380) shares of Terayon
common stock and approximately Two Million dollars in a cash payment as
described in the Internet Telecom Agreement, attached hereto as Exhibit 2.2. The
Internet Telecom Acquisition is intended to be accounted for as a "purchase"
under the requirements of Opinion 16 of the Accounting Principles Board of the
American Institute of Certified Public Accountants ("AICPA") and the related
published interpretations of the AICPA, the Financial Accounting Standards Board
and the rules and regulations of the Securities and Exchange Commission.
C. Tyco Electronics Corporation
On April 22, 2000, Terayon acquired certain assets and assumed certain
liabilities of Tyco Electronics Corporation ("Tyco") through its acquisition of
the Access Network
<PAGE>
Electronics Division, an unincorporated division of Tyco ("ANE"), pursuant to
that certain Amended and Restated Asset Purchase Agreement (the "Tyco
Agreement") between Terayon and Tyco dated February 10, 2000 (the "ANE
Acquisition"). ANE develops, markets and produces Digital Subscriber Line (DSL)
systems that provide multiple phone lines through a single pair of copper wires.
Under the Tyco Agreement, Terayon will acquire certain assets and assume
certain liabilities of Tyco through its acquisition of ANE. As consideration for
the ANE Acquisition, Tyco will receive an aggregate of One Million Four Hundred
Four Thousand Five Hundred Fifty Two (1,404,552) shares of Terayon common stock
as described in the Internet Telecom Agreement, attached hereto as Exhibit 2.3.
The ANE Acquisition is intended to be accounted for as a "purchase" under the
requirements of Opinion 16 of the Accounting Principles Board of the American
Institute of Certified Public Accountants ("AICPA") and the related published
interpretations of the AICPA, the Financial Accounting Standards Board and the
rules and regulations of the Securities and Exchange Commission.
D. Ultracom Communications Holdings (1995) Ltd.
On April 19, 2000 (the "Ultracom Closing Date"), Terayon acquired
Ultracom Communications Holdings (1995) Ltd. ("Ultracom"), pursuant to that
certain Share Purchase Agreement (the "Ultracom Agreement") by and among
Terayon, the shareholders of Ultracom and Ultracom dated March 26, 2000 (the
"Ultracom Acquisition"). Ultracom develops, markets and sells broadband systems-
on-silicon.
Pursuant to the Ultracom Agreement, Terayon acquired outstanding shares of
capital stock of Ultracom, and Ultracom became a wholly-owned subsidiary of
Terayon on April 19, 2000 (the "Effective Time"). As consideration for the
Ultracom Acquisition, the former shareholders of Ultracom received an aggregate
of Five Hundred Thirty Six Thousand Seven Hundred Sixty Six (536,766) shares of
Terayon common stock and approximately Two Million Seven Hundred Fifty Five
Thousand Two Hundred Ninety Nine dollars in a cash payment as described in the
Ultracom Agreement, attached hereto as Exhibit 2.4. The Ultracom Acquisition is
intended to be accounted for as a "purchase" under the requirements of Opinion
16 of the Accounting Principles Board of the American Institute of Certified
Public Accountants ("AICPA") and the related published interpretations of the
AICPA, the Financial Accounting Standards Board and the rules and regulations of
the Securities and Exchange Commission.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) The following financial statements are filed as part of this report.
Financial statements of Access Network Electronics Business, a division of Tyco
Electronics Corporation.
Included herein are the statements of assets acquired and liabilities assumed of
Access Network Electronics Business as of June 30, 1999 and March 31, 2000
(unaudited) and of net sales and direct costs and operating expenses for the
year ended June 30, 1999 and for the nine months ended March 31, 1999
(unaudited) and 2000 (unaudited).
<PAGE>
Report Of Independent Accountants
To the Board of Directors
Tyco Electronics Corporation
We have audited the accompanying statement of assets acquired and liabilities
assumed of the Access Network Electronics Business (the "Business") of Tyco
Electronics Corporation as of June 30, 1999, and the related statement of net
sales and direct costs and operating expenses for the year then ended. These
statements are the responsibility of Tyco Electronics Corporation and the
Business' management. Our responsibility is to express an opinion on these
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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in these statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for inclusion in the Securities and
Exchange Commission Current Report on Form 8-K of Terayon Communication Systems,
Inc. as described in Note 2 and are not intended to be a complete presentation
of the Business' financial position and results of operation.
In our opinion the statements referred to above present fairly, in all material
respects, the assets acquired and liabilities assumed as described in Note 2 as
of June 30, 1999, and the net sales and direct costs and operating expenses as
described in Note 2 for the year then ended, of the Business in conformity with
accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 24, 2000
<PAGE>
Access Network Electronics Business
(A division of Tyco Electronics Corporation)
Statement of Assets Acquired and Liabilities Assumed
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
June 30, March 31,
1999 2000
<S> <C> <C>
Unaudited
---------
Assets Acquired
Accounts receivable, net of allowance for doubtful accounts of $284 $ 6,299 $ 7,282
Inventory 12,159 5,566
Prepaid expenses and other current assets 172 59
-------- --------
Total current assets acquired 18,630 12,907
Property and equipment 11,756 8,206
-------- --------
Total assets acquired $ 30,386 $ 21,113
======== ========
Liabilities Assumed
Accounts payable $ 3,461 $ 4,500
Other current accrued liabilities 1,919 1,680
-------- --------
Total liabilities assumed $ 5,380 $ 6,180
======== ========
</TABLE>
See accompanying Notes to the Statements of Assets Acquired and Liabilities
Assumed and of Net Sales and Direct Costs and Operating Expenses.
<PAGE>
Access Network Electronics Business
(A division of Tyco Electronics Corporation)
Statement of Net Sales and Direct Costs and Operating Expenses
(in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Year Ended Nine Months
June 30, Ended March, 31
---------------
1999 1999 2000
---- ----
Unaudited
---------
<S> <C> <C> <C>
Net sales $ 87,446 $ 70,365 $ 43,621
-------- -------- --------
Direct costs and operating expenses:
Cost of sales 60,109 49,036 31,772
Research and development 16,465 12,263 7,832
Selling, general and administrative 11,612 8,280 6,110
-------- -------- --------
Total direct costs and operating expenses 88,186 69,579 45,714
-------- -------- --------
Net sales less direct costs and operating expenses $ (740) $ 786 $ (2,093)
======== ======== ========
</TABLE>
See accompanying Notes to the Statements of Assets Acquired and Liabilities
Assumed and of Net Sales and Direct Costs and Operating Expenses.
<PAGE>
Access Network Electronics Business
(A division of Tyco Electronics Corporation)
Notes to Statements of Assets Acquired and Liabilities Assumed and of
Net Sales and Direct Costs and Operating Expenses
June 30, 1999 (amounts in thousands)
--------------------------------------------------------------------------------
1. Description of Business
The Access Network Electronics business (the "Business") of Tyco
International Ltd. operates in a single segment and is engaged in the
development, manufacture and marketing of digital subscriber line
multiplexers for telecommunications service providers. Prior to August 12,
1999, the Business operated as a division of Raychem Corporation
("Raychem"). On August 12, 1999, Raychem was acquired by Tyco International
Ltd. in a transaction accounted for using the purchase method of
accounting.
2. Basis of Presentation
On February 10, 2000, Tyco Electronics Corporation ("Tyco"), the subsidiary
of Tyco International Ltd. into which Raychem was integrated, agreed to
sell to Terayon Communication Systems, Inc. ("Terayon") for cash certain
tangible assets and Terayon agreed to assume certain liabilities of the
Business in accordance with the Amended and Restated Asset Purchase
Agreement between Tyco and Terayon. It is anticipated that the transaction
will close by the end of April 2000.
The accompanying statements of assets acquired and liabilities assumed as
of June 30, 1999 and of net sales and direct costs and operating expenses
for the year then ended have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission
for inclusion in the Current Report on Form 8-K of Terayon. No adjustments
have been made to these statements relative to the acquisition of Raychem
by Tyco.
The statement of net sales and direct costs and operating expenses includes
direct expenses of the Business for research and development,
manufacturing, marketing, selling, distribution, and administration as well
as allocations of costs incurred by Raychem primarily for administration
and management services that are directly attributed to the operations of
the Business. Corporate overhead, interest expense and income tax incurred
by Raychem have been excluded from the statement of net sales and direct
costs and operating expenses. The statement does not purport to represent
all the costs and expenses associated with a stand-alone separate company,
or the costs which may be incurred by an unaffiliated company to achieve
similar results. Complete financial statements, including historical
balance sheets, were not prepared as Raychem did not maintain the Business
as a separate business unit and has not segregated indirect operating cost
information or certain assets and liabilities in Raychem's or the Business'
accounting records. However, in the opinion of Tyco and the Business'
management, the statement reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
statement.
<PAGE>
Access Network Electronics Business
(A division of Tyco Electronics Corporation)
Notes to Statements of Assets Acquired and Liabilities Assumed and of
Net Sales and Direct Costs and Operating Expenses (Continued)
June 30, 1999 (amounts in thousands)
--------------------------------------------------------------------------------
3. Summary of Significant Policies
Use of estimates
The preparation of statements of assets acquired and liabilities assumed
and of net sales and direct costs and operating expenses in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the Business'
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Revenue from product sales is recognized at the time the product is
shipped. Provisions are established for estimated costs that may be
incurred for product warranties.
The Business sells digital subscriber line multiplexer products, primarily
to domestic customers. During the year ended June 30, 1999, 6% of revenues
were from international customers.
The following table is a summary of significant customers each comprising
greater than 10% of sales during the year ended June 30, 1999:
Company A 41%
Company B 19%
Company C 16%
Inventories
Inventories are valued at cost, computed on a first-in, first-out basis,
not in excess of market values.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions, improvements
and major renewals are capitalized. Maintenance, repairs and minor renewals
are expensed as incurred. Depreciation is provided using the straight-line
method, principally over 3 to 10 years. Depreciation expense amounted to
$2,963 during the year ended June 30, 1999.
Research and Development
Research and development costs are expensed as incurred. During the year
ended June 30, 1999, research and development included $200 of corporate
allocations.
<PAGE>
Access Network Electronics Business
(A division of Tyco Electronics Corporation)
Notes to Statements of Assets Acquired and Liabilities Assumed and of
Net Sales and Direct Costs and Operating Expenses (Continued) June 30, 1999
(amounts in thousands)
--------------------------------------------------------------------------------
Corporate allocations
In addition to the allocation of research and development costs described
above, direct administrative and management costs of $1,302 were allocated
to the Business during the year ended June 30, 1999. These costs included
legal, human resources, accounting and other administrative services and
are allocated based on utilization or, as in the case of personnel related
costs, on headcount. Management believes its method of allocating costs to
be reasonable.
4. Details of Inventory and Property and Equipment
Inventory consists of the following:
Raw materials $ 693
Work in progress 142
Finished goods 11,324
--------
$ 12,159
========
Property and equipment consists of the following:
Machinery and equipment $ 16,339
Leasehold improvements, furniture and fixtures 6,781
Software 1,156
--------
24,276
Less: Accumulated depreciation and amortization (12,520)
--------
$ 11,756
========
5. Lease Commitments
In November 1994, Raychem exercised its option to extend the term of the
operating lease for its facility through May 2000. Pursuant to the terms of
the original lease agreement, Raychem has the option to extend the lease
through May 2005. The future ability of the Business to exercise this
option is subject to the consent of the lessor to transfer such option to
Terayon. As of June 30, 1999, future minimum lease payments pursuant to the
terms of the amended lease agreement were $535 during the year ending June
30, 2000. Rent expense relating to the lease was $686 during the year ended
June 30, 1999.
<PAGE>
Financial statements of Combox, Ltd.
Included herein are the consolidated balance sheets of Combox Ltd. ("Combox")
for the years ended December 31, 1998 and 1999 and March 31, 2000 (unaudited)
and the related consolidated statements of operations and cash flows for each of
the years in the three year period ended December 31, 1999 and for the three
months ended March 31, 1999 (unaudited) and 2000 (unaudited) and the
consolidated statement of changes in shareholders' equity (deficiency) for each
of the years in the two year period ended December 31, 1999 and for the three
months ended March 31, 2000 (unaudited).
COMBOX LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
IN U.S. DOLLARS
UNAUDITED
INDEX
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Statements of Changes in Shareholders' Equity (Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
COMBOX LTD.
We have audited the accompanying consolidated balance sheets of Combox Ltd.
("the Company") as of December 31, 1998 and 1999 and the related consolidated
statements of operations, changes in shareholders' equity (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 did not audit the financial statements of Combox Inc., a wholly-
owned U.S. subsidiary, which statements reflect total assets constituting 2% as
of December 31, 1999 and total revenues constituting 9% of the related
consolidated total for the year ended December 31, 1999. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for that subsidiary, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards 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 the management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiary as of December 31, 1999 and 1998 and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States.
Tel-Aviv, Israel /s/ KOST, FORER & GABBAY
February 20, 2000 A Member of Ernst & Young International
(except Note 1c, as to which the date is April 18, 2000)
<PAGE>
COMBOX LTD.
CONSOLIDATED BALANCE SHEETS U.S.
--------------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------
1998 1999 2000
-------- -------- ---------
Unaudited
---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 937 $ 5,890 $ 4,460
Trade receivables (net of allowance for doubtful
accounts of $ 24 and $ 78 as of December 31,
1998 and 1999, respectively) 360 171 370
Other accounts receivable 81 326 266
Inventory 268 272 319
-------- -------- ---------
Total current assets 1,646 6,659 5,415
----- -------- -------- ---------
LONG-TERM DEPOSIT - 10 16
-------- -------- ---------
SEVERANCE PAY FUND 75 119 232
-------- -------- ---------
PROPERTY AND EQUIPMENT, NET (Note 3) 181 263 310
-------- -------- ---------
OTHER ASSETS, NET 33 28 27
-------- -------- ---------
Total assets $ 1,935 $ 7,079 $ 6,000
----- ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMBOX LTD.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------
1998 1999 2000
-------- -------- ---------
Unaudited
---------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt (Note 4) $ 33 $ 159 $ 381
Trade payables 87 433 578
Other accounts payable and accrued expenses (Note 5) 356 466 608
-------- -------- ---------
Total current liabilities 476 1,058 1,567
----- -------- -------- ---------
LONG-TERM LIABILITIES:
Accrued severance pay 104 173 327
Convertible shareholders' loan (Note 6) 1,322 - -
Long-term loan (Note 7) - 998 938
-------- -------- ---------
1,426 1,171 1,265
-------- -------- ---------
SHAREHOLDERS' EQUITY (Note 9):
Preferred shares of NIS 0.01 par value:
Authorized: 6,750,000 Preferred A shares as of
December 31, 1998 and 5,700,000 Preferred A shares
and 5,847,000 Preferred B shares as of December 31,
1999; Issued and outstanding: 3,115,000 Preferred A
shares as of December 31, 1998 and 5,253,000
Preferred A shares and 5,847,000 Preferred B shares
as of December 31, 1999; Aggregate liquidation
preference of $ 45,616 as of December 31, 1999 1 20 20
Ordinary shares of NIS 0.01 par value:
Authorized: 3,500,000 Ordinary A shares and
16,850,000 Ordinary shares as of December 31, 1998
and 3,500,000 Ordinary A shares and 12,053,000
Ordinary shares as of December 31, 1999
Issued and outstanding: 9,999,000 Ordinary shares
as of December 31, 1998 and 12,037,000 Ordinary
shares as of December 31, 1999 3 36 36
Additional paid-in capital 1,707 8,527 9,481
Deferred compensation (3) (71) (275)
Accumulated deficit (1,675) (3,662) (6,094)
-------- -------- ---------
Total shareholders' equity 33 4,850 3,168
----- -------- -------- ---------
Total liabilities and shareholders equity $ 1,935 $ 7,079 $ 6,000
----- ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMBOX LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, March 31,
-------------------------------------------- -------------------------------
1997 1998 1999 1999 2000
-------------------------------------------- -------------------------------
Unaudited
-------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,249 $ 814 $ 1,012 $ 487 $ 238
Cost of revenues 762 637 757 277 338
------------ ------------ ------------ ------------- ------------
Gross profit (loss) 487 177 255 210 (100)
------------ ------------ ------------ ------------- ------------
Operating expenses:
Research and development
costs, net (Note 10) 307 456 930 230 1,201
Sales and marketing expenses 193 292 512 77 250
General and administrative
expenses 236 505 870 117 930
------------ ------------ ------------ ------------- ------------
Total operating expenses 736 1,253 2,312 424 2,381
----- ------------ ------------ ------------ ------------- ------------
Operating loss 249 1,076 2,057 214 2,481
Financial expenses (income),
net 105 (3) (70) (3) (49)
------------ ------------ ------------ ------------- ------------
Net loss $ 354 $ 1,073 $ 1,987 $ 211 $ 2,432
============ ============ ============ ============= ============
Basic and diluted net loss
per share $ 0.04 $ 0.11 $ 0.19 $ 0.02 $ 0.20
============ ============ ============ ============= ============
Weighted average number of
Ordinary shares outstanding
during the period 9,999,000 9,999,000 10,231,913 9,999,000 12,037,000
============ ============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMBOX LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
<TABLE>
<CAPTION>
Additional Total
Ordinary Preferred shares paid-in Shareholders'
------------------- Deferred Accumulated equity
shares A shares B shares Amount Capital compensation deficit (deficiency)
---------- --------- --------- -------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 9,999,000 - - $ 3 $ 192 $ - $ (248) $ (53)
Deferred compensation - - - - 5 (5) - -
Net loss - - - - - - (354) (354)
---------- --------- --------- -------- -------- ------------ ----------- -------------
Balance as of January 1, 1997 (audited) 9,999,000 - - 3 197 (5) (602) (407)
Issuance of shares, net - 3,115,000 - 1 1,492 - - 1,493
Deferred compensation - - - - 18 (18) - -
Amortization of deferred compensation - - - - - 20 - 20
Net loss - - - - - - (1,073) (1,073)
---------- --------- --------- -------- -------- ------------ ----------- -------------
Balance as of December 31, 1998 9,999,000 3,115,000 - 4 1,707 (3) (1,675) 33
Conversion of convertible loans 1,926,000 - - 1 1,381 - - 1,382
Issuance of shares, net 112,000 2,138,000 5,847,000 19 5,287 - - 5,306
Issuance of warrants - - - - 105 - - 105
Stock dividend - - - 32 (32) - - -
Deferred compensation - - - - 79 (79) - -
Amortization of deferred compensation - - - - - 11 - 11
Net loss - - - - - - (1,987) (1,987)
---------- --------- --------- -------- -------- ------------ ----------- -------------
Balance as of December 31, 1999 12,037,000 5,253,000 5,847,000 56 8,527 (71) (3,662) 4,850
Deferred compensation - - - - 954 (954) - -
Amortization of deferred compensation - - - - 750 - 750
Net loss - - - - - - (2,432) (2,432)
---------- --------- --------- -------- -------- ------------ ----------- -------------
Balance as of March 31, 2000 (unaudited) 12,037,000 5,253,000 5,847,000 $ 56 $ 9,481 $ (275) $ (6,094) $ 3,168
========== ========= ========= ======== ======== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMBOX LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, March 31,
------------------------------------- ---------------------
1997 1998 1999 1999 2000
-------- --------- --------- ------- ---------
Unaudited
---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
------------------------------------
Net loss $ (354) $ (1,073) $ (1,987) $ (211) $ (2,432)
Adjustments required to reconcile net loss to net cash
used in operating activities:
Amortization of deferred compensation - 20 11 1 750
Depreciation and amortization 30 64 101 20 43
Increase in accrued severance pay, net 12 13 25 27 41
Decrease (increase) in trade receivables (745) 508 189 43 (199)
Decrease (increase) in other accounts receivable 7 (8) (245) (4) 60
Decrease (increase) in inventory (320) 134 (4) 25 (47)
Increase (decrease) in trade payables 58 (27) 346 37 145
Increase (decrease) in other accounts payable
and accrued expenses 454 (201) 110 (110) 142
Others - - 69 41 96
------- --------- --------- ------- ---------
Net cash used in operating activities (858) (570) (1,385) (131) (1,401)
------- --------- --------- ------- ---------
Cash flows from operating activities:
------------------------------------
Long-term deposit - - (10) - (6)
Purchase of property and equipment (113) (97) (178) (26) (89)
------- --------- --------- ------- ---------
Net cash used in investing activities (113) (97) (188) (26) (95)
------- --------- --------- ------- ---------
Cash flows from financing activities:
------------------------------------
Short-term debt, net 971 (1,211) (30) (18) 66
Proceeds from shareholders' long-term loans - 1,322 1,145 - -
Proceeds from issuance of warrants - - 105 - -
Proceeds from issuance of shares, net - 1,493 5,306 10 -
------- --------- --------- ------- --------
Net cash provided by (used in) financing activities 971 1,604 6,526 (8) 66
------- --------- --------- ------- --------
Increase (decrease) in cash and cash equivalents - 937 4,953 (165) (1,430)
Cash and cash equivalents at the beginning
of the period - - 937 937 5,890
------- --------- --------- ------- --------
Cash and cash equivalents at the end of the period $ - $ 937 $ 5,890 $ 772 $ 4,460
======= ========= ========= ======== ========
Supplementary disclosure of cash flows information:
Interest $ 32 $ 52 $ 39 $ 13 $ 25
======= ========= ========= ======== ========
Non-cash investing and financing information:
Conversion of convertible loans $ - $ - $ 1,382 $ - $ -
======= ========= ========= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
a. The Company - Combox Ltd. was incorporated and commenced
operations on January 1, 1996.
b. The Company is engaged in the application, installation and
development of electronic equipment.
c. The Company has a wholly-owned subsidiary in the United States,
which ceased its operations in February, 2000.
On April 18, 2000, the Company's shareholders signed a share purchase
agreement (the "agreement") with Terayon Communication Systems Inc.
("Terayon") pursuant to which Terayon will acquire all of their shares
and related warrants in the Company in consideration of 775 thousand
shares of Terayon. According to the agreement, Terayon shall be
entitled to pay the selling shareholders cash in an amount of up to
$250 which shall reduce the share consideration by such number of
Terayon shares as described in the agreement.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States.
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that effect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. Financial statements in U.S. dollars:
The majority of sales of the Company and its subsidiary are made
in U.S. dollars. In addition, a substantial portion of their
costs are incurred in dollars. Since the dollar is the primary
currency in the economic environment in which the Company and its
subsidiary operate, the dollar is their functional and reporting
currency and, accordingly, non-dollar monetary transactions and
balances have been remeasured into U.S. dollars in accordance
with Statement No. 52 of the Financial Accounting Standard Board
("FASB") "Foreign Currency Translation". All transaction gains
and losses from the remeasurement of monetary balance sheet items
denominated in non-dollar currencies are reflected in the
consolidated statement of operations as financial income or
expenses, as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
d. Cash equivalents:
Cash equivalents include short-term highly liquid
investments that are readily convertible to cash, when
originally purchased with maturities of three months or
less.
e. Inventory:
Inventory is presented at the lower of cost or market value.
Cost is determined using the "first-in-first-out" method.
f. Other assets:
Know-how - is presented at cost and is amortized over 10
years.
g. Property and equipment:
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, as follows:
<TABLE>
<CAPTION>
%
-------------------------
<S> <C>
Leasehold improvements over the term of the lease
Machines and industrial equipment 15 - 20
Office furniture and equipment 7 - 33
</TABLE>
h. Research and development costs:
Research and development costs are expensed as incurred.
i. Income taxes:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes". This Statement prescribes the
use of the liability method, whereby deferred tax asset and
liability account balances are determined based on
differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
j. Revenue recognition:
Revenues from sales of products are recognized upon shipment
to customer. For certain contracts, revenue is recognized
upon satisfaction of customer acceptance standards.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
k. Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for
funding certain approved research projects are recognized at
the time in which the Company is entitled to such grants, on
the basis of the related costs incurred
l. Accounting for stock-based compensation:
The Company accounts for stock-based compensation in
accordance with the provisions of Accounting Principles
Board Opinion No. 25 ("APB-25"), "Accounting for Stock
Issued to Employees". Under APB-25, when the exercise price
of the Company's share options equals or is higher than the
market price of the underlying shares on the date of grant,
no compensation expense is recognized. The pro-forma
information with respect to the fair value of the options is
provided in accordance with the provisions of Statement No.
123 (see Note 9c).
m. Severance pay:
The Company's liability for severance pay is calculated
pursuant to Israeli severance pay law based on the most
recent salary of the employees multiplied by the number of
years of employment as of the balance sheet date. The
Company's liability for all of its employees, is fully
provided by monthly deposits with insurance policies and by
an accrual.
The deposited funds include profits accumulated up to the
balance sheet date.
Severance expenses for the years ended December 31, 1997,
1998 and 1999, were $ 59, $ 110 and $ 174, respectively.
n. Fair value of financial instruments:
SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments", requires disclosures about the fair value of
financial instruments. The following disclosures of the
estimated fair value of financial instruments have been
determined by the Company using available market information
and valuation methodologies described below. However,
considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly,
the estimates presented herein may not be indicative of the
amounts that the company could realize in a current market
exchange. The use of different market assumptions or
valuation methodologies may have a material effect on the
estimated fair value amounts.
The carrying values of cash and cash equivalents, bank
overdrafts, trade payables and trade receivables approximate
fair values due to the short-term maturities of these
instruments.
Debt (including long-term loans) - the carrying amounts of
the Company's long-term borrowing arrangements approximate
their fair value, estimated by discounting the future cash
flows, using rates currently available for debt of similar
terms and maturity.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
o. Concentrations of credit risk:
SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", requires
disclosure of any significant off-balance-sheet and credit
risk concentrations. The Company has no significant off-
balance-sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign
hedging arrangements.
Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of cash
and cash equivalents and trade receivables. Cash and cash
equivalents are deposited with major banks in Israel and the
United States. Such deposits in the United States may be in
excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Company's investments are
financially sound, and, accordingly, minimal credit risk
exists with respect to these investments. The Company's
trade receivables are mainly derived from sales to customers
in the United States. The Company has adopted credit
policies and standards intended to accommodate industry
growth and inherent risk. Management believes that credit
risks are moderated by the diversity of its end customers.
The Company performs ongoing credit evaluations of its
customers' financial condition and requires collateral as
deemed necessary.
p. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board
issued No. 133 ("SFAS 133"), "Accounting for Derivative
instruments and Hedging Activities" ("SFAS No. 133"). This
Statement establishes accounting and reporting standards
requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also
requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income
statement, and requires that a company must formally
document, designate, and assess the effectiveness of
transactions that receive hedge accounting. The FASB has
issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -Deferral of the Effective Date of
FASB Statement No. 133". The Statement defers for one year
the effective date of SFAS No. 133. The rule will apply to
all fiscal quarters of all fiscal years beginning after June
15, 2000. The Company does not expect the impact of this new
Statement on the Company's consolidated balance sheets or
results of operations to be material.
q. Basic and diluted loss per share:
Basic loss per share is computed based on the weighted
average number of Ordinary shares outstanding during each
year. Diluted earnings per share is computed based on the
weighted average number of Ordinary shares outstanding
during each year, plus dilutive potential Ordinary shares
considered outstanding during the year, in accordance with
FASB Statement No. 128, "Earnings Per Share".
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
All convertible Preferred shares, outstanding stock options,
and warrants have been excluded from the calculation of the
diluted loss per Ordinary share because all such of these
securities are anti-dilutive for all periods presented. The
total numbers of shares related to the outstanding options
and warrants excluded from the calculations of diluted net
loss per share were 0, 3,115,000 and 14,969,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
r. Interim financial information:
The financial information as of March 31, 1999 and 2000 and
for the three months ended March 31, 1999 and 2000, is
unaudited. However, in the opinion of management, said
financial information has been prepared on the same Bases as
the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments), which the
Company considers necessary for a fair presentation of the
financial position of such date, and the operating results
and cash flows for those periods. Results for the interim
period are not necessarily indicative of the results to be
expected for the entire year.
NOTE 3:- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Cost:
Leasehold improvements $ 1 $ 1
Machines and industrial equipment 162 310
Office furniture and equipment 110 140
------- --------
273 451
------- --------
Accumulated depreciation:
Leasehold improvements 1 1
Machines and industrial equipment 47 109
Office furniture and equipment 44 78
------- --------
92 188
------- --------
Depreciated cost $ 181 $ 263
======= ========
</TABLE>
Depreciation expenses amounted to $ 25, $ 60 and $ 96, for the
years ended December 31, 1997, 1998 and 1999, respectively.
NOTE 4:- SHORT-TERM DEBT
As of December 31, 1999, the Company has an authorized line of
credit in the amount of $ 36, denominated in NIS and bearing
interest at the rate of 16% - 17%. The weighted average interest
rate of the line of credit as of December 31, 1998 and 1999 was
approximately 17%, and 18%, respectively.
The Company had an unused line of credit in the amount of
approximately $ 33 as of December 31, 1999 (there is no fee for
the unused portion of the line of credit).
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 5:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
---- ----
<S> <C> <C>
Related companies (1) $ 110 $ 30
Employees and payroll accruals 91 247
Accrued expenses 76 110
Customer advances 79 79
---- ----
$ 356 $ 466
===== =====
</TABLE>
(1) The balance is linked to the Israeli CPI and does not bear
interest.
NOTE 6:- CONVERTIBLE SHAREHOLDERS' LOAN
The loan is linked to the Israeli CPI. During 1999, the shareholders'
loan was converted into share capital.
NOTE 7:- LONG-TERM LOAN
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
a. From banks:
Long-term loan $ 1,154
Less - current portion 156
------------
$ 998
============
b. The loan is repayable in the following years
subsequent to the balance sheet date:
First year - current portion $ 156
------------
Second year 625
Third year 469
------------
1,094
------------
$ 1,250
Including interest (96)
------------
$ 1,154
============
</TABLE>
c. The loan is linked to the U.S dollar and bears interest at the
rate of Libor + 2%.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
d. During September 1999, the Company encumbered its assets in favor
of the Bank for the Development of Industry ("the Bank") in
return for a long-term loan in the amount of $ 1,250. The loan is
linked to the U.S. dollar and bears interest at the rate of Libor
+2%. Further, the Bank was granted an option to purchase 397
thousand Ordinary shares of the Company, for the exercise price
and at the conditions as agreed upon between the parties. The
option is exercisable through August 11, 2003 or at an earlier
date, pending an IPO, the sale of the Company or its merger. The
Company reserves the right to redeem the option at the conditions
as agreed upon between the parties.
On February 14, 2000, the Company redeemed the option in
consideration of approximately $ 187.
NOTE 8:- TAXES ON INCOME
a. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in NIS
after certain adjustments for increases in the Israeli CPI. As
explained in Note 2c, the financial statements are measured in
U.S. dollars. The difference between the annual change in the
Israeli CPI and in the NIS/dollar exchange rate causes a further
difference between taxable income and the income before taxes
shown in the financial statements. In accordance with paragraph
9(f) of SFAS No. 109, the Company has not provided deferred
income taxes on the difference between the reporting currency and
the tax bases of assets and liabilities.
b. Net operating loss carryforward:
The Company has carryforward tax losses aggregating to
approximately $ 2,962 thousand, for which valuation allowance was
provided since their utilization is uncertain.
c. Deferred taxes:
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. Should the Company be liable to pay
taxes, the applicable tax rate will be 36%. Significant
components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforward $ 554 $ 1,233
-------- --------
Total deferred tax asset 554 1,233
Valuation allowance (554) (1,233)
--------
Net deferred tax asset $ - $ -
======== ========
</TABLE>
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars inthousands
The Company's Israel and U.S. subsidiary have provided
valuation allowances in respect of deferred tax assets
resulting from tax loss carryforwards. Management currently
believes that since the Company has a history of losses it
is more likely than not that the deferred tax regarding the
loss carryforwards and other temporary differences will not
be realized in the foreseeable future.
Pre-tax loss:
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Domestic $ (354) $(1,073) $(1,738)
Foreign - - (249)
------- -------- -------
$ (354) $(1,073) $(1,987)
------- -------- --------
</TABLE>
NOTE 9:- SHARE CAPITAL
a. Pertinent rights and privileges conferred by Preferred
shares:
Preferred A shares:
(i) Preemptive rights on the distribution of a dividend;
(ii) Convertible at any time into Ordinary shares; and
(iii) Liquidation preferences and preemptive rights on
liquidation, and the proceeds received will be equal
to the amount paid.
Preferred B shares:
(i) Preemptive rights on the distribution of a dividend;
(ii) Convertible at any time into Ordinary shares; and
(iii) Liquidation preferences after Preferred A shares and
preemptive rights on liquidation, and the proceeds
received will be three times the amount paid, with the
addition of 8% per year.
b. Share options:
Employee Share Option Plan:
During 1997, 1998 and 1999, the Board of Directors of the
Company adopted share option plans (as amended, "the
Plans").
The Board of Directors is empowered, among other things, to
designate the options, dates of grant and the exercise price
of options.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
A summary of the stock options activities in 1997, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------
1997 1998 1999
------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
------------------------- ----------- ------------- ----------- ------------
In thousand In thousand In thousand
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of the year - $ - 537 $ - 2,401 $ -
Granted 537 - 1,864 - 1,468 -
----------- ------ ----------- ------ ----------- -------
Outstanding at the
end of the year 537 $ - 2,401 $ - 3,869 $ -
=========== ====== =========== ====== =========== =======
Options exercisable - $ - 350 $ - 2,153 $ -
=========== ====== =========== ====== =========== =======
</TABLE>
The options outstanding as of December 31, 1999 have been separated into range
of exercise prices, as follows:
<TABLE>
<CAPTION>
Options Weighted Weighted
outstanding average Weighted Options average
as of remaining average exercisable at exercise price
Exercise December 31, contractual exercise December 31, of exercisable
price 1999 life price 1999 options
-------- ------------ ----------- --------- ------------- ----------------
In thousand In years In thousand
------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
$ - 3,869 7.96 $ - 2,153 $ -
============ =========== ========= ============= ================
</TABLE>
c. Pro forma information regarding net loss is required by SFAS
123, which also requires that the information be determined
as if the Company has accounted for its employee stock
options under the fair value method of that Statement. The
fair value for these awards was estimated at the date of
grant using the minimum value options pricing model. The
minimum value options pricing valuation model was developed
for use in estimating the fair value of options that have no
vesting restrictions and are fully transferable. Option
valuation models require the input of highly subjective
assumptions. Because the Company's stock-based awards 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 stock-based awards. The fair value of these
options was estimated at the date of grant using the minimum
value method option pricing model with the following
weighted-average assumptions: risk-free interest rates of 6%
for 1997 and 1998, and 5.75% for 1999, no dividend yield for
1997, 1998 and 1999; and a weighted-average expected life of
the option of approximately five years for 1997 and 1998,
and one half to one and half years for 1999.
The weighted average fair value of options at the date of
grant for the years ended December 31, 1997, 1998 and 1999,
was $ 9.79, $ 9.79 and $ 53.74, respectively.
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Pro-forma information under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss $ 354 $ 1,073 $ 1,987
=========== ============ ============
Pro-forma net loss $ 354 $ 1,073 $ 1,987
=========== ============ ============
Pro-forma basic and diluted net
loss per share $ 0.04 $ 0.11 $ 0.19
=========== ============ ============
</TABLE>
d. In 1999, the Company effected a stock split of 1 to 100, so that
each share was split into 100 shares of NIS 0.01 par value each.
The Company also increased its authorized share capital. After
the split, 9 bonus shares were issued for each issued and
outstanding share. Retroactive effect has been given.
e. In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay
cash dividends in the foreseeable future.
f. On November 19, 1998, the Company consummated a transaction,
wherein it issued 3,115 thousand Preferred A shares to an
external investor, in consideration for an amount in NIS
equivalent to $ 1,500 ("the transaction"). Within the framework
of the transaction, an option was granted to the investor, to
purchase up to 1,038 thousand additional Preferred shares of
Combox, at the conditions determined therein, which was exercised
in 1999, further to an additional issuance of 1,100 thousand
Preferred shares.
g. During the second quarter of 1999, the Company consummated a
transaction, wherein it issued 111 thousand Ordinary shares to
its legal counsel in consideration for an amount equivalent to $
55, which reflects the fair value as of the date of the grant.
h. In November 1999, the Company entered into an agreement according
to which an inclusive amount of $ 5,250 was invested in Combox,
including the exercise of options from prior transactions (see f.
above) in consideration for 7,985 thousand Preferred shares.
NOTE 10:- RESEARCH AND DEVELOPMENT COSTS, NET
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Research and development costs $ 361 $ 606 $ 1,479
Less - Government grants 54 150 549
--------- ---------- ---------
$ 307 $ 456 $ 930
========= ========== =========
</TABLE>
<PAGE>
COMBOX LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- COMMITMENTS, CONTINGENT LIABILITIES AND CHARGES
a. The Company has entered into a lease agreement for 4 years.
Total annual lease fees amount to $ 145. The Company has
also entered into a lease agreement of a motor vehicle for 3
years. Total annual lease fees in respect of these motor
vehicles amount to $ 39.
Aggregate expected lease payments under these lease
agreements for the years subsequent to December 31, 1999 are
as follows:
2000 $ 184
2001 184
2002 145
-------
$ 513
=======
b. Royalties:
The Company is committed to pay royalties at the rate of 3%
to 5% to the Government of Israel, on sales proceeds from
products in which the Government participates in the
research and development by way of grants.
At December 31, 1999, the Company has a remaining contingent
obligation of $ 1,200.
c. Charges:
The Company encumbered its assets, share capital, goodwill,
securities, notes and other instruments in favor of the Bank
for the Development of Industry.
Financial statements of Telegate Ltd.
Included herein are the balance sheets of Telegate Ltd for the years ended
December 31, 1999 and the related statements of operations and cash flows for
each of the three years in the period ended December 31, 1999 and the statement
of changes in shareholders' equity (deficiency) for each of the two years in the
period ended December 31, 1999.
<PAGE>
TELEGATE LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
IN U.S. DOLLARS
INDEX
Report of Independent Auditors
Balance Sheets
Statements of Operations
Statements of Changes in Shareholders' Deficiency
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
TELEGATE LTD.
We have audited the accompanying balance sheets of Telegate Ltd. as of
December 31, 1998 and 1999, and the related statements of operations, changes in
shareholders' 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 generally accepted auditing
standards 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 the 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 financial statements referred to above, present fairly, in
all material respects, the financial position of Telegate Ltd. as of December
31, 1998 and 1999, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles in the United States.
Tel-Aviv, Israel /s/ KOST FORER & GABBAY
March 30, 2000 A Member of Ernst & Young International
<PAGE>
TELEGATE LTD.
BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1999
----------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 385 $ 1,415
Trade receivables - related parties (Note 13) 320 5,548
Government grants receivable 331 346
Other accounts receivable 12 112
Inventories (Note 3) 1,210 3,424
----------------- ----------------
2,258 10,845
----------------- ----------------
SEVERANCE PAY FUNDS (Note 7) 429 595
----------------- ----------------
PROPERTY AND EQUIPMENT, NET (Note 4) 1,548 1,906
----------------- ----------------
Total assets $ 4,235 $ 13,346
----- ================= ================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term bank credit(Note 5) $ 21 $ -
Short-term bank loans (Note 5) 1,135 294
Trade payables 1,332 2,930
Employees and payroll accruals 791 911
Advances from a customer - related party (Note 13) 385 -
Other accounts payable (Note 6) 372 1,337
----------------- ----------------
Total current liabilities 4,036 5,472
----- ----------------- ----------------
ACCRUED SEVERANCE PAY (Note 7) 677 1,074
----------------- ----------------
CONVERTIBLE LOANS (Note 8) 5,633 12,482
----------------- ----------------
SHAREHOLDERS' DEFICIENCY (Note 9):
Share capital
Authorized: 1,100,000 Ordinary shares of NIS 0.1 par value
as of December 31, 1998, and 3,000,000 as of December 31, 1999
Issued and outstanding: 706,900 Ordinary shares of NIS 0.1 par value as of
December 31, 1998 and 1,077,339 as of December 31, 1999 23 32
Additional paid-in capital 9,569 21,110
Deferred compensation (109) (1,854)
Accumulated deficit (15,594) (24,970)
----------------- ----------------
(6,111) (5,682)
----------------- ----------------
Total liabilities and shareholders' deficiency $ 4,235 $ 13,346
----- ================= ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELEGATE LTD.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Sales to related parties (Note 13) $ - $ 3,569 $ 9,144
Cost of sales to related parties - 3,737 9,445
--------------- -------------- --------------
Gross loss - 168 301
--------------- -------------- --------------
Operating expenses:
Research and development, net (Note 12a) 3,362 4,660 5,467
Selling and marketing, net (Note 12b) 392 489 914
General and administrative 608 716 1,982
--------------- -------------- --------------
Total operating expenses 4,362 5,865 8,363
----- --------------- -------------- --------------
Operating loss 4,362 6,033 8,664
Financial income (expenses), net (Note 12c) 102 23 (712)
--------------- -------------- --------------
Net loss $ 4,260 $ 6,010 $ 9,376
=============== ============== ==============
Basic and diluted net loss per share $ 6.22 $ 8.50 $ 11.35
=============== ============== ==============
Weighted average number of shares used in computing
basic and diluted loss per share 684,902 706,900 826,413
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELEGATE LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
<TABLE>
<CAPTION>
Total
Additional shareholders'
paid-in Deferred Accumulated equity
Share capital capital compensation deficit (deficiency)
---------------------- ------------- -------------- ------------- --------------
Number of
shares Amount
---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 665,289 $ 22 $ 9,026 $ (734) $ (5,324) $ 2,990
Deferred compensation related to
stock-based options granted to employees - - (10) 10 - -
Amortization of deferred compensation - - - 362 - 362
Conversion of a convertible loan into
shares, net 41,611 1 553 - - 554
Net loss - - - - (4,260) (4,260)
---------- -------- ------------- -------------- ------------- --------------
Balance as of December 31, 1997 706,900 23 9,569 (362) (9,584) (354)
Amortization of deferred compensation - - - 253 - 253
Net loss - - - - (6,010) (6,010)
---------- -------- ------------- -------------- ------------- --------------
Balance as of December 31, 1998 706,900 23 9,569 (109) (15,594) (6,111)
Conversion of convertible loans into
shares, net 129,698 3 2,767 - - 2,770
Issuance of shares, net 240,741 6 6,302 - - 6,308
Deferred compensation related to
stock-based options granted to employees
and bank - 2,472 (2,472) -
Amortization of deferred compensation - - - 727 - 727
Net loss - - - - (9,376) (9,376)
---------- -------- ------------- -------------- ------------- --------------
Balance as of December 31, 1999 1,077,339 $ 32 $ 21,110 $ (1,854) $ (24,970) $ (5,682)
========== ======== ============= ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELEGATE LTD.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
------------------------------------
Net loss $(4,260) $(6,010) $ (9,376)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation 362 253 727
Depreciation 211 411 603
Increase in accrued severance pay, net 70 109 231
Decrease in value of marketable securities 221 - -
Increase of accrued interest on convertible loans - 193 496
Increase in trade receivables - related parties - (320) (5,228)
Decrease (increase) in government grants receivable 112 (99) (15)
Decrease (increase) in other accounts receivable 18 99 (100)
Increase in inventories - (1,210) (2,214)
Increase in trade payables 455 589 1,598
Increase in employees and payroll accruals 230 250 120
Increase (decrease) in advances from a customer - related party - 385 (385)
Increase in other accounts payable 6 291 965
Other (1) (2) -
------------ ------------- -------------
Net cash used in operating activities (2,576) (5,061) (12,578)
------------ ------------- -------------
Cash flows from investing activities:
------------------------------------
Purchase of property and equipment (597) (1,110) (979)
Proceeds from sale of property and equipment 19 51 18
------------ ------------- -------------
Net cash used in investing activities (578) (1,059) (961)
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELEGATE LTD.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------------------------
1997 1998 1999
------------ -------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
------------------------------------
Proceeds from issuance of shares, net - - 6,308
Short-term bank credit, net - 21 (21)
Short-term bank loans, net - 1,135 (841)
Proceeds from convertible loans 1,960 2,940 9,150
Issuance expenses related to conversion of convertible loan into (6) - (27)
shares
------------ -------------- -------------
Net cash provided by financing activities 1,954 4,096 14,569
------------ -------------- -------------
Increase (decrease) in cash and cash equivalents (1,200) (2,024) 1,030
Cash and cash equivalents at the beginning of the year 3,609 2,409 385
------------ -------------- -------------
Cash and cash equivalents at the end of the year $ 2,409 $ 385 $ 1,415
============ ============== =============
Non-cash transactions:
---------------------
Conversion of convertible loans into shares $ 560 $ - $ 2,797
============ ============== =============
Supplemental disclosure of cash flows activities:
------------------------------------------------
Cash paid during the year for interest $ - $ 66 $ 240
============ ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
NOTE 1:- GENERAL
a. Telegate Ltd. ("the Company") was incorporated on May 6, 1993, under
the name of Capitec (1993) Ltd. In 1994, the Company changed its
name to Telegate Ltd.
The Company is engaged in the research, development, manufacturing
and marketing of local access systems that interface and transmit
public telecommunications services over existing Cable TV
infrastructures.
The Company is dependent upon sole source of suppliers for the
production of a modem, which is a key component used in its product.
b. On January 2, 2000 the Company's shareholders signed a share
purchase agreement with Terayon Communication Systems, Inc.
("Terayon") pursuant to which Terayon will acquire all of their
shares and related warrants in the Company in consideration of
2,200,000 shares of Terayon plus cash equal to the Company's net
cash as of the closing date less $ 2,000.
c. The Company's shareholders' deficiency as of December 31, 1999 and
net loss for the year ended December 31, 1999 amounting to $ 5,682
and $ 9,376, respectively. The Company's ability to continue to
operate is dependent upon additional financial support until
profitability is achieved.
Subsequent to December 31, 1999, Terayon undertook to financially
support Telegate operations.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
b. Financial statements in U.S. dollars:
Company's management believes that the U.S. dollar is the currency
of the primary economic environment in which it operates. Therefore,
the functional and reporting currency for the Company is the U.S.
dollar.
The Company's transactions and balances denominated in U.S. dollars
are presented at their original amounts. Non-dollar transactions and
balances have been remeasured to U.S. dollars in accordance with
Statement No. 52 of the Financial Accounting Standards Board
("FASB"). All transaction gains and losses from remeasurement of
monetary balance sheet items denominated in non-dollar currencies
are reflected in the statements of operations as financial income or
expenses, as appropriate. Certain amounts in the dollar financial
statements may represent the dollar equivalent of other currencies,
including new Israeli shekels (NIS), and may not be exchangeable for
dollars.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
c. Cash and cash equivalents:
The Company considers all highly liquid investments originally
purchased with maturities of three months or less to be cash
equivalents.
d. Marketable securities:
In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), the Company has classified its marketable
debt into trading category. Under SFAS 115, traded marketable
securities are stated according to the quoted market prices as of
balance sheet date.
Gains and losses (realized and unrealized) related to traded
securities as well as interest on such securities are included in
"financial income (expenses), net".
e. Inventories:
Inventories are valued at the lower of cost or market value. Cost is
determined as follows:
Raw materials and components - on the moving average basis.
Work in progress and finished products:
Raw materials and components - on the moving average basis.
Labor, overhead and subcontracted work - on the basis of actual
costs.
Periodically, the Company evaluates the quantities on hand relative
to current selling prices and historical and forecasted sales
volume. Based on these evaluations, provisions are made in each
period to write inventory down to its net realizable value, which
establishes a new cost basis.
f. Property and equipment, net:
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful
lives, at the following annual rates:
%
----------------------------
Computers and peripheral equipment 7 - 33
Machinery and engineering equipment 15 - 20
Motor vehicles 15
Office furniture and equipment 7 - 15
Leasehold improvements Over the term of the lease
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
g. Income taxes:
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) 109, "Accounting for Income
Taxes". This statement prescribes the use of the liability method
whereby deferred tax asset and liability account balances are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated
realizable value.
h. Revenue recognition:
Revenues from sales are recognized upon shipment when no significant
obligations remain on the part of the Company and the collection of
the related receivable is probable. Generally, the Company does not
have any significant obligations after delivery.
i. Warranty costs:
A provision for warranty costs is calculated and provided based on a
percentage of sales.
j. Research and development costs:
Research and development costs are charged to expenses as incurred.
k. Grants:
Royalty-bearing grants from the Government of Israel and others for
funding of approved research projects and non-royalty-bearing grants
from the Government of Israel for funding of approved marketing
activities, are recognized at the time the Company is entitled to
such grants on the basis of the related costs incurred.
l. Concentrations of credit risk:
SFAS No. 105, "Disclosure of Information About Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk", requires disclosure of any
significant Off-Balance-Sheet and credit risk concentrations. The
Company has no significant Off-Balance-Sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables.
The Company's cash and cash equivalents are invested in deposits
with major Israeli banks. Management believes that the financial
institutions that hold the Company's investments are financially
sound, and accordingly, minimal credit risk exists with respect to
these investments.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
The Company's trade receivables are derived from sales to a
shareholder. The Company performs ongoing credit evaluations of its
shareholder's debt, and, to date, has not experienced any material
losses.
m. Severance pay:
The Company's liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the
balance sheet date. Employees are entitled to one month's salary for
each year of employment or a portion thereof. The Company's
liability for all of its employees, is fully provided by monthly
deposits with severance pay funds, insurance policies and by an
accrual.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law
or labor agreements. The value of the deposited funds is based on
the cash surrendered value of these policies, and includes
immaterial profits.
n. Accounting for stock-based compensation:
The Company has elected to account for stock-based compensation in
accordance with the provisions of Accounting Principles Board
Opinion No. 25 ("APB-25"), "Accounting for Stock issued to
Employees". Under APB-25, when the exercise price of the Company's
stock options is equal to or above the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Financial Accounting Standards Board Statement No. 123 "Accounting
for Stock Based Compensation" (SFAS 123") requires the use of option
valuation model to measure the fair value of the options at the
grant date. The proforma disclosures required by Statement 123, are
provided in Note 9c
o. Basic and diluted net loss per share:
Basic and diluted net loss per share are presented in accordance
with SFAS No. 128, "Earnings per Share" , for all periods presented.
Basic net loss per share has been computed using the weighted-
average number of Ordinary shares outstanding during the period.
Diluted net loss per share is computed based on the weighted average
number of Ordinary shares outstanding during each year, plus the
weighted average number of dilutive potential Ordinary shares
considered outstanding during the year.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands , except per share data
All outstanding stock options, and warrants have been excluded from
the calculation of the diluted loss per Ordinary share because all
such securities are anti-dilutive for all periods presented. The
total number of shares related to the outstanding options excluded
from the calculations of diluted net loss per share were 88,468,
88,443, and 192,243, for the years ended December 31, 1997, 1998 and
1999, respectively. In addition warrants exercisable into the number
of Ordinary shares totaling $ 500 (see Note 5) and warrants
regarding convertible loans (see Note 8) were excluded.
p. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents, trade receivables, related parties,
short-term bank credit and trade payables - The carrying amounts of
these items approximate their fair value due to the short-term
maturity of such instruments.
Short-term loans - The carrying amounts of the Company's borrowing
arrangements approximate their fair value. Fair values were
estimated using discounted cash flow analyses, based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.
q. Impact of recently issued accounting standard:
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative instruments and Hedging
Activities" ("SFAS No. 133"). This statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires
that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting. The FASB has issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". The
Statement defers for one year the effective date of SFAS No. 133.
The rule will apply to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect the
impact of this new statement on the Company's balance sheets or
results of operations to be material.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
r. Segment reporting:
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". In 1998. SFAS No. 131
supercedes SFAS No. 14, replacing the "industry segment approach"
with the "management approach", whereby companies report financial
and descriptive information about their operating segments.
Operating segments are revenue-producing components of the
enterprise for which separate financial information is produced
internally and are subject to evaluation by the chief operating
decision-maker in deciding how to allocate resources to segments.
The Company manages its business on a basis of one reportable
segment.
s. Adjustment of computer systems for the Year 2000:
The costs required in order to adjust and modify the Company's
existing software in order for it to be Year 2000 Compliant are
recorded as current expenses at the time they are incurred.
NOTE 3:- INVENTORIES
December 31,
-------------------------
1998 1999
--------- ---------
Raw materials and components $ 937 $2,381
Work-in-progress 203 774
Finished products 70 269
--------- ---------
$1,210 $3,424
========= =========
NOTE 4:- PROPERTY AND EQUIPMENT
Cost:
Computers and peripheral equipment $1,135 $1,657
Machinery and engineering equipment 799 1,106
Motor vehicles 131 94
Office furniture and equipment 114 165
Leasehold improvements 131 230
--------- ---------
2,310 3,252
--------- ---------
Accumulated depreciation:
Computers and peripheral equipment 462 818
Machinery and engineering equipment 205 378
Motor vehicles 54 53
Office furniture and equipment 19 33
Leasehold improvements 22 64
--------- ---------
762 1,346
--------- ---------
Depreciated cost $1,548 $1,906
========= =========
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 5:- SHORT-TERM BANK CREDIT AND SHORT-TERM BANK LOANS
As of December 31, 1999, the Company has an authorized line of credit in
the amount of approximately $ 3,000, of which dollar denominated credit
bears interest at the rate of Libor + 1% and NIS denominated credit
bears interest at the prime rate minus 0.75% to prime rate +3%.
The Company received two NIS denominated bank loans. The loans bear
annual interest rate of prime and prime minus 0.75%, and are to be
repaid on an on-call basis during 2000.
The Company had an unused line of credit in the amount of approximately
$ 2,706 as of December 31, 1999 (there is no fee for the unused portion
of the line of credit).
In connection with one of the credit lines, the Company issued on
February 7, 1999, to a subsidiary of Bank Hapoalim B.M., a warrant to
purchase Ordinary shares of the Company. The warrant is exercisable into
the number of Ordinary shares totaling $ 500 according to the price per
share paid by purchasers of the Company's securities in one of the
following events ("Liquidity Events") less a discount of twenty percent
of the event price:
1. Issuance of equity securities, excluding exercise of options to
employees.
2. An Initial Public Offering ("IPO").
3. Sale of all or substantially all of the Company's property and
assets.
4. Merger or consolidation with or into another corporation.
If a Liquidity Event ("the event") will not occur until February 7, 2000
the exercise price will equal to the event price. If the event will not
occur until February 7, 2001, the exercise price will be 120% of the
event price and if the event does not occur until February 7, 2002, the
warrant can be exercised at an exercise price of $ 58 during the
following thirty days.
In respect of this warrant, the Company will record over 3 years
interest expense in the total amount of $ 125, representing the 20%
discount of the event price. For the year ended December 31, 1999, the
Company recorded interest expense in the amount of $ 37.
NOTE 6:- OTHER ACCOUNTS PAYABLE
December 31,
------------------
1998 1999
-------- --------
Office of the Chief Scientist and the BIRD-F *) $ 149 $ 246
Tax authorities 116 18
Related parties **) 32 21
Accrued expenses - 914
Provision for guarantee 75 138
-------- --------
$ 372 $1,337
======== ========
*) See Note 10a
**) See Note 13b.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- ACCRUED SEVERANCE PAY
The Company's liability for severance pay, pursuant to Israeli law, is
fully provided by an accrual. Part of the liability is funded through
insurance policies. The cash value of these policies is recorded as an
asset in the Company's balance sheets.
Severance expenses for the three years ended December 31, 1997, 1998 and
1999, amounted to approximately $ 195, $ 322 and $ 495, respectively.
NOTE 8:- CONVERTIBLE LOANS
On July 8, 1999, the Company entered into a convertible loans agreement
("the agreement") with one existing shareholder and with several new
investors, in the aggregate amount of $ 11,694 (such amount includes
loans which were received prior to executing the agreement, as described
below, and accrued interest in the amount of $ 144).
The loans are denominated in dollars and bear annual interest at the
rate of 5%, payable annually on December 31, of each calendar year
commencing on December 31, 1999.
The loans shall be due on December 31, 2002 ("the repayment date") and
shall be convertible, including accrued but unpaid interest, at any time
until the repayment date. The loans shall be converted into the number
of issued and outstanding Ordinary shares equal to the principal amount
of the loan divided by the conversion price, which is $ 40.6 per share,
subject to adjustments set forth in the agreement.
The conversion price regarding $ 2,400 received during the fourth
quarter of 1998, shall at all times and in any event be equal to 75% of
the applicable conversion price.
The aggregate principal amount of loans is composed as follows:
1. $ 7,000 were received during the third quarter of 1999 from new
investors:
2. $ 2,150 were received during the second quarter of 1999 from an
existing shareholder.
3. $ 2,400 were received during the fourth quarter of 1998 from an
existing shareholder.
In addition, the Company granted options Series A,B,C and D to the
shareholder and to the new investors. The exercise price of the options
and the number of options are dependent upon the volume of sales of the
Company during the years 1999 and 2000, as determined in the agreement.
The options are exercisable upon the earlier of:
1. Series A and C: December 31, 2001; Series B and D: December 31,
2002.
2. The initial offering of Company's shares to the public.
3. A merger or acquisition pursuant to which the Company is not the
surviving entity.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- SHARE CAPITAL
a. On July 15, 1999, shareholders' loans in the aggregate amount of $
2,797, including accrued interest in the amount of $ 297 thousand,
were converted into 129,698 Ordinary shares of the Company.
b. On October 2, 1999, the Company issued 240,741 Ordinary shares in
consideration of $ 6,308 net.
In addition, the Company granted to the investor warrants for the
purchase of Ordinary shares, entitling the investor to purchase
214,500 Ordinary shares at an exercise price of $ 35 per share
during the period from date of agreement until the earlier of:
1. The initial offering of Company's shares to the public.
2. The sale of substantially all of the assets or the shares of the
Company.
3. December 31, 2001.
c. Stock options to employees:
1. According to the Company's stock option plan to employees ("the
plan"), 194,743 options may, from time to time, be granted to
employees of the Company. As of December 31, 1999, 2,500 options
of the Company are still available for future grant.
Any options which are canceled or not exercised before
expiration become available for future grant.
An option must be granted within ten years from the date the
plan is adopted and expires no later than January 1, 2006.
As long as the Company's shares have not been listed for trade,
in the event one shareholder will hold more than 80% of the
Company's issued share capital, all of the employee options
which have not yet become exercisable, will become exercisable
to shares.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
A summary of the Company's share option activity under the Plan
is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------------
1997 1998 1999
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
options price options price options price
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at the beginning
of the year 89,168 $ 5.99 88,468 $ 5.96 88,443 $ 5.96
Granted - - - - 107,500 14.36
Exercised - - - - - -
Forfeited (700) 10.00 (25) 10.00 (3,700) 10.00
------------ ------------- ------------ ------------ ------------- ------------
Options outstanding at the end of the
year 88,468 $ 5.96 88,443 $ 5.96 192,243 $ 10.58
============ ============= ============ ============ ============= ============
Options exercisable 54,892 $ 4.75 76,243 $ 5.31 100,006 $ 6.62
============ ============= ============ ============ ============= ============
</TABLE>
The options outstanding as of December 31, 1999 have been
separated into ranges of exercise price, as follows:
<TABLE>
<CAPTION>
Options Weighted
outstanding average Options
as of remaining exercisable as Weighted
Exercise December 31, contractual of December 31, average
price 1999 life 1999 exercise price
---------------- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
$ 0.03 32,501 6.00 32,501 $ 0.03
5.00 6,667 6.00 6,667 5.00
10.00 74,975 6.00 57,638 10.00
16.00 78,100 6.00 3,200 16.00
---------------- --------------- --------------- ----------------- -----------------
$0.03-$ 16.00 192,243 6.00 100,006 $ 6.62
================ =============== =============== ================= =================
</TABLE>
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
2. Pro forma information regarding net loss is required by SFAS
123, which also requires that the information be determined as
if the Company has accounted for its employee stock options
under the fair value method of that Statement. The fair value
for these awards was estimated at the date of grant using the
minimum value options pricing model. The minimum value options
pricing valuation model was developed for use in estimating the
fair value of options that have no vesting restrictions and are
fully transferable. Option valuation models require the input of
highly subjective assumptions. Because the Company's stock-based
awards 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
stock-based awards. The fair value of these options was
estimated at the date of grant using the minimum value method
option pricing model with the following weighted-average
assumptions: risk-free interest rates of 6% for 1997 and 1998,
and 5.75% for 1999, no dividend yield for 1997, 1998 and 1999;
and a weighted-average expected life of the option of
approximately five years for 1997 and 1998, and one half to one
and half years for 1999.
Pro-forma information under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1997 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Net loss $4,260 $6,010 $9,376
============== ============== ===============
Pro-forma net loss $4,296 $6,037 $9,420
============== ============== ===============
Pro-forma basic and diluted
net loss per share $ 6.27 $ 8.54 $11.40
============== ============== ===============
</TABLE>
NOTE 10:- CONTINGENT LIABILITIES AND COMMITMENTS
a. Royalties:
(i) Under the Company's research and development agreements with the
Office of the Chief Scientist ("OCS") and pursuant to applicable
law, the Company is required to pay royalties at the rate of 3%
to 5% of sales of products developed with funds provided by the
OCS, up to an amount equal to 100% of the OCS's research and
development grants related to such projects.
Royalties regarding agreements with the OCS ("agreements") which
were signed before 1999 are dollar-linked, as royalties
regarding agreements signed in 1999 are
dollar-linked+Libor.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Repayment of such grants is not required, in the event that
there are no sales of products with respect to such grants.
For the years ended December 31, 1997, 1998 and 1999, the
Company recognized grants in the amounts of $ 1,662, $ 2,173
and $ 2,452, respectively, which are presented in the
financial statements as an offset to research and development
costs.
(ii) The Company is committed to pay to the Israeli-U.S. Binational
Industrial Research and Development Foundation ("BIRD-F")
royalties of 2.5% on proceeds from sales of any product
arising from the research and development project, up to the
amount of 100%-150% of the grant. The Company received a grant
in the amount of $ 111.
(iii) The Company has expensed royalties relating to the repayment
of such grants in the amount of $ 0, $ 107 and $ 274 for the
years ended December 31, 1997, 1998 and 1999, respectively.
(iv) As of December 31, 1999, the Company has a contingent
obligation to pay royalties in the amount of $ 8,509 in
respect of the aforementioned grants and participations
received from the OCS and the BIRD-F.
b. Charges and guarantees:
The Company has placed floating charges in favor of two banks on its
property, assets and insurance rights, and also a fixed charge on
its share capital and goodwill.
c. Lease commitments:
The Company's premises are rented from a related party, under an
operating lease, for a period until August 31, 2003.
The future minimum lease commitment, under a non-cancelable
operating lease is $ 265, annually.
Total rent expenses for the years ended December 31, 1997, 1998 and
1999, were approximately $ 172, $ 216 and $ 265, respectively.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (hereinafter - "the law"):
According to the provisions of this law, the Company has elected to
enjoy "alternative benefits" - waiver of grants in return for a tax
exemption and, accordingly, the Company's income is tax-exempt for a
period of two years commencing with the year it first earns taxable
income. In the remaining five years of benefits, the Company will be
liable to a corporate tax of 25%. The period of tax benefits has not
yet commenced.
The period of tax benefits, detailed above, is subject to limits of
12 years from the commencement of production, or 14 years from the
approval date (which is December 29, 1996), whichever is earlier.
If a dividend is distributed out of such tax-exempt profits, the
Company will be liable for corporate tax at the rate of 25%.
The law also grants entitlement to claim accelerated depreciation on
buildings, machinery and equipment used by the "approved
enterprise", during five tax years.
Should the Company derive income from sources other than the
approved enterprises during the relevant period of benefits, such
income will be taxable at regular corporate tax rate of 36%.
b. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985.
Results for tax purposes are measured in terms of earnings in NIS
after certain adjustments for increases in the Israeli CPI. As
explained in Note 2b, the financial statements are presented in US
dollars. The difference between the annual change in the CPI and in
the NIS\dollar exchange rate causes a difference between taxable
income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the
Company has not reserved for deferred income taxes on the difference
between the reporting currency and the tax bases of assets and
liabilities.
c. Deferred income taxes:
Deferred taxes have not been included, as it is more likely than not
that they will not be utilized in the foreseeable future.
d. Carryforward losses:
As of December 31, 1999 the Company has approximately $ 21,773 in
losses to offset against future taxable income, which have no
expiration date.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 12:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development cost, net:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Total cost $ 5,024 $ 6,833 $ 7,919
Less - royalty-bearing grant (Note 10a) 1,662 2,173 2,452
--------------- --------------- ---------------
$ 3,362 $ 4,660 $ 5,467
=============== =============== ===============
b. Selling and marketing, net:
Total cost $ 392 $ 489 $ 964
Less - non-royalty-bearing grants - - 50
--------------- --------------- ---------------
$ 392 $ 489 $ 914
=============== =============== ===============
c. Financial income (expenses):
Financial expenses:
Interest $ (15) $ (258) $ (736)
Amortization of deferred compensation
to a bank - - (37)
Other expenses (4) (8) (10)
Foreign currency translation differences (66) (223) (402)
--------------- -------------- ---------------
(85) (489) (1,185)
--------------- -------------- -------------
Financial income: 116 60 37
Interest 33 - -
Gain from marketable securities 38 452 436
Foreign currency translation differences --------------- -------------- -------------
187 512 473
--------------- -------------- -------------
$ 102 $ 23 $ (712)
Financial income (expenses), net =============== ============== =============
</TABLE>
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13:- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
All of the Company's sales are made to its sole customer through a
company who is also a 28% shareholder in the Company.
a. Transactions with related parties:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Sales $ - $ 3,569 $ 9,144
Rent and maintenance $ 252 $ 270 $ 432
Subcontractors $ - $ 139 $ 137
Interest $ 14 $ 193 $ 496
</TABLE>
b. Balances with related parties:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Trade receivables $ 320 $ 5,548
Advances from a customer $ 385 $ -
Other accounts payable $ 32 $ 21
</TABLE>
b) Terayon Communication Systems, Inc. unaudited pro forma combined condensed
financial statements.
The following unaudited pro forma combined condensed financial statements give
effect to the Terayon Communication Systems, Inc. ("Terayon") acquisition of
certain assets and the assumption of certain liabilities of Access Networks
Electronics Business, a division of Tyco Electronics Corporation, in exchange
for common shares of Terayon that was completed on April 22, 2000 and the
acquisition of Combox Ltd. ("Combox") through a merger and exchange of shares
that completed on April 18, 2000. In addition, the unaudited pro forma combined
condensed financial statements give effect to Terayon's acquisition of Telegate
Ltd. ("Telegate") through a merger and exchange of shares that was completed on
January 2, 2000, Terayon's acquisition of Radwiz Ltd. ("Radwiz") through a
merger and exchange of shares that was completed on November 22, 1999 and
Terayon's acquisition of Imedia Corporation ("Imedia") through a merger and
exchange of shares that was completed on September 16, 1999.
<PAGE>
<-PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Terayon ANE Combox Pro-forma
Actual Actual Actual Adjustments Total
----------- ---------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 54,676 $ $ 4,238 $ (250) [9] $ $58,664
Short-term investments 63,200 63,200
Accounts receivable, net 22,079 7,282 370 29,731
Accounts receivable from related party 13,104 13,104
Inventory 12,284 5,566 319 $ 1,890 [1] 20,059
Other current assets 10,115 59 266 10,440
----------- ---------- --------- ------------ -------------
Total current assets 175,458 12,907 5,193 1,640 195,198
Property and equipment, net 9,544 8,206 310 $ (1,996) [1] 16,064
Developed technology 72,864 12,600 [1] 97,964
12,500 [7]
Assembled workforce 7,800 12,200 [1] 21,100
1,100 [7]
Trademark 4,721 600 [1] 5,321
Customer Relationship 31,698 31,698
Customer Base 2,400 [1] 2,400
Other assets 3,604 3,604
Goodwill 144,467 275 42,138 [1] 265,454
78,574 [7]
----------- ---------- --------- ------------ -------------
Total assets $ 450,156 $ 21,113 $ 5,778 $ 161,756 $ 638,803
=========== ========== ========= ============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt 1,078 381 1,459
Accounts payable 39,212 4,500 578 44,290
Accrued payroll and related expenses 6,386 608 6,994
Other accrued liabilities 9,856 1,680 500 [2] 12,576
540 [8]
Current portion of capital lease obligations 5 5
------------------------------------------------------ -------------
Total current liabilities 56,537 6,180 1,567 1,040 65,324
Deferred tax liabilities 10,916 4,896 [13] 15,812
-
Long-term debt 938 938
Long-term obligations 1,775 1,775
Accrued severance pay 327 327
Stockholders' equity (deficiency):
Common stock 559,472 9,537 85,000 [3] 741,906
87,897 [9]
Accumulated deficit (176,795) (6,316) (735) [4] (185,530)
(1,684) [10]
Deferred compensation (1,395) (275) 275 [12] (1,395)
Stockholders' notes receivable (6) (6)
Accumulated other comprehensive income (348) (348)
---------- ---------- -------- ------------ -------------
Total stockholders' equity (deficiency) 380,928 - 2,946 170,753 554,627
------------------------------------------------------ -------------
Total liabilities and stockholders' equity $ 450,156 $ 6,180 $ 5,778 $ 176,689 $ 638,803
====================================================== =============
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Terayon ANE Combox Pro-forma
Actual Actual Actual Adjustments Total
------------ ----------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues $ 33,635 $ 14,543 $ 238 $ 48,416
Related party product revenues 25,702 25,702
------------ ----------- ------------ --------------- -----------
Total revenues 59,337 14,543 238 74,118
-
Cost of Goods Sold:
Cost of product revenues 24,967 11,364 338 1,263 [6] 38,618
44 [5]
642 [11]
Cost of related party product revenues 18,981 18,981
------------------------------------------------------------ -----------
Total cost of goods sold 43,948 11,364 338 1,949 57,599
Gross profit (loss) 15,389 3,179 (100) (1,949) 16,519
Operating Expenses:
Research and development, net 10,568 2,704 1,201 588 [6] 15,242
89 [5]
92 [11]
Cost of product development assistance
agreement 9,563 9,563
In-process research and development 6,750 (6,750)[16] -
Sales and marketing 7,676 1,454 250 368 [6] 9,903
144 [5]
11 [11]
General and administrative 4,185 525 930 88 [6] 5,884
139 [5]
17 [11]
Goodwill amortization 6,435 2,107 [6] 12,471
3,929 [11]
------------ ----------- ------------ --------------- -----------
Total operating expenses 45,177 4,683 2,381 822 53,063
------------ ----------- ------------ --------------- -----------
Operating loss (29,788) (1,504) (2,481) (2,771) (36,544)
Interest income (expense), net 1,394 (173) 1,221
------------ ----------- ------------ --------------- ---------
Net loss applicable to common stockholders $ (28,394) $ (1,504) $ (2,654) $ (2,771) $ (35,323)
============ =========== ============ =============== =========
Historical basic and diluted net loss per share
attributable to common stockholders $ (0.52) $ (0.61)
============ =========
Shares used in computing historical basic and
diluted net loss per share attributable to
common stockholders 54,512 2,950 57,462
============ =============== =========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Terayon ANE Combox Radwiz Telegate Imedia Pro-forma
Actual Actual Actual Actual Actual Actual Adjustments Total
---------- --------- -------- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues $ 57,345 $ 73,069 $ 1,012 $ 1,704 $ 3,567 $ (2,762) [17] $ 133,935
Related party product revenues 39,664 9,144 48,808
---------- --------- -------- -------- -------- -------- ---------- ---------
Total revenues 97,009 73,069 1,012 1,704 9,144 3,567 (2,762) 182,743
Cost of Goods Sold:
Cost of product revenues 46,215 49,308 757 1,573 1,697 175 [5] 130,774
5,050 [6]
2,569 [11]
15,672 [15]
4,450 [19]
3,308 [22]
Cost of related party product
revenues 25,829 9,399 (2,762) [17] 32,466
---------------------------------------------------------------------------- ---------
Total cost of goods sold 72,044 49,308 757 1,573 9,399 1,697 28,462 163,240
Gross profit (loss) 24,965 23,761 255 131 (255) 1,870 (31,224) 19,503
Operating Expenses:
Research and development, net 17,579 13,913 930 1,649 5,467 2,432 355 [5] 47,055
2,350 [6]
367 [11]
987 [15]
668 [19]
358 [22]
Cost of product development assistance
agreement 35,147 35,147
In-process research and development 14,600 (3,600) [20] -
(11,000) [23]
Sales and marketing 15,727 7,061 512 2,351 914 2,705 575 [5] 32,902
1,470 [6]
46 [11]
215 [15]
588 [19]
738 [22]
General and administrative 7,476 2,774 870 1,001 1,927 2,534 555 [5] 18,134
350 [6]
69 [11]
269 [15]
167 [19]
142 [22]
Goodwill amortization 3,524 8,428 [6] 49,865
15,715 [11]
11,105 [15]
3,557 [19]
7,536 [22]
---------- --------- -------- -------- -------- -------- -------- ---------
Total operating expenses 94,053 23,748 2,312 5,001 8,308 7,671 42,010 183,103
---------- --------- -------- -------- -------- -------- -------- ---------
Operating loss (69,088) 13 (2,057) (4,870) (8,563) (5,801) (73,234) (163,600)
Interest income (expense), net 5,008 - 70 (42) (711) (629) 3,696
---------- --------- -------- --------- -------- -------- -------- ---------
Net loss applicable to common
stockholders $ (64,080) $ 13 $ (1,987) $ (4,912) $ (9,274) $ (6,430) $(73,234) $(159,904)
========== ========= ======== ========= ======== ======== ======== =========
Historical basic and diluted net
loss per share attributable to
common stockholders $ (1.55) $ (3.07)
========== =========
Shares used in computing historical
basic and diluted net loss per
share attributable to
common stockholders 41,260 10,754 52,014
========== ======== =========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
As of, and For the Three Months Ended March 31, 2000 and For the Year Ended
December 31, 1999
The Unaudited Pro Forma Combined Condensed Financial Statements as of and for
the three months ended March 31, 2000 give effect to:
. Terayon's acquisition of certain assets and liabilities of Access Network
Electronics ("ANE"), a division of Tyco Electronics Corporation, Ltd.
("Tyco"), in exchange for common shares of Terayon ("the ANE acquisition")
that was completed on April 22, 2000.
. Terayon Communication Systems, Inc. ("Terayon") acquisition of Combox Ltd.
("Combox") through a merger and exchange of shares ("the Combox merger")
that was completed on April 18, 2000.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the
three months ended March 31, 2000 reflect the ANE and Combox transactions as if
they had taken place on January 1, 2000. The Unaudited Pro Forma Combined
Condensed Balance Sheet gives effect to the ANE and Combox transactions as if
they had occurred on March 31, 2000.
In addition, to the ANE and Combox acquisition the Unaudited Pro Forma Combined
Condensed Statements of Operations for the year ended December 31, 1999 give
effect to:
. Terayon's acquisition of Imedia Corporation ("Imedia") through a merger and
exchange of shares that was completed on September 16, 1999.
. Terayon's acquisition of Radwiz Ltd. ("Radwiz") through a merger and
exchange of shares that was completed on November 22, 1999.
. Terayon's acquisition of Telegate Ltd. ("Telegate") through a merger and
exchange of shares that was completed on January 2, 2000.
The Unaudited Pro Forma Combined Condensed Statements of Operations for the year
ended December 31, 1999 reflect the Imedia, Radwiz, Telegate, ANE and Combox
transactions as if they had taken place on January 1, 1999.
The results of Imedia, Radwiz and Telegate are included in Terayon's actual
results for the period following September 16, 1999, November 22, 1999 and
January 2, 2000, respectively.
The ANE, Combox, Telegate, Radwiz and Imedia transactions were accounted for
using the purchase method of accounting. The unaudited pro forma combined
condensed financial statements have been prepared on the basis of assumptions
described in the following notes and include assumptions relating to the
allocation of the consideration paid for the assets and liabilities of each of
the acquired companies based on actual fair value. In the opinion of Terayon's
management, all
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
adjustments necessary to present fairly such unaudited pro forma combined
condensed financial statements have been made on the proposed terms and
structure of the above transactions.
In connection with the acquisition of ANE, Terayon expects to incur write-offs
related to in-process research and development of approximately $735,000. In
connection with the acquisition of Combox, Terayon expects to incur write-offs
related to in-process research and development of approximately $8.0 million. In
connection with the acquisition of Radwiz, Terayon incurred write-offs related
to in-process research and development of approximately $3.6 million in the year
ended December 31, 1999. In connection with the acquisition of Imedia, Terayon
incurred write-offs related to in-process research and development of $11.0
million in the year ended December 31, 1999. In connection with the acquisition
of Telegate, Terayon incurred write-offs related to in-process research and
development of approximately $6.8 million in the three months ended March 31,
2000. The Unaudited Pro Forma Combined Condensed Balance Sheet includes the
Radwiz, Telegate and Imedia write-offs and the anticipated ANE and Combox write-
offs related to in-process research and development; however, the Unaudited Pro
Forma Combined Condensed Statements of Operations do not reflect these charges.
The charges related to in-process research and development for ANE and Combox
will be reflected in Terayon's consolidated financial statements when the
mergers are consummated. Terayon expects integration costs to be insignificant
as a result of the mergers.
Terayon's Board of Directors approved a two-for-one stock split in April 2000.
The stock split was paid in the form of a stock dividend to all stockholders of
record on April 25, 2000, and was distributed on May 5, 2000. All share numbers
reflect the two-for-one split.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS--continued
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of what the actual financial results would have been had
all of the above mergers taken place on January 1, 1999, January 1, 2000 or
March 31, 2000 and do not purport to indicate the results of future operations.
The unaudited pro forma combined condensed financial statements give effect to
the following pro forma adjustments.
1. In accordance with the Asset Purchase Agreement between Terayon and Tyco
Electronics Corporation ("the ANE Agreement), Terayon agreed to purchase
substantially all of the assets and assume specified liabilities of ANE.
The ANE acquisition was accounted for using the purchase method of
accounting. In general, Tyco will receive shares of Terayon common stock.
The aggregate number of shares of Terayon common stock to be issued under
the ANE 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 date on which a registration statement registering the
shares issued at the closing becomes effective. On the closing date,
Terayon issued 1,404,552 shares of common stock to Tyco. In addition,
Terayon agreed to establish an employee retention program for the purposes
of retaining certain identified employees of ANE. The retention program
provides for up to three annual payments to the identified employees in a
total amount of approximately $4.2 million provided the employees remain
employed by Terayon. The retention payments will be charged to expense over
the employees' respective periods of service.
For purposes of the pro forma combined condensed financial statements the
purchase price was determined to be approximately $85.0 million. This
represents the minimum purchase price, as specified in the Agreement, to be
issued to the shareholders.
The unaudited pro forma combined condensed financial statements have been
prepared on the basis of assumptions described in the notes thereto and
include assumptions relating to the allocation of the consideration paid
for the assets and liabilities of ANE based upon preliminary estimates of
fair value. The actual allocation of such consideration may differ from
that reflected in the unaudited pro forma combined condensed financial
statements after valuations and other procedures to be performed after the
closing of the ANE merger have been completed. Below is a table of the
estimated acquisition cost, purchase price allocation and annual
amortization of the intangible assets acquired (in thousands):
Annual
Amortization Amortization
Life of Intangibles
-------------- ----------------
Estimated Acquisition Cost:
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
Estimated Purchase Price................... $ 85,000
Acquisition Expenses....................... 500
--------
Total Estimated Acquisition Cost......... $ 85,500
========
Purchase Price Allocation:
Historical value of net assets acquired
of ANE at March 31, 2000................. $ 14,933
Adjustment to state net assets as fair
market value (106)
--------
14,827
Intangible assets acquired:
Developed technology..................... 12,600 5 years $ 2,520
Assembled workforce...................... 12,200 2 6,100
Trademark................................ 600 5 120
Customer base............................ 2,400 5 480
In-Process technology.................... 735
Goodwill................................. 42,138 5 8,428
--------
$ 85,500
========
Tangible assets of ANE acquired principally include accounts receivable,
inventory and property and equipment. Liabilities of ANE assumed
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
$12.6 million for developed technology which had reached technological
feasibility and therefore was capitalizable. The developed technology is
being amortized on a straight line basis over a five 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 $12.2 million for the assembled workforce. The
asset is being amortized on a straight line basis over a two year period.
The preliminary goodwill allocation as of March 31, 2000 is approximately
$42.1 million. Amortization of goodwill will occur over six years.
The projects identified as in-process at ANE are those that were underway
at the time of the acquisition of ANE and will, after consummation of the
acquisition, require additional effort to establish technological
feasibility. These projects have
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
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 $735,000.
In-process technology acquired in the transaction consists primarily of
additions to ANE's core technology, which is related to ANE's planned
development of new features. A portion of the intended functionality of
these new features is not supported by ANE's current technology. The
resultant technology is intended to allow the transmission from a 56Kbps
modem without the loss of transmission rate.
Terayon expects that the in-process technology will be successfully
developed, and that initial benefits from these projects will begin in
calendar 2000. Notwithstanding Terayon's expectation that the in-process
technology will be successfully developed, there remain significant
technical challenges that must be resolved in order to complete the
in-process technology.
2. The pro forma adjustment to "Other accrued liabilities" reflects the
accrual of acquisition costs arising from the ANE acquisition, for a total
of approximately $500,000.
3. The pro forma adjustment to "Common stock" reflects the issuance of Terayon
common stock ($85.0 million) in exchange for certain assets and liabilities
of ANE.
4. The pro forma adjustment reflects the in-process technology charge
($735,000).
5. The pro forma adjustment reflects the cost associated with the retention
program.
6. The pro forma adjustment reflects the amortization of goodwill, developed
technology trademark and assembled workforce.
7. In accordance with the Share Purchase Agreement among Terayon and Combox
("the Agreement"), Combox became a wholly-owned subsidiary of Terayon, and
all outstanding shares of its common stock were converted into shares of
common stock of Terayon. The Combox acquisition was completed on April 18,
2000.
The Combox acquisition was accounted for using the purchase method of
accounting. In general, the shareholders and vested optionholders of Combox
received 1,547,770 shares and options to purchase shares of Terayon common
stock and a cash payment of approximately $250,000. In addition, Terayon
will issue options to purchase shares of Terayon common stock to the
unvested optionholders of Combox, the value of which will be included in
the purchase price.
For purposes of the pro forma combined condensed financial statements the
purchase price was determined to be approximately $97.7 million. The
estimated purchase price was determined as the value of Terayon's common
stock issued at closing
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
($92.0 million) and the value of the options to purchase Terayon's shares
issued to the unvested optionsholders ($5.5 million) based on the fair
market value of Terayon's common stock on the days immediately preceding
and following the date the acquisition was announced. In addition, a cash
payment of approximately $250,000 is included in the purchase price.
Proceeds to be received from the optionholders and warrantholders upon
exercise are not significant.
The unaudited pro forma combined condensed financial statements have been
prepared on the basis of assumptions described in the notes thereto and
include assumptions relating to the allocation of the consideration paid
for the assets and liabilities of Combox based upon preliminary estimates
of fair value. The actual allocation of such consideration may differ from
that reflected in the unaudited pro forma combined condensed financial
statements after valuations and other procedures to be performed after the
closing of the Combox merger have been completed. Below is a table of the
estimated acquisition cost, purchase price allocation and annual
amortization of the intangible assets acquired (in thousands):
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
------------- ---------------
<S> <C> <C>
Estimated Acquisition Cost:
Estimated Purchase Price................ $97,684
Estimated transaction and other direct
costs................................... 540
-------
Total Estimated Acquisition Cost... $98,224
=======
Purchase Price Allocation:
Historical value of net assets acquired
of Combox at March 31, 2000......... $ 2,946
Intangible assets acquired:
Developed technology................. 12,500 5 years $ 2,500
Assembled workforce.................. 1,100 2 550
In-Process technology................ 8,000
Goodwill............................. 78,574 5 15,715
Deferred tax liability............... (4,896)
-------
$98,224
=======
</TABLE>
Tangible assets of Combox acquired principally include cash and cash
equivalents and accounts receivable. Liabilities of Combox assumed
principally include short and long term debt, accounts payable and accrued
liabilities.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
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
$12.5 million for developed technology which had reached technological
feasibility and therefore was capitalizable. The developed technology is
being amortized on a straight line basis over a five 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 $1.1 million for the assembled workforce. The
asset is being amortized on a straight line basis over a two year period.
The preliminary goodwill allocation as of March 31, 2000 is approximately
$78.6 million. Amortization of goodwill will occur over five years.
The projects identified as in-process at Combox are those that were
underway at the time of the acquisition of Combox and will, 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 $8.0 million.
In-process technology acquired in the transaction consists primarily of
additions to Combox's core technology, which is related to Combox's planned
development of new features. A portion of the intended functionality of
these new features is not supported by Combox's current technology.
Intended new features include modems that offer end-to-end solutions for
both the cable and the satellite infrastructure.
Terayon expects that the in-process technology will be successfully
developed, and that initial benefits from these projects will begin in late
calendar 2000. Notwithstanding Terayon's expectation that the in-process
technology will be successfully developed, there remain significant
technical challenges that must be resolved in order to complete the
in-process technology.
8. The pro forma adjustment to "Other accrued liabilities" reflects the
accrual of acquisition costs arising from the Combox acquisition, for a
total of approximately $540,000.
9. The pro forma adjustment to "Common stock" reflects the elimination of
Combox's common stock ($9.5 million), the impact of the issuance of Terayon
common stock ($97.4 million) and the payment of $250,000 in cash for
Combox.
7
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
10. The pro forma adjustment to "Accumulated deficit" reflects the elimination
of Combox's accumulated deficit ($6.3 million) and the in-process
technology charge ($8.0 million).
11. The pro forma adjustment is for the amortization of goodwill, developed
technology, trademark and assembled workforce.
12. The pro forma adjustment eliminates deferred compensation related to Combox
options.
13. Goodwill has been increased and deferred tax liabilities have been recorded
in the amount of approximately $4.9 million to reflect the net tax effect
of the book/tax basis differences in the acquired intangibles, excluding
goodwill and in-process research and development. Deferred tax assets have
been realized based on the projected reversal of taxable temporary
differences and have been netted against deferred tax liabilities for
purposes of allocating the purchase price.
14. In accordance with the Share Purchase Agreement among Terayon and Telegate
("the Agreement"), Telegate became a wholly-owned subsidiary of Terayon,
and all outstanding shares of its common stock were converted into shares
of common stock of Terayon. The acquisition of Telegate was completed on
January 2, 2000. The results of Telegate for the period following January
2, 2000 are included in Terayon's actual results.
The Telegate merger was accounted for using the purchase method of
accounting. In general, the shareholders and vested optionholders of
Telegate received 4,400,000 shares of Terayon common stock and options to
purchase shares of Terayon common stock plus a cash payment equal to
Telegate's net current assets at closing in excess of $2.0 million. In
addition, the Company issued a warrant to purchase 2,000,000 shares of the
Company's common stock under the terms of an agreement between Telegate and
a customer of Terayon. The value of the warrant was included in the
purchase price and was associated with the value of the customer
relationship.
The purchase price was determined to be approximately $138.1 million. This
represents the minimum purchase price as specified in the Telegate
Agreement of $100.0 million, an estimated cash payment of $3.5 million and
the value of the warrant ($34.6 million). Terayon does not anticipate
receiving any proceeds from the optionholders upon exercise of the options
and warrants. The purchase price was allocated to the assets acquired and
liabilities assumed based on a determination from an independent appraisal
of their respective values.
Below is a table of the approximate purchase price, purchase price
allocation and annual amortization of the intangible assets acquired:
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
--------------- ------------------
<S> <C> <C> <C>
Approximate Purchase Price:
Purchase price............................ $ 138,067
Estimated transaction and other direct
costs.....................................
1,929
------------
$ 139,996
============
Purchase Price Allocation:
Historical net tangible assets of Telegate
at January 2, 2000...................... $ (5,580)
Conversion of Telegate convertible
notes and accrued interest.............. 12,482
------------
6,902
Intangible assets acquired:
Customer relationship............... 34,580 3 years $11,527
Developed technology................ 21,100 6 3,517
Assembled workforce................. 4,200 2 2,100
In-Process Technology............... 6,750
Goodwill............................ 66,631 6 11,105
Deferred tax liability.............. (167)
------------
$ 139,996
============
</TABLE>
Tangible assets of Telegate acquired principally include cash, accounts
receivable, inventory and property and equipment. Liabilities of Telegate
assumed in the Telegate merger principally include accounts payable and
accrued liabilities.
The value of the customer relationship was determined as the value of the
warrant ($34.6 million) using the Black Scholes model. The warrant is fully
vested, non-forfeitable, and immediately exercisable and has a term of
three years. The value of the customer relationship is being amortized on a
straight-line basis over a three-year period.
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
$21.1 million 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
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
each category of employee. The analysis yielded a valuation of
approximately $4.2 million for the assembled workforce. The asset is being
amortized on a straight line basis over a two year period.
The goodwill allocation is approximately $66.6 million. Amortization of
goodwill will occur over six years.
The projects identified as in process at Telegate are those that were
underway at the time of the acquisition of Telegate 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. Terayon incurred $6.8 million in in-process
research and development write-offs in the three months ended March 31,
2000 as result of the Telegate merger.
In-process technology acquired in the transaction consists primarily of
additions to Telegate's core technology, which is related to Telegate's
planned development of new features. The majority of the intended
functionality of these new features is not supported by Telegate's current
technology. Intended new features include: connection on demand
functionality to extend the product's ISDN compatibility; the ability to
use cordless technology for either voice or data applications; and, a
subscriber end unit that can be used in multi-dwelling units.
Terayon expects that the in-process technology will be successfully
developed, and that initial benefits from these projects will begin in
calendar 2000. Notwithstanding Terayon's expectation that the in-process
technology will be successfully developed, there remain significant
technical challenges that must be resolved in order to complete the
in-process technology.
15. The pro forma adjustment reflects the amortization of goodwill, developed
technology, trademark and assembled workforce for the twelve month period
ended December 31, 1999.
16. The pro forma adjustment reflects the elimination of $6.8 million of
in-process research and development write-offs incurred by Terayon in the
three months ended March 31, 2000 relating to the Telegate merger.
17. The pro forma adjustment reflects the elimination of intercompany
transactions between Terayon and Telegate prior to the merger.
18. In accordance with the Share Purchase Agreement among Terayon and Radwiz
("the Radwiz Agreement"), Radwiz became a wholly-owned subsidiary of
Terayon, and all outstanding shares of its common stock converted into
shares of common stock of Terayon. The acquisition of Radwiz was completed
on November 22, 1999. The
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
results of Radwiz for the period following November 22, 1999 are included
in Terayon's actual results.
The Radwiz merger was accounted for using the purchase method of
accounting. In general, the shareholders and vested optionholders received
cash and shares of Terayon common stock and options to purchase shares of
Terayon common stock. On the closing, Terayon paid $250,000 in cash and
issued 1,747,164 shares of Terayon common stock to the former shareholders
of Radwiz and issued options to purchase 145,142 shares of Terayon common
stock to the vested optionholders of Radwiz. In addition, the unvested
optionholders of Radwiz options also received options to purchase Terayon
common stock, the fair value of which was included in the purchase price.
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 and the twelve month anniversary. Subsequent to December 31, 1999,
the market valuation specified in the Radwiz Agreement was reached and
Terayon's obligation to issue additional shares of common stock was
eliminated. As a result, no additional consideration will be issued to the
former shareholders and optionholders of Radwiz.
The approximate purchase price was determined to be $52.7 million. This
represents the minimum purchase price, as specified in the Agreement, to be
issued to the shareholders and vested optionholders of Radwiz ($50.0
million) plus the value of the options issued to unvested optionholders of
Radwiz ($2.7 million) based on the market value of Terayon'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 purchase price was allocated to the assets acquired and liabilities
assumed based on a determination from an independent appraisal of their
respective values.
Below is a table of the approximate purchase price, purchase price
allocation and annual amortization of the intangible assets acquired (in
thousands):
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
------------------ -------------------
<S> <C> <C> <C>
Approximate Purchase Price:
Purchase price.............................. $ 52,667
Estimated transaction and other direct
costs....................................... 902
---------
$ 53,569
=========
Purchase Price Allocation:
Historical net tangible assets of Radwiz
at November 22, 1999.................... $ 3,058
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
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 technology.................. 3,600
Goodwill............................... 24,109 6 4,018
Deferred tax liability................. (10,998)
--------
$ 53,569
========
Tangible assets of Radwiz to be acquired principally include cash, accounts
receivable, inventory and property and equipment. Liabilities of Radwiz
assumed in the Radwiz merger 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
$29.9 million 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 $2.8 million for the assembled workforce. The
asset is being amortized on a straight line basis over a two year period.
The goodwill allocation is approximately $24.1 million. Amortization of
goodwill will occur over six years.
The projects identified as in process at Radwiz are those that were
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 indentifiable technological
risk factors that indicate that even though successful completion is
expected, it is not assured. Terayon incurred $3.6 million in in-process
research and development write-offs in the year ended December 31, 1999 as
result of the Radwiz merger.
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.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
Terayon expects that the in-process technology will be successfully
developed, and that initial benefits from these projects will begin in
calendar 2000. Notwithstanding Terayon's expectation that the in-process
technology will be successfully developed, there remain significant
technical challenges that must be resolved in order to complete the
in-process technology.
19. The pro forma adjustment reflects the amortization of goodwill, developed
technology, trademark and assembled workforce for the period from January
1, 1999 to November 22, 1999.
20. The pro forma adjustment reflects the elimination of $3.6 million of
in-process research and development write-offs incurred by Terayon in the
year ended December 31, 1999 relating to the Radwiz merger.
21. In accordance with the Agreement and Plan of Merger and Reorganization
among Terayon and Imedia ("the Agreement"), Imedia became a wholly-owned
subsidiary of Terayon, and all outstanding shares of its common stock were
converted into shares of common stock of Terayon. The Imedia merger closed
on September 16, 1999. The results of Imedia for the period following
September 16, 1999 are included in Terayon's actual results.
The Imedia merger was accounted for using the purchase method of
accounting. In general, the shareholders, vested optionholders and
warrantholders received shares of Terayon common stock, options and
warrants to purchase shares of Terayon common stock. The aggregate number
of shares of Terayon common stock issued under the Imedia Agreement will
depend, among other things, on the performance of Terayon's common stock
over the period during which the payments are to be made. Terayon issued
1,654,814 shares of common stock on the closing of the Imedia merger.
Subsequent to December 31, 1999, 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 was eliminated. As a result, no
additional consideration will be issued in the future to the former
stockholders, optionholders and warrantholders of Imedia.
The purchase price of approximately $106.3 million was determined using the
maximum value of the consideration (approximately $99.0 million) as
specified in the Imedia Agreement, the value of the options to purchase
Terayon shares issued to the unvested optionholders of Imedia
(approximately $6.3 million) and the forgiveness of the Imedia note payable
($1.0 million). The estimated purchase price is net of the estimated
proceeds that will be received from the optionholders and warrantholders
upon exercise (approximately $3.1 million). 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.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
The unaudited pro forma combined condensed financial statements have been
prepared on the basis of assumptions described in the notes thereto. Below
is a table of the approximate purchase price, purchase price allocation and
annual amortization of the intangible assets acquired:
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
------------------ -------------------
<S> <C> <C> <C>
Approximate Purchase Price:
Purchase price............................. $106,347
Estimated transaction and other direct
costs..................................... 2,631
--------
$108,978
========
Purchase Price Allocation:
Historical net tangible assets of Imedia
at September 16, 1999.................. $ (355)
Forgiveness of Imedia note payable......... 1,000
--------
645
Intangible assets acquired:
Developed technology.................... 27,000 6 $ 4,500
Assembled workforce..................... 2,500 2 1,250
Trademark............................... 4,000 6 667
In-Process technology................... 11,000
Goodwill................................ 63,833 6 10,639
--------
$108,978
========
</TABLE>
Tangible assets of Imedia acquired in the Imedia merger principally include
cash, accounts receivable and property and equipment. Liabilities of Imedia
assumed in the Imedia merger principally include accounts payable and
accrued liabilities. Upon the closing of the Imedia merger, Imedia's note
payable obligation to Terayon of $1.0 million was forgiven by Terayon.
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
$27.0 million 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.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS -- continued
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting and hiring costs and
training costs for each category of employee. The analysis yielded a
valuation of approximately $2.5 million for the assembled workforce. The
asset is being amortized on a straight line basis over a two year period.
The goodwill allocation is approximately $63.8 million. Amortization of
goodwill will occur over six years.
The projects identified as in-process at Imedia are those that were
underway at the time of the acquisition of Imedia and would, after
consummation of the acquisition, require additional effort to establish
technological feasibility. These projects have indentifiable technological
risk factors that indicate, even though successful completion is expected,
it is not assured. Terayon incurred $11.0 million in in-process research
and development write-offs in the nine months ended September 30, 1999 as
result of the Imedia merger.
In-process technology acquired in the transaction consists primarily of
major additions to Imedia's core technology, which is related to Imedia's
planned development of new features. The majority of the intended
functionality of these new features is not supported by Imedia's current
technology. Intended new features include offering high quality video
service over the Internet and multiplexing data with video.
Terayon expects that the in-process technology will be successfully
developed, and that initial benefits from these projects will begin in
calendar 2001. Notwithstanding Terayon's expectation that the in-process
technology will be successfully developed, there remain significant
technical challenges that must be resolved in order to complete the
in-process technology.
22. The pro forma adjustment reflects the amortization of goodwill, developed
technology, trademark and assembled workforce for the period from January
1, 1999 to September 16, 1999.
23. The pro forma adjustment refelcts the elimination of $11.0 million of
in-process research and development write-offs incurred by Terayon in the
nine months ended September 30, 1999 relating to the Imedia merger.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Terayon Communication Systems, Inc.
Dated: June 27, 2000 By: /s/ Ray M. Fritz
Ray M. Fritz
Chief Financial Officer
