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As filed with the Securities and Exchange Commission on November 6, 2000
Registration No. 333-48272
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Amendment No. 1 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________
TERAYON COMMUNICATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3661 77-0328533
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
2952 Bunker Hill Lane
Santa Clara, California 95054
(408) 727-4400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Edward Lopez
General Counsel
2952 Bunker Hill Lane
Santa Clara, California 95054
(408) 727-4400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
___________
Copies to:
Karyn S. Tucker
Edward A. Deibert
Rachel N. Halpren
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
(415) 693-2000
___________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering.[_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.[_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box.[_]
___________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission
(the "SEC"), acting pursuant to said Section 8 (a), may determine. (1)
(1) The registration fee was previously paid.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the Registration
Statement filed with the SEC is effective. This prospectus is not an offer to
sell these securities and it is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to Completion
(November 6, 2000)
TERAYON COMMUNICATION SYSTEMS, INC.
2,969,062 Shares
Common Stock
The Selling Stockholders: The selling stockholders identified in this
prospectus are selling 2,969,062 shares of our common
stock. We are not selling any shares of our common
stock under this prospectus and will not receive any
of the proceeds from the sale of shares by the
selling stockholders.
Offering Price: The selling stockholders may sell the shares of
common stock described in this prospectus in a number
of different ways and at varying prices. We provide
more information about how they may sell their shares
in the section titled "Plan of Distribution" on page
25.
Trading Market: Our common stock is listed on the Nasdaq National
Market under the symbol "TERN." On November 3, 2000,
the closing sale price of our common stock, as
reported on the Nasdaq National Market, was
$23.875.
Risks: Investing in our common stock involves a high degree
of risk. See "Risk Factors" beginning on page 3.
The shares offered or sold under this prospectus have not been approved by
the SEC or any state securities commission, nor have these organizations
determined that this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is ______________, 2000
Terayon, TeraComm, TeraLink, TeraPro, TeraView, CherryPicker and the Terayon
logo are our trademarks. This prospectus also includes trade dress, trade names
and trademarks of other companies. Our use or display of other parties'
trademarks, trade dress or products is not intended to and does not imply a
relationship with the trademark or trade dress owners.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We make "forward-looking statements" throughout this prospectus. Whenever
you read a statement that is not simply a statement of historical fact (such as
when we describe what we "believe," "expect" or "anticipate" will occur, and
other similar statements), you must remember that our expectations may not be
correct, even though we believe they are reasonable. We do not guarantee that
the transactions and events described in this prospectus will happen as
described (or that they will happen at all). You should read this prospectus
completely and with the understanding that actual future results may be
materially different from what we expect. We will not update these forward-
looking statements, even though our situation may change in the future. Whether
actual results will conform with our expectations and predictions is subject to
a number of risks and uncertainties including but not limited to:
. risks associated with the effect of economic conditions;
. future capital needs;
. our ability to identify, complete and integrate acquisitions successfully;
. risks associated with retaining our significant customers;
. our strategies for reducing the costs of our products;
. our product development efforts;
. the impact of competition and technological change on us;
. the timing of our introduction of new products and the extent of the
deployment of our products by our customers;
. our dependence on industry trends and the future growth in the markets for
cable modem systems and other broadband access systems;
. the impact of legislation and regulation; and
. the loss of key employees.
You should read carefully the section of this prospectus under the heading
"Risk Factors" beginning on page 3. We assume no responsibility for updating
forward-looking information contained in this prospectus.
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PROSPECTUS SUMMARY
The following is a summary of our business. You should carefully read the
section entitled "Risk Factors" in this prospectus, our Annual Report on Form
10-K for the year ended December 31, 1999, our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 and our Report on Form 8-K filed with the SEC on
July 18, 2000 for more information on our business and the risks involved in
investing in our stock.
In addition to the historical information contained in this prospectus, this
prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These
statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors"
beginning on page 3 of this prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in our
Annual Report, Quarterly Report and Form 8-K filed in July 2000 contain a
discussion of some of the factors that could contribute to those differences.
Terayon
Overview
We develop, market and sell broadband access systems that enable cable
operators and other providers of broadband access services to cost effectively
deploy reliable broadband access services over cable, copper wire utilizing
digital subscriber line technology (or DSL) and wireless systems. We have
substantial development and marketing resources focused on cable operators.
However, through internal development and recent acquisitions of complementary
technology and businesses, we also are focusing on service providers that offer
broadband access through existing copper wire infrastructures and wireless
systems.
In recent years, the volume of bandwidth-intensive data, voice and video
traffic across existing cable infrastructure, the Internet, corporate intranets
and other public networks has increased dramatically. International Data
Corporation estimates that the number of worldwide Internet users will increase
from approximately 200 million at the end of 2000 to more than one billion by
the end of 2005. IDC estimates that the number of homes in the United States
with broadband access will increase from two million at the end of 1999 to 20
million by the end of 2003. As a result of the rapid evolution of broadband
access, cable operators, providers of telephone services and other service
providers are providing a bundle of voice, data and video services to their
residential and commercial subscribers over existing and new infrastructures.
Our objective is to be the leading provider of broadband access systems to
providers of broadband services that use existing cable, copper wire (DSL) and
wireless networks to offer services to residential and commercial customers.
Key elements of our strategy include the following:
. build a complete portfolio of broadband products;
. supply leading broadband service providers worldwide;
. increase our presence in existing and new markets;
. extend technology leadership and advance industry standards; and
. provide superior customer support.
Our primary product is the TeraComm system, which is based on our patented
Synchronous Code Division Multiple Access or "S-CDMA" technology. Our S-CDMA
technology enables reliable two-way broadband data communications over both pure
coaxial and hybrid fiber/coax cable infrastructure and is designed to enable
cable operators to maximize the capacity and reliability of broadband data
services over any cable plant. In furtherance of our strategy to provide a
complete portfolio of broadband products, we have recently completed several
acquisitions of complementary broadband technologies, including digital video
management systems, DSL and wireless.
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We sell our broadband access products to cable operators and other providers
of broadband access services through direct sales forces in North America, South
America, Europe and Asia. We also distribute our products via distributors and
systems integrators. Companies currently using or distributing our TeraComm
system include Rogers Communications, Inc., Shaw Communications, Inc., TCA Cable
TV, Inc. (a subsidiary of Cox Communications, Inc.), United Pan-Europe
Communications and Crossbeam Networks Corporation, a wholly owned subsidiary of
Sumitomo Corporation. Companies currently using our DSL products include major
ILEC's (Incumbent Local Exchange Carriers) in the United States, including SBC,
Bell Atlantic, Bell South, U.S. West and GTE.
Our company was incorporated in California in January 1993 and reincorporated
in Delaware in July 1998. Our executive offices are located at 2952 Bunker Hill
Lane, Santa Clara, California 95054 and our telephone number is (408) 727-4400.
Our Web site is located at www.terayon.com. Information contained on our Web
site does not constitute part of this offering memorandum.
Recent Events
In July 2000, we issued $500 million of 5% Convertible Subordinated Notes
(the "Convertible Notes" or "Notes") due in August 2007, which resulted in net
proceeds to us of approximately $484.5 million. The Convertible Notes are a
general unsecured obligation and are subordinated in right of payment to all
existing and future senior indebtedness and all of the liabilities of our
subsidiaries. The Convertible Notes are convertible into shares of common stock
at a conversion price of $84.01 per share at any time on or after October 24,
2000, unless previously redeemed or repurchased. We may redeem some or all of
the Convertible Notes at any time on or after October 24, 2000, and before
August 7, 2003 at a redemption price of $1,000 per $1,000 principal amount of
the Convertible Notes, plus accrued and unpaid interest, if any, if the closing
price of our stock exceeds 150% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending on the trading day
prior to the date of mailing of the redemption notice. We may redeem the
Convertible Notes at any time on or after August 7, 2003 at specified prices
plus accrued and unpaid interest. Interest is payable semiannually. Our debt
issuance costs related to the Convertible Notes are estimated at $15.5 million.
We believe that the following acquisitions, in combination with our own
internal development and previous acquisitions, significantly increase our
technological expertise throughout broadband access technologies including cable
modems, DSL, digital and wireless broadband access:
In September 2000, we acquired Digital Transmission Equipment ("Digitrans"),
a company that develops, markets and sells digital equipment solutions that
enable broadcasters, satellite operators, and cable television system operators
to optimize network services.
In September 2000, we acquired Mainsail Networks, Inc., a company that
develops and markets next-generation broadband networks that enable
telecommunications carriers to deliver multiple services over a single network
infrastructure.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
We Have a Limited Operating History and a History of Losses.
We have a limited operating history, and it is difficult to predict our
future operating results. We began shipping products commercially in June 1997,
and we only have been shipping products in volume since the first quarter of
1998. As of June 30, 2000, we had an accumulated deficit of $211.2 million. We
believe that we will continue to experience net losses for the foreseeable
future. Most of our expenses are fixed in advance, and we generally are unable
to reduce our expenses significantly in the short term to compensate for any
unexpected delay or decrease in anticipated revenues. We expect to continue to
increase expenses for the foreseeable future to support increased sales and
marketing and technical support costs. Any significant delay in our anticipated
revenues or commercialization of new products would harm our business. The
revenue and profit potential of our business and our industry are unproven. We
had negative gross margins from our inception until the fourth quarter of 1998,
and any future revenue growth may not result in positive gross margins or
operating profits in future periods.
Our Operating Results May Fluctuate.
Our quarterly revenues are likely to fluctuate significantly in the future
due to a number of factors, many of which are outside our control. Factors that
could affect our revenues include the following:
. variations in the timing of orders and shipments of our products;
. variations in the size of the orders by our customers;
. new product introductions by competitors;
. delays in our introduction of new products;
. delays in our receipt of orders forecasted by our customers;
. delays by our customers in the completion of upgrades to their cable
infrastructure;
. variations in capital spending budgets of broadband access service
providers;
. adoption of industry standards and the inclusion in or compatibility of
our technology with any such standards; and
. delays in obtaining regulatory approval for commercial deployment of cable
modem systems.
Our expenses generally will vary from quarter to quarter depending on the
level of actual and anticipated business activities. Research and development
expenses will vary as we begin development of new products and as our
development programs move to wafer fabrication and prototype development, which
results in higher engineering expenses.
A variety of factors affect our gross margin, including the following:
. the sales mix of our products;
. the volume of products manufactured;
. the type of distribution channel through which we sell our products;
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. the average selling prices or "ASPs" of our products; and
. the effectiveness of our cost reduction measures.
We anticipate that unit ASPs of our products will decline in the future.
This could cause a decrease in the gross margins for these products. In
addition, the maturity of TeraComm system deployments affects our gross margin.
New deployments of the TeraComm system involve the sale of headend equipment
(which has higher margins) and generally involve smaller quantities of product.
New deployments typically are sold at higher margins than the larger volume
sales of product associated with more mature deployments of the TeraComm system.
The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways and TeraPro
cable modems also affects our gross margin. The TeraPro cable modems have
significantly lower margins than the TeraLink 1000 Master Controller and
TeraLink Gateway headend products. We expect to achieve significantly lower
margins on the TeraPro cable modems for the foreseeable future. Further, we
expect that sales of TeraPro cable modems will continue to constitute a
significant portion of our revenues for the foreseeable future.
We also anticipate that our operating results will be impacted by sales,
gross profit and operating expenses of acquired companies. The impact of these
factors on our operating results will vary as we acquire additional companies.
We Are Dependent on a Small Number of Customers.
Two related party customers accounted for approximately 39% of our revenues
for the quarter ended June 30, 2000 and two customers (one of which is a related
party) accounted for approximately 46% of our revenues for the quarter ended
June 30, 1999. We believe that a substantial majority of our revenues will
continue to be derived from sales to a relatively small number of customers for
the foreseeable future. In addition, we believe that sales to these customers
will be focused on a limited number of projects.
The cable industry is undergoing significant consolidation in North America
and internationally, and a limited number of cable operators controls an
increasing number of cable systems. Currently, ten cable operators in the
United States own and operate facilities passing approximately 86% of total
homes passed. In addition, the North American DSL market is concentrated with
the major ILECs, constituting a significant percentage of the market. As a
result, our sales will be largely dependent upon product acceptance by the
leading broadband service providers. Currently, the timing and size of each
customer's order is critical to our operating results. Our major customers are
likely to have significant negotiating leverage and may attempt to change the
terms, including pricing, upon which we do business with them. These customers
also may require longer payment terms than we anticipate, which could require us
to raise additional capital to meet our working capital requirements.
Acquisitions Could Result In Dilution, Operating Difficulties and Other Adverse
Consequences.
We have acquired nine businesses since September 1999: Imedia Corporation
("Imedia") in September 1999; Radwiz Ltd. in November 1999; Telegate Ltd. in
January 2000; Access Network Electronics Division of Tyco Electronics
Corporation in April 2000; ComBox, Ltd. in April 2000; some assets of Internet
Telecom Ltd. in April 2000; Ultracom Communications Holdings (1995) Ltd. in
April 2000; Mainsail in September 2000; and Digitrans in September 2000. If
appropriate opportunities present themselves, we intend to acquire additional
businesses, technologies, services or products that we believe are strategic.
The process of integrating any acquired business into our business and
operations is risky and may create unforeseen operating difficulties and
expenditures. The areas in which we may face difficulties include:
. diversion of management time (both ours and that of the acquired
companies) during the period of negotiation through closing and after
closing from the ongoing development of our businesses, issues of
integration and future products;
. decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects or the direction
of the business;
. the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management, and the lack of control if this integration is delayed or not
implemented; and
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. the need to implement controls, procedures and policies appropriate for a
larger public group of companies that prior to acquisition had been
smaller, private companies.
We have very limited experience in managing this integration process.
Moreover, the anticipated benefits of any or all of these completed or pending
acquisitions may not be realized.
Future acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could harm our business. Future acquisitions also could require us to
obtain additional equity or debt financing, which may not be available on
favorable terms or at all. Even if available, this financing may be dilutive.
The Sales Cycle for Our Products Is Lengthy.
The sales cycle associated with our products typically is lengthy, often
lasting six months to a year. Our customers typically conduct significant
technical evaluations of competing technologies prior to the commitment of
capital and other resources. In addition, purchasing decisions may be delayed
because of our customers' internal budget approval procedures. Sales also
generally are subject to customer trials, which typically last three months.
Because of the lengthy sales cycle and the large size of customers' orders, if
orders forecasted for a specific customer for a particular quarter do not occur
in that quarter, our operating results for that quarter could suffer.
There Are Many Risks Associated with Our Participation in the Establishment of
Advanced Physical Layer Specifications to Be Added to DOCSIS.
In November 1998, CableLabs selected us to co-author DOCSIS 1.2 (Data Over
Cable Service Interface Specifications), an enhanced version of the DOCSIS cable
modem specification based in part on our S-CDMA technology. In September 1999,
CableLabs indicated that it intended to proceed with the advanced physical layer
("PHY") work on two parallel tracks: one for the development of a prototype
based on our S-CDMA technology and one for the inclusion of Advanced TDMA
technology (Time Division Multiple Access), as proposed by other companies. In
February 2000, CableLabs further clarified the status of the advanced PHY
project regarding a separate release that will include TDMA technologies. In
addition, CableLabs reiterated that it is continuing to work with us on the
development of a DOCSIS specification that could include our S-CDMA technology.
To that end, CableLabs has requested that we submit a prototype of a DOCSIS
system that incorporates an S-CDMA advanced PHY capability for testing.
CableLabs has stated that if the testing of this prototype reveals that the S-
CDMA advanced PHY works as claimed (including proper backwards compatibility and
coexistence with the other aspects of DOCSIS), and if the costs for adding S-
CDMA to DOCSIS products are in line with estimates, then it is likely, but not
certain, that S-CDMA advanced PHY capabilities will be included in a future
version of the DOCSIS specification. The prototype we submit to CableLabs may
fail to demonstrate the level of performance that CableLabs seeks; even if it
does meet performance expectations there can be no guarantee that CableLabs will
incorporate the technology into a future version of DOCSIS specifications. In
addition, if CableLabs does proceed to include S-CDMA in a future DOCSIS
specification, there can be no guarantee that the DOCSIS S-CDMA specification
will be the same as the specification we incorporated in the prototype submitted
for tests, which may require us to further develop our prototype.
Our future revenues and operating results are likely to suffer if S-CDMA is
not included in a future release of DOCSIS. We also may incur substantial
additional research and development expenditures to adapt our specifications to
the version adopted by CableLabs. CableLabs has not established a schedule for
adding the S-CDMA capabilities to the DOCSIS specifications. Delays in the
establishment of a final specification for S-CDMA in DOCSIS could harm our plans
to sell DOCSIS compatible modems and headend equipment. In particular, if the
final DOCSIS S-CDMA specification is not approved prior to the time when we are
ready to ship DOCSIS products with S-CDMA features included, then we may be
required to delay the introduction of those products until the DOCSIS S-CDMA
specification is released or to introduce the S-CDMA features as proprietary
enhancements to a standard DOCSIS product. Either one of these events could
harm revenues and operating results.
We have already given CableLabs assurances that we will contribute some
aspects of our proprietary S-CDMA technology to a royalty-free intellectual
property pool, if S-CDMA is included in a future version of DOCSIS
specifications. This royalty-free pool has been established by CableLabs to
facilitate the participation of as many vendors as possible in providing
equipment that is compatible with the DOCSIS specifications. As a result, any
of our competitors who join the DOCSIS intellectual property pool would have
access to some aspects of our
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technology and would not be required to pay us any royalties or other
compensation. If a competitor is able to duplicate the functionality and
capabilities of our technology, we could lose some or all of the time-to-market
advantage we might otherwise have, which could harm our future revenues and
operating results.
We believe the addition of advanced upstream PHY capabilities to DOCSIS will
increase the overall market for DOCSIS-compatible products, and as such will
result in increased competition in the cable modem market. This competition
could come from existing competitors or from new competitors who enter the
market as a result of the enhancements to the specifications. This increased
competition is likely to result in lower ASPs of cable modem systems and could
harm revenues and gross margins. Because our competitors will be able to
incorporate some aspects of our technology into their products, our current
customers may choose alternate suppliers or choose to purchase DOCSIS-compliant
cable modems with advanced PHY capabilities from multiple suppliers. We may be
unable to produce DOCSIS compliant cable modems with advanced PHY capabilities
more quickly or at lower cost than our competitors. The inclusion of our S-CDMA
technology in future DOCSIS specification could result in increased competition
for the services of our existing employees who have experience with S-CDMA. The
loss of these employees to one or more competitors could harm our business.
DOCSIS standards have not yet been accepted in Europe and Asia. An alternate
standard for cable modem systems, called the EuroModem standard, or DAVIC/DVB,
has been formalized, and some European cable system operators have embraced it.
We intend to develop and sell products that comply with the EuroModem standard
and to pursue having portions of our S-CDMA technology included in a future
version of the EuroModem standard. We may be unsuccessful in these efforts.
We Need to Develop New Products in Order to Remain Competitive.
Our future success will depend in part on our ability to develop, introduce
and market new products in a timely manner. We also must respond to competitive
pressures, evolving industry standards and technological advances. Our current
S-CDMA products are not DOCSIS-compliant. We are currently developing a
prototype of a DOCSIS system that incorporates an S-CDMA advanced PHY capability
for testing and eventual inclusion in the DOCSIS standard. There is no
guarantee that we will be successful in developing the prototype or that the
prototype, if successfully developed, will be included in a future release of
the DOCSIS standard. We anticipate that during the year 2000, existing or
potential customers may delay purchases of our TeraComm system in order to
purchase systems that comply with the DOCSIS standard. In addition, potential
new customers could decide to purchase DOCSIS-compliant products from one or
more of our competitors rather than from us. As a result, our product sales in
the second half of the year 2000 may be lower than we anticipate. In order to
promote sales of our current products, we may be required to reduce our prices
for sales to existing customers. This would harm our operating results and
gross margin.
As a result of the inclusion of TDMA technology in the new DOCSIS version
announced by CableLabs in February 2000, we will have to incorporate advanced
TDMA technology into our DOCSIS-compliant products. If we are unable to do this
effectively, or in a timely manner, we will lose some or all of the time-to-
market advantage we might otherwise have had.
Our future success will also depend on our ability to develop and market
products for broadband applications over DSL and wireless networks. The markets
for these broadband applications are also subject to evolving standards, such as
NEBS compliance in the North American DSL market, and technological advances in
these arenas. There is no guarantee that we will be successful in developing
products that are compliant with these standards or that we will be successful
in keeping pace with future technological advances in this arena.
Average Selling Prices of Broadband Access Equipment Typically Decrease.
The broadband access systems market has been characterized by erosion of
average selling prices. We expect this to continue. This erosion is due to a
number of factors, including competition, rapid technological change and price
performance enhancements. The ASPs for our products may be lower than expected
as a result of competitive pricing pressures, our promotional programs and
customers who negotiate price reductions in exchange for longer term purchase
commitments. We anticipate that ASPs and gross margins for our products will
decrease over product life cycles. In addition, we believe that the widespread
adoption of industry standards is likely to further erode ASPs, particularly for
cable modems and other similar consumer premise equipment. It is likely that the
widespread adoption of industry standards will result in increased retail
distribution of cable modems and other
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similar consumer premise equipment, which could put further price pressure on
our products. Decreasing ASPs could result in decreased revenue even if the
number of units sold increases. As a result, we may experience substantial
period-to-period fluctuations in future operating results due to ASP erosion.
Therefore, we must continue to develop and introduce on a timely basis next-
generation products with enhanced functionalities that can be sold at higher
gross margins. Our failure to do this could cause our revenues and gross margin
to decline.
We Must Achieve Cost Reductions.
Certain of our competitors currently offer products at prices lower than
ours. Market acceptance of our products will depend in part on reductions in
the unit cost of our products. We expect that as headend equipment becomes more
widely deployed, the price of cable modems and other similar consumer premise
equipment will decline. In particular, we believe that the widespread adoption
of industry standards such as DOCSIS will cause increased price competition for
consumer premise equipment. However, we may be unable to reduce the cost of our
products sufficiently to enable us to compete with other suppliers. Our cost
reduction efforts may not allow us to keep pace with competitive pricing
pressures or lead to gross margin improvement.
Some of our competitors are larger and manufacture products in significantly
greater quantities than we intend to for the foreseeable future. Consequently,
these competitors have more leverage in obtaining favorable pricing from
suppliers and manufacturers. In order to remain competitive, we must
significantly reduce the cost of manufacturing our cable modems through design
and engineering changes. We may not be successful in redesigning our products.
Even if we are successful, our redesign may be delayed or may contain
significant errors and product defects. In addition, any redesign may not
result in sufficient cost reductions to allow us to significantly reduce the
list price of our products or improve our gross margin. Reductions in our
manufacturing costs will require us to use more highly integrated components in
future products and may require us to enter into high volume or long-term
purchase or manufacturing agreements. Volume purchase or manufacturing
agreements may not be available on acceptable terms. We could incur expenses
without related revenues if we enter into a high volume or long-term purchase or
manufacturing agreement and then decide that we cannot use the products or
services offered by such agreement.
We Must Keep Pace with Rapid Technological Change to Remain Competitive.
The markets for our products are characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements. Our future success will depend upon our
ability to enhance our existing products and to develop and introduce new
products that achieve market acceptance. Providers of broadband access services
may adopt alternative technologies or they may deploy alternative services that
are incompatible with our products.
The demand for broadband access services has resulted in the development of
several competing modulation technologies. For example, some of our cable
products utilize a modulation technology known as S-CDMA, while several of our
competitors utilize modulation technologies known as TDMA and Frequency Division
Multiple Access or "FDMA." Our headend equipment and cable modem products
currently are not interoperable with the headend equipment and modems of other
suppliers of broadband access products. As a result, potential customers who
wish to purchase broadband access products from multiple suppliers may be
reluctant to purchase our products. Although our technology may be incorporated
into a future version of a DOCSIS specification or another industry standard, we
cannot be certain that major cable operators will adopt these standards. Major
cable operators may not adopt products or technologies based on our current
proprietary S-CDMA technology or on any future industry standard S-CDMA
technology. Further, major cable operators may adopt products or standards
technologies based on competing modulation technologies. If competitors using
other modulation technologies can incorporate functionality and capabilities
currently found in S-CDMA, the value of our S-CDMA technology would be
diminished.
Broadband Access Services Have Not Achieved Widespread Market Acceptance, and
Many Competing Technologies Exist.
Our success will depend upon the widespread commercial acceptance of
broadband access services by service providers and end users of broadband access
services. The market for these services is not fully developed. We cannot
accurately predict the future growth rate or the ultimate size of the market for
broadband access services. Potential users of our products may have concerns
regarding the security, reliability, cost, ease of installation and
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use and capability of broadband access services in general.
The market for our products may be impacted by the development of other
technologies that enable the provisioning of broadband access services and the
deployment of services over other media. Widespread acceptance of other
technologies or deployment of services over media not supported by our products
could materially limit acceptance of our broadband access systems. Broadband
access services based on our products and technology may fail to gain widespread
commercial acceptance by providers of broadband access services and end users.
In addition, we only recently began to offer products based on alternate
technologies such as DSL. We may not be successful in marketing and selling
these products.
We Need to Develop Additional Distribution Channels.
We presently market our TeraComm system to cable operators and systems
integrators. We believe that much of the North American cable modem market may
shift to a retail distribution model. Accordingly, we may need to redirect our
future marketing efforts to sell our cable modems directly to retail
distributors and end users. This shift would require us to establish new
distribution channels for our products.
We May Be Unable to Establish These Additional Distribution Channels.
If we do establish them, we may be unable to hire the additional personnel
necessary to foster and enhance such distribution channels. In addition, if the
cable modem market shifts to a retail distribution model, we may not
successfully establish a retail distribution presence. To the extent that large
consumer electronics companies enter the cable modem market, their well-
established retail distribution capabilities would provide them with a
significant competitive advantage. We may be unable to market effectively to
broadband access service providers. Our growth and future success will be
substantially dependent upon our ability to convince providers of broadband
access services to adopt our technologies, purchase our products and effectively
market our products to end users. Our potential customers are likely to prefer
purchasing products from established manufacturing companies that can
demonstrate the capability to supply large volumes of products on short notice.
In addition, many of our potential customers may be reluctant to adopt
technologies that have not gained acceptance among other providers of similar
services. This reluctance could result in lengthy product testing and
acceptance cycles for our products. Consequently, the impediments to our
initial sales may be even greater than those to later sales.
No established distribution network in the cable modem industry exists that
would provide us with easy access to smaller or geographically diverse cable
operators. Therefore, our initial sales to larger, more established cable
operators are critical to our business. Although we intend to establish
strategic relationships with leading distributors worldwide, we may not succeed
in establishing these relationships. Even if we do establish these
relationships, the distributors may not succeed in marketing our products to
cable operators. Some of our competitors have already established relationships
with certain cable operators. These established relationships may further limit
our ability to sell products to those cable operators. We do not have long,
well-established relationships with those cable operators. If we were to sell
our products to those cable operators, it would likely not be based on long-term
contracts and those customers would be able to terminate their relationships
with us at any time.
In addition, one or more of our current customers could cancel its
relationship with us at any time. We have recently begun marketing and selling
our products to providers of DSL and wireless broadband services and thus we
have very limited experience. We do not have long, well-established
relationships with these providers, and we may not be successful in establishing
these relationships.
We Are Dependent on Broadband Service Providers Choosing to Offer Additional
Services to Their Customers.
We depend on cable operators to purchase our cable modem systems and to
provide our cable modems to end users. Cable operators have a limited amount of
available bandwidth over which they can offer robust data services, and they may
not choose to provide these data services to their customers. If cable
operators choose to provide these services, we also will depend upon them to
market these services to cable customers, to install our equipment and to
provide support to end users. In addition, we will be highly dependent on cable
operators to continue to maintain their cable infrastructure in a manner that
allows us to provide consistently high performance and reliable services. Our
success also will depend upon the acceptance of our products by other providers
of services to the cable industry, such as Excite@Home's @Home Network and Road
Runner, a joint venture between MediaOne Group,
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Inc. and Time Warner Cable. Sales of our DSL and wireless products are also
dependent on service providers choosing to purchase our products and to provide
additional services to their end users.
Sales of Our Cable Products Are Dependent on the Cable Industry Upgrading to
Two-Way Cable Infrastructure.
Demand for our products will depend, to a significant degree, upon the
magnitude and timing of capital spending by cable operators for implementation
of access systems for data transmission over cable networks. This involves the
enabling of two-way transmission over existing coaxial cable networks and the
eventual upgrade to HFC in areas of higher penetration of data services. If
cable operators fail to complete these upgrades of their cable infrastructures
in a timely and satisfactory manner, the market for our products could be
limited. In addition, few businesses in the United States currently have cable
access. Cable operators may not choose to upgrade existing residential cable
systems or to install new cable systems to serve business locations.
The success and future growth of our business will be subject to economic and
other factors affecting the cable television industry generally, particularly
its ability to finance substantial capital expenditures. Capital spending
levels in the cable industry in the United States have fluctuated significantly
in the past, and we believe that such fluctuations will occur in the future.
The capital spending patterns of cable operators are dependent on a variety of
factors, including the following:
. the availability of financing;
. cable operators' annual budget cycles, as well as the typical reduction in
upgrade projects during the winter months;
. the status of federal, local and foreign government regulation and
deregulation of the telecommunications industry;
. overall demand for cable services;
. competitive pressures (including the availability of alternative data
transmission and access technologies);
. discretionary consumer spending patterns; and
. general economic conditions.
In recent periods, the United States cable market has been characterized by
the acquisition of smaller and independent cable operators by large cable
operators. We cannot predict the effect, if any, that consolidation in the
United States cable industry will have on overall capital spending patterns by
cable operators. The effect on our business of further industry consolidation
also is uncertain.
Supply of Our Products May Be Limited by Our Ability to Forecast Demand
Accurately.
The emerging nature of the broadband access services market makes it
difficult for us to accurately forecast demand for our products. Our inability
to accurately forecast the actual demand for our products could result in
supply, manufacturing or testing capacity constraints. These constraints could
result in delays in the delivery of our products or the loss of existing or
potential customers, either of which could have a negative impact on our
business, operating results or financial condition. In addition, we had
unconditional purchase obligations of approximately $6,078,000 as of June 30,
2000, primarily to purchase minimum quantities of materials and components used
to manufacture our products. We must fulfill these obligations even if demand
for our products is lower than we anticipate.
We Are Dependent on Key Third-Party Suppliers.
We manufacture all of our products using components or subassemblies procured
from third-party suppliers. Some of these components are available from a
single source and others are available from limited sources. All of our sales
are from products containing one or more components that are available only from
single supply sources.
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In addition, some of the components are custom parts produced to our
specifications. For example, we currently rely on Philips Semiconductors, Inc.
to supply a custom ASIC that is used in our products. Other components, such as
the radio frequency tuner and some surface acoustic wave filters, are procured
from sole source suppliers. Any interruption in the operations of vendors of
sole source parts could adversely affect our ability to meet our scheduled
product deliveries to customers. We are dependent on semiconductor manufacturers
and are affected by worldwide conditions in the semiconductor market. If we are
unable to obtain a sufficient supply of components from our current sources, we
could experience difficulties in obtaining alternative sources or in altering
product designs to use alternative components. Resulting delays or reductions in
product shipments could damage customer relationships. Further, a significant
increase in the price of one or more of these components could harm our gross
margin or operating results.
Shortages in Supplies of Components May Impair Our Ability to Meet Customer
Demands.
Due to increasing demand for electronic and communications equipment, the
worldwide market for component parts is currently constrained. Delays in key
component or product deliveries may occur due to shortages resulting from a
limited number of suppliers, the financial or other difficulties of such
suppliers or a limitation in component product availability. Due to these
current market conditions, we face the risk of possible shortages of certain key
components that could result in product performance shortfalls and reduced
control over or delay in delivery schedules, manufacturing capability, quality
and costs, all of which could impair our ability to produce enough product to
meet our customer demand. In addition, in order to fulfill demand for our
products, we may have to purchase these components on the spot market at a price
that may be higher than we have experienced in the past.
Although we work closely with our suppliers to avoid these types of
shortages, there can be no assurance that we will not encounter these problems
in the future. While our suppliers have performed effectively and been
relatively flexible to date, we believe that we will be faced with the following
challenges going forward:
. new markets in which we participate may grow quickly and consume component
capacity; and
. as we continue to acquire companies and new technologies, we are
dependent, at least initially, on unfamiliar supply chains or relatively
small supply partners.
Manufacturing capacity and component supply constraints could be significant
issues for us. If we were unable to obtain adequate quantities of significant
component materials on a timely basis, our business and our customer
relationships would be adversely affected. If we are unable to satisfy our
customers' demand, our customers could decide to purchase products from our
competitors. Inability to meet demand, or a decision by one or more of our
customers to purchase from our competitors, could harm our operating results.
We May Be Unable to Migrate to New Semiconductor Process Technologies
Successfully or on a Timely Basis.
Our future success will depend in part upon our ability to develop products
that utilize new semiconductor process technologies. These technologies change
rapidly and require us to spend significant amounts on research and development.
We continuously evaluate the benefits of redesigning our integrated circuits
using smaller geometry process technologies to improve performance and reduce
costs. The transition of our products to integrated circuits with increasingly
smaller geometries will be important to our competitive position. Other
companies have experienced difficulty in migrating to new semiconductor
processes and, consequently, have suffered reduced yields, delays in product
deliveries and increased expense levels. Moreover, we depend on our
relationship with our third-party manufacturers to migrate to smaller geometry
processes successfully.
Our Ability to Directly Control Product Delivery Schedules and Product Quality
Is Dependent on Third-Party Contract Manufacturers.
Most of our products are assembled and tested by contract manufacturers using
testing equipment that we provide. As a result of our dependence on these
contract manufacturers for assembly and testing of our products, we do not
directly control product delivery schedules or product quality. Any product
shortages or quality assurance problems could increase the costs of manufacture,
assembly or testing of our products. In addition, as manufacturing volume
increases, we will need to procure and assemble additional testing equipment and
provide it to our contract manufacturers. The production and assembly of
testing equipment typically requires significant time.
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We could experience significant delays in the shipment of our products if we are
unable to provide this testing equipment to our contract manufacturers in a
timely manner.
There Are Many Risks Associated with International Operations.
Sales to customers outside of the United States accounted for approximately
84% of our revenues in 1999 and approximately 74% of our revenues in 1998. We
expect sales to customers outside of the United States to continue to represent
a significant percentage of our revenues for the foreseeable future.
International sales are subject to a number of risks, including the following:
. changes in foreign government regulations and communications standards;
. export license requirements, tariffs and taxes;
. other trade barriers;
. difficulty in protecting intellectual property;
. difficulty in collecting accounts receivable;
. difficulty in managing foreign operations; and
. political and economic instability.
If our customers are affected by currency devaluations or general economic
crises, such as the recent economic crisis affecting many Asian and Latin
American economies, their ability to purchase our products could be reduced
significantly. Payment cycles for international customers typically are longer
than those for customers in the United States. Foreign markets for our products
may develop more slowly than currently anticipated. Foreign countries may
decide not to construct cable infrastructure or may prohibit, terminate or delay
the construction of new cable plants for a variety of reasons. These reasons
include environmental issues, economic downturns, the availability of favorable
pricing for other communications services or the availability and cost of
related equipment. Any action like this by foreign countries would reduce the
market for our products.
We anticipate that our foreign sales generally will be invoiced in U.S.
dollars, and we currently do not plan to engage in foreign currency hedging
transactions. However, as we commence and expand our international operations,
we may be paid in foreign currencies and exposure to losses in foreign currency
transactions may increase. We may choose to limit our exposure by the purchase
of forward foreign exchange contracts or through similar hedging strategies. No
currency hedging strategy can fully protect against exchange-related losses. In
addition, if the relative value of the U.S. dollar in comparison to the currency
of our foreign customers should increase, the resulting effective price increase
of our products to those foreign customers could result in decreased sales.
We May Be Unable to Provide Adequate Customer Support.
Our ability to achieve our planned sales growth and retain current and future
customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our broadband access systems, particularly in the initial
deployment and implementation stages. To date our sales have been concentrated
in a small number of customers. We have limited experience with widespread
deployment of our products to a diverse customer base. We may not have adequate
personnel to provide the levels of support that our customers may require during
initial product deployment or on an ongoing basis. Our inability to provide
sufficient support to our customers could delay or prevent the successful
deployment of our products. In addition, our failure to provide adequate
support could harm our reputation and relationship with our customers and could
prevent us from gaining new customers.
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Our Industry Is Highly Competitive with Many Established Competitors.
The market for broadband access systems is extremely competitive and is
characterized by rapid technological change. Our direct competitors in the
cable access systems arena include Cisco Systems, Com21, General Instrument,
Matsushita Electric Industrial (which markets products under the brand name
"Panasonic"), Motorola, Nortel Networks, Vyyo, Thomson Consumer Electronics
(which markets products under the brand name "RCA"), Samsung, Scientific-
Atlanta, Sony, 3Com, Toshiba and Zenith Electronics. We also compete with
companies that develop integrated circuits for broadband access products, such
as Broadcom, Conexant and Texas Instruments. We also sell products that compete
with existing data access and transmission systems utilizing the
telecommunications networks, such as those of 3Com. Additionally, our
controller and headend system products face intense competition from well-
established companies such as Cisco, Nortel and 3Com. In addition, we compete
with companies in the DSL arena such as ECI, Charles Industries, Pairgain,
Copper Mountain, Accelerated Networks, Integral Access and VINA Technologies.
As standards, such as DOCSIS, are developed for broadband access systems, other
companies may enter the broadband access systems market. The principal
competitive factors in our market include the following:
. product performance, features and reliability;
. price;
. size and stability of operations;
. breadth of product line;
. sales and distribution capability;
. technical support and service;
. relationships with providers of broadband access services; and
. compliance with industry standards.
Some of these factors are outside of our control. The existing conditions in
the broadband access market could change rapidly and significantly as a result
of technological advancements. The development and market acceptance of
alternative technologies could decrease the demand for our products or render
them obsolete. Our competitors may introduce broadband access products that are
less costly, provide superior performance or achieve greater market acceptance
than our products.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, distribution, customer support and other
resources, as well as greater name recognition and access to customers than we
do. The anticipated widespread adoption of DOCSIS and other industry standards
is likely to cause increased worldwide price competition, particularly in the
North American market. The adoption of DOCSIS and these other standards also
could result in lower sales of our TeraComm system, including the higher margin
headend products. Any increased price competition or reduction in sales of our
headend products would result in downward pressure on our gross margin. We
cannot accurately predict how the competitive pressures that we face will affect
our business.
Our Business Is Dependent on the Internet and the Development of the Internet
Infrastructure.
Our success will depend in large part on increased use of the Internet to
increase the need for high speed broadband access networks. Critical issues
concerning the commercial use of the Internet remain largely unresolved and are
likely to affect the development of the market for our products. These issues
include security, reliability, cost, ease of access and quality of service. Our
success also will depend on the growth of the use of the Internet by businesses,
particularly for applications that utilize multimedia content and thus require
high bandwidth. The recent growth in the use of the Internet has caused
frequent periods of performance degradation. This has required the upgrade of
routers, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet. Any perceived degradation in the
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performance of the Internet as a whole could undermine the benefits of our
products. Potentially increased performance provided by our products and the
products of others ultimately is limited by and reliant upon the speed and
reliability of the Internet backbone itself. Consequently, the emergence and
growth of the market for our products will depend on improvements being made to
the entire Internet infrastructure to alleviate overloading and congestion.
Our Failure to Manage Growth Could Adversely Affect Us.
The growth of our business has placed, and is expected to continue to place,
a significant strain on our limited personnel, management and other resources.
Our management, personnel, systems, procedures and controls may be inadequate to
support our existing and future operations. To manage any future growth
effectively, we will need to attract, train, motivate, manage and retain
employees successfully, to integrate new employees into our overall operations
and to continue to improve our operational, financial and management systems.
We Are Dependent on Key Personnel.
Due to the specialized nature of our business, we are highly dependent on the
continued service of, and on the ability to attract and retain qualified
engineering, sales, marketing and senior management personnel. The competition
for personnel is intense. The loss of any of these individuals, particularly
our Chairman, President and Chief Technical Officer, Shlomo Rakib, and our Chief
Executive Officer, Zaki Rakib, would harm our business. In addition, if we are
unable to hire additional qualified personnel as needed, we may be unable to
adequately manage and complete our existing sales commitments and to bid for and
execute additional sales. Further, we must train and manage our growing
employee base, which is likely to require increased levels of responsibility for
both existing and new management personnel. Our current management personnel
and systems may be inadequate, and we may fail to assimilate new employees
successfully.
Highly skilled employees with the education and training that we require,
especially employees with significant experience and expertise in both data
networking and radio frequency design, are in high demand. We may not be able
to continue to attract and retain the qualified personnel necessary for the
development of our business. We do not have "key person" insurance coverage for
the loss of any of our employees. Any officer or employee of our company can
terminate his or her relationship with us at any time. Our employees generally
are not bound by non-competition agreements with us.
Our Business Is Subject to the Risks of Product Returns, Product Liability and
Product Defects.
Products as complex as ours frequently contain undetected errors or failures,
especially when first introduced or when new versions are released. Despite
testing, errors may occur. The occurrence of errors could result in product
returns and other losses to our company or our customers. This occurrence also
could result in the loss of or delay in market acceptance of our products. Due
to the recent introduction of our products, we have limited experience with the
problems that could arise with this generation of products. However, the
limitation of liability provision contained in our purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries. We have
not experienced any product liability claims to date, but the sale and support
of our products entails the risk of such claims. In addition, any failure by
our products to properly perform could result in claims against us by our
customers. We maintain insurance to protect against certain claims associated
with the use of our products, but our insurance coverage may not adequately
cover any claim asserted against us. In addition, even claims that ultimately
are unsuccessful could result in our expenditure of funds in litigation and
management time and resources.
We May Be Unable to Adequately Protect or Enforce Our Intellectual Property
Rights.
We rely on a combination of patent, trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights in
our products. Our pending patent applications may not be granted. Even if they
are granted, the claims covered by the patents may be reduced from those
included in our applications. Any patent might be subject to challenge in court
and, whether or not challenged, might not be broad enough to prevent third
parties from developing equivalent technologies or products without taking a
license from us. We have entered into confidentiality and invention assignment
agreements with our employees, and we enter into non-disclosure agreements with
some of our suppliers, distributors and appropriate customers so as to limit
access to and disclosure of our proprietary information. These statutory and
contractual arrangements may not prove sufficient to prevent
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misappropriation of our technology or to deter independent third-party
development of similar technologies. In addition, the laws of some foreign
countries might not protect our products or intellectual property rights to the
same extent as do the laws of the United States. Protection of our intellectual
property might not be available in every country in which our products might be
manufactured, marketed or sold.
In November 1998, CableLabs selected us to co-author DOCSIS 1.2, an enhanced
version of the DOCSIS cable modem specification based in part on our S-CDMA
technology. In September 1999, CableLabs indicated that it intended to proceed
with the advanced PHY work on two parallel tracks: one for the development of a
prototype based on our S-CDMA technology and one for the inclusion of Advanced
TDMA technology, as proposed by other companies. In February 2000, CableLabs
further clarified the status of the advanced PHY project regarding a separate
release that will include TDMA technologies. In addition, CableLabs reiterated
that it is continuing to work with us on the development of a DOCSIS
specification that could include our S-CDMA technology. To that end, we have
indicated to CableLabs that we would contribute some aspects of our S-CDMA
technology to the DOCSIS intellectual property pool if and when a DOCSIS
specification is approved that includes our S-CDMA technology.
We would contribute our technology pursuant to a license agreement with
CableLabs that we would execute at that time, and which contains the terms that
CableLabs has established for the inclusion of any intellectual property from
any source in the DOCSIS specifications. Under the terms of the proposed
license agreement, we would grant to CableLabs a royalty-free license for those
aspects of our S-CDMA technology that are essential for compliance with the
DOCSIS cable modem standard. So-called "implementation know how" is not covered
by this license-only those aspects of the technology that are essential to
implementing a compliant product. CableLabs would have the right to extend
royalty-free sublicenses to companies that wish to build DOCSIS-compatible
products. These sublicenses would allow participating companies to utilize and
incorporate the essential portions of the S-CDMA technology on a royalty-free
basis for the limited use of making and selling products or systems that comply
with the DOCSIS cable modem specification. We have already joined the DOCSIS
intellectual property pool and, as a result, we have a royalty-free sublicense
that allows us to ship DOCSIS-compatible products which contain intellectual
property submitted by other companies. The scope of this license would not
extend to the use of the S-CDMA technology in other areas; only for products
that comply with the DOCSIS specifications. As a result, any of our competitors
who join or have joined the DOCSIS intellectual property pool will have access
to some aspects of our technology without being required to pay us any royalties
or other compensation. If and when we submit S-CDMA to the DOCSIS Intellectual
Property pool, we are in no way restricted from entering into royalty-bearing
license agreements with companies that wish to use the S-CDMA technology for
purposes other than implementing DOCSIS compatible products, or that do not wish
to enter into the DOCSIS intellectual property pool. Further, some of our
competitors have been successful in reverse engineering the technology of other
companies, and the inclusion of S-CDMA in a future DOCSIS specification would
expose some aspects of our technology to those competitors. DOCSIS
specifications are available on an open basis once they are approved, not only
to companies that are members of the DOCSIS IP Pool. If a competitor is able to
duplicate the functionality and capabilities of our technology, we could lose
all or some of the time-to-market advantage we might otherwise have. Under the
terms of the proposed license agreement, if we sue certain parties to the
proposed license agreement on claims of infringement of any copyright or patent
right or misappropriation of any trade secret, those parties may terminate our
license to the patents or copyrights they contributed to the DOCSIS intellectual
property pool. If a termination like this were to occur, we would continue to
have access to some aspects of the DOCSIS intellectual property pool, but we
would not be able to develop products that fully comply with the DOCSIS cable
modem specification. Also, even if we were to be removed from the IP pool, we
would not be prevented from developing and selling products that fully comply
with the DOCSIS specifications, but we would not be able to do this with the
benefit of a royalty-free license, which would increase the cost of our
products, assuming we were able to obtain a license agreement for the required
technology. Because of these terms, we may find it difficult to enforce our
intellectual property rights against certain companies, even in areas that are
not directly related to DOCSIS specifications and products.
We anticipate that developers of cable modems increasingly will be subject to
infringement claims as the number of products and competitors in our industry
segment grows. We have received letters from two individuals claiming that our
technology infringes patents held by these individuals. We have reviewed the
allegations made by these individuals and, after consulting with our patent
counsel, we do not believe that our technology infringes any valid claim of
these individuals' patents. If the issues are submitted to a court, the court
could find that our products infringe these patents. In addition, these
individuals may continue to assert infringement. If we are found to have
infringed these individuals' patents, we could be subject to substantial damages
and/or an injunction preventing us from conducting our business. In addition,
other third parties may assert infringement claims against us in the future. An
infringement claim, whether meritorious or not, could be time-consuming, result
in costly litigation,
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cause product shipment delays or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements may not be available on terms
acceptable to us or at all. Litigation also may be necessary to enforce our
intellectual property rights.
We pursue the registration of our trademarks in the United States and have
applications pending to register several of our trademarks. However, the laws
of certain foreign countries might not protect our products or intellectual
property rights to the same extent as the laws of the United States. This means
that effective trademark, copyright, trade secret and patent protection might
not be available in every country in which our products might be manufactured,
marketed or sold.
Our Business Is Subject to Communications Industry Regulations.
Our business and our customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the Federal Communications
Commission extends to the communications industry, including our broadband
access products. The FCC has promulgated regulations that, among other things,
set installation and equipment standards for communications systems. Although
FCC regulations and other governmental regulations have not materially
restricted our operations to date, future regulations applicable to our business
or our customers could be adopted by the FCC or other regulatory bodies. For
example, FCC regulatory policies affecting the availability of cable services
and other terms on which cable companies conduct their business may impede our
penetration of certain markets. In addition, regulation of cable television
rates may affect the speed at which cable operators upgrade their cable
infrastructures to two-way HFC. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards for such products and services. This process generally
involves extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past, and may in the future, cause the cancellation, postponement or
rescheduling of the installation of communications systems by our customers.
If other countries begin to regulate the cable modem industry more heavily or
introduce standards or specifications with which our products do not comply, we
will be unable to offer products in those countries until our products comply
with those standards or specifications. In addition, we may have to incur
substantial costs to comply with those standards or specifications. For
instance, should the Digital Audio Visual Counsel ("DAVIC") standards for ATM-
based digital video be established internationally, we will need to conform our
cable modems to compete. Further, many countries do not have regulations for
installation of cable modem systems or for upgrading existing cable network
systems to accommodate our products. Whether we currently operate in a country
without these regulations or enter into the market in a country where these
regulations do not exist, new regulations could be proposed at any time. The
imposition of regulations like this could place limitations on a country's cable
operators' ability to upgrade to support our products. Cable operators in these
countries may not be able to comply with these regulations, and compliance with
these regulations may require a long, costly process. For example, we
experienced delays in product shipments to a customer in Brazil due to delays in
certain regulatory approvals in Brazil. Similar delays could occur in other
countries in which we market or plan to market our products. In addition, our
customers in certain parts of Asia, such as Japan, are required to obtain
licenses prior to selling our products, and delays in obtaining required
licenses could harm our ability to sell products to these customers.
Our Business Is Subject to Other Regulatory Approvals and Certifications.
In the United States, in addition to complying with FCC regulations, our
products are required to meet certain safety requirements. For example, we are
required to have our products certified by Underwriters Laboratory in order to
meet federal requirements relating to electrical appliances to be used inside
the home. Outside the United States, our products are subject to the regulatory
requirements of each country in which the products are manufactured or sold.
These requirements are likely to vary widely. We may be unable to obtain on a
timely basis or at all the regulatory approvals that may be required for the
manufacture, marketing and sale of our products. In addition to regulatory
compliance, some cable industry participants may require certification of
compatibility.
We Are Vulnerable to Earthquakes and Other Natural Disasters.
The facility housing our corporate headquarters, the majority of our research
and development activities and our in-house manufacturing operations is located
in an area of California known for seismic activity. In addition, the
operations of some of our key suppliers are also located in this area and in
other areas know for seismic activity,
15.
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such as Taiwan. An earthquake, or other significant natural disaster, could
result in an interruption in our business or that of one or more of our key
suppliers. Such an interruption could harm our operating results.
Our Indebtedness Could Adversely Affect our Financial Condition; We May Incur
Substantially More Debt.
After issuing the Convertible Notes, we had approximately $500.9 million of
indebtedness outstanding. Our high level of indebtedness could have important
consequences to you. For example, it could:
. make it more difficult for us to satisfy our obligations with respect to
our indebtedness;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to obtain additional financing;
. require the dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of such cash flow to fund
our growth strategy, working capital, capital expenditures and other
general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and
. place us at a competitive disadvantage relative to our competitors with
less debt.
We may incur substantial additional debt in the future. The terms of our
outstanding debt do not fully prohibit us from doing so. If new debt is added
to our current levels, the related risks described above could intensify.
Our Stock Price Has Been and Is Likely to Continue To Be Volatile.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to
a variety of factors, including the following:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the broadband access services industry;
. changes in the economic performance and/or market valuations of Internet,
online service or broadband access service industries;
. changes in the economic performance and/or market valuations of other
Internet, online service or broadband access service companies;
. our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. adoption of industry standards and the inclusion of or compatibility of
our technology with such standards;
. adverse or unfavorable publicity regarding us or our products;
. additions or departures of key personnel;
. sales of common stock; and
16.
<PAGE>
. other events or factors that may be beyond our control.
In addition, the stock markets in general, and the Nasdaq National Market and
the market for broadband access services and technology companies in particular,
have experienced extreme price and volume volatility and a significant
cumulative decline in recent months. This volatility and decline has affected
many companies irrespective of or disproportionately to the operating
performance of these companies. Our stock price has declined significantly in
recent weeks and months and these broad market and industry factors may
materially adversely further affect the market price of our common stock,
regardless of our actual operating performance.
On April 13, 2000, a lawsuit against us and certain of our officers and
directors, entitled Birnbaum v. Terayon Comm. Systems, Inc., was filed in the
United States District Court for the Central District of California. The
plaintiff purports to be suing on behalf of a class of stockholders who
purchased or committed to purchase our securities during the period from
February 2, 2000 to April 11, 2000. The complaint alleges that the defendants
violated the federal securities laws by issuing materially false and misleading
statements and failing to disclose material information regarding our
technology. Several other lawsuits similar to the Birnbaum suit have since been
filed. The lawsuits seek an unspecified amount of damages, in addition to other
forms of relief. On August 24, 2000, the lawsuits against us and other named
individual defendants were consolidated in the U.S. District Court of the
Northern District of California and lead plaintiffs and lead plaintiffs' counsel
was appointed pursuant to the Private Securities Litigation Reform Act. On
September 21, 2000, plaintiffs filed a Consolidated Class Action Complaint for
violation of federal securities laws. The consolidated complaint contains
allegations nearly identical to the Birnbaum suit. We consider the lawsuits to
be without merit and we intend to defend vigorously against these allegations.
17.
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of common
stock offered by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
intend to retain any future earnings to support operations and to finance the
growth and development of our business and we do not anticipate paying cash
dividends for the foreseeable future.
WHERE YOU CAN GET MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy
these reports, proxy statements and other information at the SEC's public
reference rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C., as well
as at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, NY
10048. You can request copies of these documents by writing to the SEC and
paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference rooms. Our SEC
filings are also available at the SEC's web site at "http://www.sec.gov." In
addition, you can read and copy our SEC filings at the office of the National
Association of Securities Dealers, Inc. at 1735 "K" Street, Washington, D.C.
20006.
The SEC allows us to "incorporate by reference" information that we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
. Annual Report on Form 10-K for the year ended December 31, 1999, as
amended on Form 10-K/A filed on April 28, 2000;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;
. Current Report on Form 8-K filed on May 3, 2000, as amended on Form 8-K/A
on May 8, 2000 and as amended on Form 8-K/A on June 29, 2000;
. Current Report on Form 8-K filed on July 18, 2000;
. Current Report on Form 8-K filed on October 5, 2000, as amended on Form 8-
K/A filed on October 18, 2000;
. Current Report on Form 8-K filed on October 23, 2000; and
. The description of the common stock contained in our Registration
Statement on Form 8-A, as filed on July 20, 1998 with the SEC.
You may request a copy of these filings at no cost, by writing or telephoning
us at the following address:
Terayon Communication Systems, Inc.
2952 Bunker Hill Lane
Santa Clara, CA 95054
(408) 727-4400
This prospectus is part of a Registration Statement we filed with the SEC.
You should rely only on the information incorporated by reference or provided in
this prospectus and the Registration Statement. We have authorized no one to
provide you with different information. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of the document.
18.
<PAGE>
SELLING STOCKHOLDERS
In our acquisition of Mainsail that we consummated in September 2000, we
issued to all of the selling stockholders shares of our common stock, and we
agreed to register all of those shares for resale. We also agreed to use
reasonable efforts to keep the registration statement effective until September
30, 2001. Our registration of the shares of common stock does not necessarily
mean that the selling stockholders will sell all or any of the shares.
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of October 10, 2000, by each of the selling
stockholders.
The information provided in the table below with respect to each selling
stockholder has been obtained from that selling stockholder. Except as
otherwise disclosed below, none of the selling stockholders has, or within the
past three years has had, any position, office or other material relationship
with us. Because the selling stockholders may sell all or some portion of the
shares of common stock beneficially owned by them, we cannot estimate the number
of shares of common stock that will be beneficially owned by the selling
stockholders after this offering. In addition, the selling stockholders may
have sold, transferred or otherwise disposed of, or may sell, transfer or
otherwise dispose of, at any time or from time to time since the date on which
they provided the information regarding the shares of common stock beneficially
owned by them, all or a portion of the shares of common stock beneficially owned
by them in transactions exempt from the registration requirements of the
Securities Act of 1933.
Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Commission under the Securities Exchange Act of 1934. Unless
otherwise noted, each person or group identified possesses sole voting and
investment power with respect to shares, subject to community property laws
where applicable. None of the share amounts set forth below represents more
than 1% of our outstanding stock as of October 10, 2000, adjusted as required by
rules promulgated by the SEC, except for the shares owned by Crosspoint Venture
Partners, L.P., which represents approximately 1.1% of our outstanding stock as
of October 10, 2000.
<TABLE>
<CAPTION>
Shares Shares
Selling Stockholder Number of Shares Being Offered Held in Escrow*
----------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
Boris Zats 490,032 490,032 265,768
John Walsh 144,511 144,511 86,706
Yuri Zats 147,270 147,270 86,981
Alex Lubivy 150,030 150,030 87,257
Lucy Zats 144,511 144,511 86,706
Vlad Cherednichenko 144,511 144,511 86,706
</TABLE>
19.
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Selling Stockholder Number of Shares Being Offered Held in Escrow*
----------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
A. Lailan Fell TTEE U/A DTD 08/25/1995 144 144 14
By Alethea Lailan Fell Trust
Andrew Alcon 558 558 56
Antoinette M. Belt 58 58 5
Benedict A. Itri 58 58 5
Billante Living Trust dtd Jan. 17, 2000 13 13 1
c/o Andrea Billante, Trustee
Bobby R. Johnson, Jr. 58 58 5
Brody Family Trust U/D/T 8/15/86; 288 288 29
William R. Brody, Trustee
C. Preston Butcher and Carolyn F. 288 288 29
Butcher, Trustees of the CPB/CFB
Revocable Trust U/D/T dated February
2, 1998
Chad W. Keck 577 577 57
Charles S. and Nan Y. Strauch Living 57 57 5
Trust dtd 10/26/82; Charles/Nan
Strauch, Trustees
Charles S. and Nan Y. Strauch Living 577 577 57
Trust dtd 10/26/82; Charles/Nan
Strauch, Trustees
Church Pension Fund 43,245 43,245 4,324
Civil Aviation Authority Pension 17,298 17,298 1,729
Scheme; Nortrust Nominees Limited,
Custodian
Computrol Limited, BVI 5,766 5,766 577
Barbara N. Lubash 1,524 1,524 152
John Breese Mumford and Christine Joyce 27,562 27,562 2,756
Mumford Trusts, U/D/T dtd 10/13/83;
John Breese Mumford and Christine
Joyce Mumford, Trustees
John Breese Mumford and Christine Joyce 1,442 1,442 144
Mumford Trusts, U/D/T dtd 10/13/83;
John Breese Mumford and Christine
Joyce Mumford, Trustees
Milder Community Property Trust dtd 33,522 33, 522 3,352
11/7/91; Donald B. and Terri L.
Milder, Trustees
Mumford Special Trust #1 dtd 12/17/87; 1,490 1,490 149
Kenneth A. Eldred, Trustee
Mumford Special Trust #2 dtd 12/17/87; 1,490 1,490 149
Kenneth A. Eldred, Trustee
Mumford Special Trust #3 dtd 12/17/87; 1,490 1,490 149
Kenneth A. Eldred, Trustee
Mumford Special Trust #4 dtd 12/17/87; 1,490 1,490 149
Kenneth A. Eldred, Trustee
</TABLE>
20.
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Selling Stockholder Number of Shares Being Offered Held in Escrow*
----------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
Rich Shapero 33,522 33,522 3,352
Robert A. Hoff 33,522 33,522 3,352
Seth Neiman 16,761 16,761 1,676
Dench Living Trust dtd 6/16/94; Robert 577 577 57
H. Dench and Gloria E. Dench, Trustees
Douglas Metz 58 58 5
Gary Rosenbach 288 288 29
George A. Needham 577 577 57
Harvard Private Capital Holdings, Inc. 57,660 57,660 5,766
Heimbuck Family Trust dtd 8/13/85; 577 577 57
Jeffrey Heimbuck, Trustee
Howard S. Flagg 58 58 5
John F. Nicholson 289 289 29
John Selling 144 144 14
Kenneth and Roberta Eldred Revocable 1,442 1,442 144
Trust, U/A dtd 1/28/83; Kenneth and
Roberta Eldred, Trustees
Leeway & Co. 33,484 33,484 3,348
Lorinda Mosca 10 10 1
Louis E. Hallman, III and Sherry L. 288 288 29
Meisman Family Trust, Louis E.
Hallman, III & Sherry L. Meisman,
Co-Trustees U.T.D. 5/29/98
Lydia Anderson 144 144 14
Massachusetts Institute of Technology 40,362 40,362 4,036
Mellon Bank, N.A. as Trustee for the 28,831 28,831 2,883
Bell Atlantic Master Trust
Needham & Company, Inc. 2,885 2,885 286
Northern Trust Company as Trustee for 53,007 53,007 5,301
Lucent Technologies Inc. Master
Pension Trust
Norwest Equity Capital, L.L.C. 11,532 11,532 1,153
Oberlin College 11,532 11,532 1,153
Okoboji Trust dtd 6/19/85; James F. 1,442 1,442 144
Willenborg, Trustee
Price Trust U/T/A dtd 10/5/84, as 577 577 57
amended; Thomas A. Price, Trustee
Raj Rajaratnam 577 577 57
Rector and Visitors of The University 23,064 23,064 2,306
of Virginia
Richard I. Keeler Revocable Trust 288 288 29
Restated dtd 7/19/94, As May Be Amended
</TABLE>
21.
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Selling Stockholder Number of Shares Being Offered Held in Escrow*
----------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
Robert C. Hawk 57 57 5
Robert C. Hawk 288 288 29
Robert M. Fell 144 144 14
Roxanne Cooley 26 26 3
SBC Master Pension Trust 57,660 57,660 5,766
Silicon Valley Bancshares 1,441 1,441 144
Stradling, Yocca, Carlson & Rauth 577 577 57
Profit Sharing Plan; CNA Trust
Corporation, Trustee
The William and Flora Hewlett Foundation 57,660 57,660 5,766
University of Chicago 23,064 23,064 2,306
Wallace R. Hawley Family Holdings, Ltd. 1,153 1,153 115
Walton Investment, L.L.C. 11,532 11,532 1,153
Wellcome Trust; Wellcome Trust, Ltd., 43,245 43,245 4,325
Trustee
William P. Cargile 58 58 5
WS Investment Company 96A 288 288 29
Yale University 43,245 43,245 4,325
VLG Investments 7,949 7,949 794
Green Family Trust 1,987 1,987 198
CAN Trust FBO Elias J. Blawie 1,987 1,987 198
Alcatel Venture Investments, Inc. 15,552 15,552 1,555
Kleinwort Benson Holding, Inc. 4,467 4,467 447
Allianz Private Equity GMBH 4,864 4,864 486
FINAMA Private Equity Global FCPR 9,331 9,331 933
Altamira Science & Technology Fund 3,110 3,110 311
Orbitex Comm. & Info Technology Fund 2,022 2,022 202
Altamira Equity Fund 1,089 1,089 109
Wifleur, Inc. 3,110 3,110 311
Silicon Valley Bancshares 778 778 78
Peter R. Stickells 778 778 78
</TABLE>
22.
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Selling Stockholder Number of Shares Being Offered Held in Escrow*
----------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
S. Allan Johnson 778 778 78
Bob Korda 778 778 78
The Bass Trust 778 778 78
Gerald K. Konz 311 311 31
S.C. Johnson & Sons, Inc. 6,221 6,221 621
Crane Capital Group, Inc. 3,110 3,110 311
Ssang Yong Cement (Singapore) Ltd. 1,555 1,555 157
JEA Summers 311 311 31
The Grable Foundation 3,110 3,110 311
State Street Bank and Trust Co. ttee 6,221 6,221 621
for the Baxter Intl. Inc. and Subsidiaries
Frank Russell Trust Co. ttee for the 6,221 6,221 621
Roche Retirement Plans' Master Trust
Private Equity Holding (Cayman) Ltd. 8,398 8,398 839
Tascom, Inc. 1,555 1,555 157
Merifin 2,191 2,191 219
Alcatel 4,383 4,383 439
Bruce J. Bauer 242 242 24
Ossama Hassanein 13,184 13,184 1,319
Michael Loughry 30 30 3
Jay B. Morrison 13,184 13,184 1,319
Colleen E. Young 1,839 1,839 185
Jacqueline M. Larkin 10 10 1
Capital Communications CDPQ 64,423 64,423 6,442
Comeura Ltd. 159,229 159,229 15,923
Private Equity Holding (Cayman) Ltd. 22,649 22,649 2,265
Worldview Technology Partners I, L.P. 135,992 135,992 13,599
Worldview Technology Int'l I, L.P. 53,003 53,003 5,003
Worldview Strategic Partners I, L.P. 11,713 11,713 1,171
Nokia Corporation 66,903 66,903 6,690
Lucent Venture Partners, Inc. 87,460 87,460 8,746
Issie Rabinovitch 27,597 27,597 2,759
Donald Thorne 22,078 22,078 2,207
George Marcus 11,039 11,039 1,103
Robert Rabin 11,039 11,039 1,103
Ron Snow 11,039 11,039 1,103
Dan Heffernan 11,039 11,039 1,103
Rabinovitch Ventures Limited 27,597 27,597 2,759
Howard Neff 11,039 11,039 1,103
Yuri Sharonin 24,777 24,777 2,477
Vladimir Taft 16,357 16,357 1,635
Robert M. Lefkowitz 18,866 18,866 1,886
</TABLE>
23.
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Selling Stockholder Number of Shares Being Offered Held in Escrow*
----------------------------------- -------------------- ----------------- -------------------
<S> <C> <C> <C>
Nicolay Makarov 15,003 15,003 1,500
Ardeshir Bordbar 13,698 13,698 1,369
Zinovy Krasnovsky 20,673 20,673 2,067
Kurt Vogel 14,451 14,451 1,445
Roy Wang 1,685 1,685 168
Owen Frances 14,451 14,451 1,445
Edmund Johnson 2,408 2,408 240
Lynette Webber 722 722 72
Vlad Vochegursky 2,890 2,890 289
Boris Zundelevich 3,371 3,371 337
Oleg Kipnis 90 90 9
Ana Raveica 75 75 7
John Trick 481 481 48
</TABLE>
* 296,866 shares of our common stock are held in the name of Embassy & Co.
pursuant to an Escrow Agreement with the former stockholders of Mainsail.
578,041 shares of our common stock are held in the name of Embassy & Co.
pursuant to Retention Escrow Agreements with certain former stockholders of
Mainsail.
24.
<PAGE>
PLAN OF DISTRIBUTION
The shares of common stock may be sold from time to time by the selling
stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. As used in this prospectus, "selling stockholders" includes
donees, pledgees, transferees and other successors in interest selling shares
received from a selling stockholder after the date of this prospectus as a gift,
pledge, partnership distribution or other non-sale transfer. Upon receiving
notice from a selling stockholder that a donee, pledgee, transferee or other
successor in interest intends to sell more than 500 shares, we will file a
supplement to this prospectus. The selling stockholders may offer their shares
of common stock in one or more of the following transactions:
. on any national securities exchange or quotation service on which the
common stock may be listed or quoted at the time of sale, including the
Nasdaq National Market ;
. in the over-the-counter market;
. in private transactions;
. through options;
. by pledge to secure debts and other obligations; or
. a combination of any of the above transactions.
If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.
The shares of common stock described in this prospectus may be sold from time
to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933. Any profits on the resale of shares of common
stock and any compensation received by any underwriter, broker/dealer or agent
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933. We have agreed to indemnify each selling stockholder against
certain liabilities, including liabilities arising under the Securities Act of
1933. The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in the sale of shares of common stock described
in this prospectus against certain liabilities, including liabilities arising
under the Securities Act of 1933.
Any shares covered by this prospectus that qualify for sale pursuant to Rule
144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares they hold. The selling stockholders may transfer, devise or gift such
shares by other means not described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common stock
must be offered or sold only through registered or licensed brokers or dealers.
In addition, in certain jurisdictions, the shares of common stock may not be
offered or sold unless they have been registered or qualified for sale or an
exemption is available and complied with.
Under the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock may not simultaneously engage in market-making
activities with respect to the common stock for five business days prior to the
start of the distribution. In addition, each selling stockholder and any other
person participating in a distribution will be subject to the Securities
Exchange Act of 1934, which may limit the timing of purchases and sales of
common stock by the selling stockholders or any such other person. These
factors may affect the marketability of the common stock and the ability of
brokers or dealers to engage in market-making activities.
All expenses of this registration, estimated at approximately $68,978 will be
paid by us. These expenses include the SEC's filing fees and fees under state
securities or "blue sky" laws.
25.
<PAGE>
LEGAL MATTERS
For the purpose of this offering, Cooley Godward llp, San Francisco,
California, is giving an opinion as to the validity of the common stock offered
by this prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K, as
amended on Form 10-K/A, for the year ended December 31, 1999, as set forth in
their reports, which are incorporated by reference in the prospectus and
elsewhere in the registration statement. Our financial statement and schedule
are incorporated by reference in reliance of Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
The financial statements of Mainsail Networks, Inc., appearing in Terayon
communication System, Inc.'s Current Report on Form 8-K/A filed October 18,
2000, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon included therein and incorporated herein by reference.
Mainsail Networks, Inc's financial statements included in Terayon Communication
Systems, Inc.'s Current Report on Form 8-K/A filed October 18, 2000 are
incorporated by reference in reliance on Ernst & Young LLP given on the
authority of such firm as experts in accounting and auditing.
The audited historical statements of assets acquired and liabilities assumed
and of net sales and direct costs and operating expenses of the Access Network
Electronics business of Tyco Electronics Corporation as of and for the year
ended June 30, 1999, incorporated in this Registration Statement by reference to
the Current Report on Form 8-K/A of Terayon Communication Systems, Inc. filed
June 29, 2000, have been so incorporated in reliance on the report (which
contains an explanatory paragraph relating to the limited presentation of such
statements, as discussed in Note 2 to the statements) of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Kosr, Forer and Gabbay, a member of Ernst and Young International,
independent auditors, have audited the financial statements of Telegate Ltd.
included in Terayon Communications System, Inc.'s Current Report on Form 8-K/A
filed June 29, 2000, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the Registration Statement.
Telegate Ltd.'s financial statements included in Terayon Communication Systems,
Inc.'s Current Report on Form 8-K/A filed June 29, 2000 are incorporated by
reference in reliance on Kosr, Forer and Gabbay's report, given on their
authority as experts in accounting and auditing.
Kosr, Forer and Gabbay, a member of Ernst and Young International,
independent auditors, have audited the consolidated financial statements of
ComBox, Ltd. included in Terayon Communications Systems, Inc.'s Current Report
on Form 8-K/A filed June 29, 2000, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the Registration
Statement. ComBox Ltd.'s consolidated financial statements included in Terayon
Communication Systems, Inc.'s Current Report on Form 8-K/A filed June 29, 2000
are incorporated by reference in reliance on Kosr, Forer and Gabbay's report,
given on their authority as experts in accounting and auditing.
26.
<PAGE>
We have not authorized any dealer, sales person or other person to give any
information or to make any representations other than those contained in this
prospectus or any prospectus supplement. You must not rely on any unauthorized
information. This prospectus is not an offer of these securities in any state
where an offer is not permitted. The information in this prospectus is current
as of ________, 2000. You should not assume that this prospectus is accurate as
of any other date.
TABLE OF CONTENTS PAGE
Forward-Looking Statements iii
Prospectus Summary 1
Risk Factors 3
Use of Proceeds 18
Dividend Policy 18
Where You Can Find More Information 18
Selling Stockholders 19
Plan of Distribution 25
Legal Matters 26
Experts 26
2,969,062 SHARES
COMMON STOCK
PROSPECTUS
TERAYON COMMUNICATION SYSTEMS, INC.
___________, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, all of which will be
paid by us, in connection with the distribution of our common stock being
registered. All amounts are estimated, except the SEC registration fee:
SEC registration fee............................ $18,978
Accounting fees................................. 10,000
Legal fees and expenses......................... 20,000
Miscellaneous................................... 10,000
Printing and engraving.......................... 10,000
Total........................................... $68,978
=======
Item 15. Indemnification of Officers and Directors.
As permitted by Section 145 of the Delaware General Corporation Law, our
Bylaws provide that (i) we are required to indemnify our directors and executive
officers to the fullest extent permitted by the Delaware General Corporation
Law, (ii) we may, in our discretion, indemnify other officers, employees and
agents as set forth in the Delaware General Corporation Law, (iii) to the
fullest extent permitted by the Delaware General Corporation Law, we are
required to advance all expenses incurred by our directors and executive
officers in connection with a legal proceeding (subject to certain exceptions),
(iv) the rights conferred in our Bylaws are not exclusive, (v) we are authorized
to enter into indemnification agreements with our directors, officers, employees
and agents and (vi) we may not retroactively amend the Bylaws provisions
relating to indemnity.
We have entered into agreements with our directors and executive officers
that require us to indemnify such persons against expenses, judgments, fines,
settlements and other amounts that such person becomes legally obligated to pay
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was our director or officer or any of
our affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to our best
interests. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
Item 16. Exhibits and Financial Statement Schedules.
Exhibit
Number Description of Document
*5.1 Opinion of Cooley Godward LLP.
*23.1 Consent of Ernst & Young LLP, Independent Auditors.
*23.2 Consent of Ernst & Young LLP, Independent Auditors.
*23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
*23.4 Consent of Kost, Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.
*23.5 Consent of Kost, Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.
*23.6 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).
*24.1 Power of Attorney. Reference is made to the signature page.
* Previously filed
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described in Item 14 or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
<PAGE>
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, officers, or controlling
persons in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
We hereby undertake that, for purposes of determining any liability under the
Securities Act of 1933, each filing of our annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe it meets all of
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Clara, State of California, on the 6th day of
November, 2000.
TERAYON COMMUNICATION SYSTEMS, INC.
By: /s/ Dr. Zaki Rakib
--------------------------------------
Dr. Zaki Rakib
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dr. Zaki Rakib Chief Executive Officer and Director (Principal November 6, 2000
---------------------------------- Executive Officer)
Dr. Zaki Rakib
* Chief Financial Officer (Principal Financial and November 6, 2000
---------------------------------- Accounting Officer)
Ray M. Fritz
* President and Chairman of the Board of November 6, 2000
---------------------------------- Directors
Shlomo Rakib
* Director November 6, 2000
----------------------------------
Michael D'Avella
* Director November 6, 2000
----------------------------------
Alek Krstajic
* Director November 6, 2000
----------------------------------
Christopher J. Schaepe
* Director November 6, 2000
----------------------------------
Lewis Solomon
* Director November 6, 2000
----------------------------------
Mark Stevens
By: * /s/ Dr. Zaki Rakib
-------------------------------
Dr. Zaki Rakib
Attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Document
*5.1 Opinion of Cooley Godward LLP.
*23.1 Consent of Ernst & Young LLP, Independent Auditors.
*23.2 Consent of Ernst & Young LLP, Independent Auditors.
*23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
*23.4 Consent of Kost, Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.
*23.5 Consent of Kost, Forer & Gabbay (a member of Ernst & Young
International), Independent Auditors.
*23.6 Consent of Cooley Godward LLP (reference is made to Exhibit
5.1).
*24.1 Power of Attorney. Reference is made to the signature page.
* Previously filed.
