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As filed with the Securities and Exchange Commission on January 19, 2001
Registration No. 333-48536
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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
incorporation or organization) Classification Code Number) Identification 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
Angelique C. Tremble
Rachel N. Halpren
Cooley Godward LLP
One Maritime Plaza, 20/th/ Floor
San Francisco, CA 94111
(415) 693-2000
___________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
___________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission
(the "SEC"), acting pursuant to said Section 8(a), may determine.
(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 holders 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
(January 19, 2001)
TERAYON COMMUNICATION SYSTEMS, INC.
$500,000,000
of 5% Convertible Subordinated Notes Due 2007 and 5,951,673 Shares
of Common Stock Issuable Upon Conversion of the Notes
This prospectus relates to the 5% Convertible Subordinated Notes of Terayon
Communication Systems, Inc., a Delaware Corporation, due 2007 (the "Notes") held
by certain holders of the Notes who may offer for sale the Notes and the shares
of common stock into which the Notes are convertible at any time at market
prices prevailing at the time of the sale or at privately negotiated prices. The
selling holders may sell the Notes or the common stock directly to purchasers or
through underwriters, broker-dealers or agents, who may receive compensation in
the firm of discounts, concessions or commissions.
The holders of the Notes may convert the Notes into shares of our common stock
at any time at a conversion rate of 11.9033 shares per $1,000 principal amount
of Notes. Interest on the Notes is payable on February 1 and August 1 of each
year, commencing on February 1, 2001. After October 24, 2000, we may redeem the
Notes, in whole or in part, at the redemption prices as set forth in this
prospectus. However, we may not redeem the Notes on or after October 24, 2000
and before August 7, 2003 unless the closing price of our stock exceeds 150% of
the conversion price then in effect for at least 20 trading days in a
consecutive 30-day period preceding the date we mail the redemption notice. As
of the date of this prospectus, the conversion price is $84.01 per share.
In the event of a change in control, defined in this prospectus, each holder of
Notes may require us to repurchase the Notes for cash at 100% of the principal
amount of the Notes plus accrued interest.
The Notes are unsecured obligations that are subordinated in right of payment to
all of our existing and future senior indebtedness.
There are no sinking fund provisions.
Our common stock is listed on the Nasdaq National Market under the symbol
"TERN." On January 11, 2001, the closing sale price of our common stock, as
reported on the Nasdaq National Market, was $5.875.
The Notes are currently eligible for trading on the Portal Market of the
National Association of Securities Dealers, Inc.
Investing in our common stock involves a high degree of risk. See "Risk Factors"
beginning on page 4.
The securities 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
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In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus.
If information is given or representations are made, you may not rely on that
information or those representations as having been authorized by us. This
prospectus is neither an offer to sell nor a solicitation of an offer to buy
an securities other than those registered by this prospectus, nor is it an
offer to sell or a solicitation of an offer to buy securities where an offer
or solicitation would be unlawful. You may not imply from the delivery of this
prospectus, nor from any sale made under this prospectus, that our affairs are
unchanged since the date of this prospectus or that the information contained
in this prospectus is correct as of any time after the date of this
prospectus.
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.
Unless the context otherwise requires, the terms "we," "our," "us" or
"Terayon" refers to Terayon Communication Systems, Inc., a Delaware corporation.
All share numbers in this prospectus reflect the two-for-one stock split
effected by us on April 25, 2000.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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. 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) and that
actual results could differ materially. The sections entitled "Risk Factors"
beginning on page 6 of this prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in
our Annual Report, Quarterly Reports and Form 8-K filed in July 2000 contain a
discussion of some of the factors that could contribute to those differences
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;
. industry trends and future growth in the markets for our products;
. 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;
. The effect of GAAP accounting pronouncements on our recognition of
revenues;
. the loss of key employees; and
. the loss associated with future and pending ligitation matters, as they
may arise
You should read carefully the section of this prospectus under the heading
"Risk Factors" beginning on page 4. We assume no responsibility for updating
forward-looking information contained in this prospectus.
1.
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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, as amended on Form 10-K/A filed
on April 28, 2000, our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000, as amended by the Form 10-Q/A filed with the SEC on November
15, 2000, our Report on Form 8-K filed with the SEC on July 18, 2000, our Report
on Form 8-K filed with the SEC on October 5, 2000, our Report on Form 8-K filed
with the SEC on October 23, 2000 and our Report on Form 8-K filed with the SEC
on January 9, 2001 for more information on our business and the risks involved
in investing in our stock.
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 December 2000, we acquired TrueChat, Inc. ("TrueChat") a company that
develops communication systems that enable multimedia teleconferencing and
provides increased control over teleconference parameters.
3.
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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 September 30, 2000, we had an accumulated deficit of $237,624,000.
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;
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. the volume of products manufactured;
. the type of distribution channel through which we sell our products;
. the average selling prices or "ASPs" of our products; and
. the effectiveness of our cost reduction measures.
We anticipate that unit ASPs of our products will decline in the future.
This could cause a decrease in the gross margins for these products. In
addition, the maturity of TeraComm system deployments affects our gross margin.
New deployments of the TeraComm system involve the sale of headend equipment
(which has higher margins) and generally involve smaller quantities of product.
New deployments typically are sold at higher margins than the larger volume
sales of product associated with more mature deployments of the TeraComm system.
The sales mix of TeraLink 1000 Master Controllers, TeraLink Gateways and TeraPro
cable modems also affects our gross margin. The TeraPro cable modems have
significantly lower margins than the TeraLink 1000 Master Controller and
TeraLink Gateway headend products. We expect to achieve 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.
Three customers (two of which are related parties) accounted for
approximately 50% of our revenues for the quarter ended September 30, 2000. We
believe that a substantial majority of our revenues will continue to be derived
from sales to a relatively small number of customers for the foreseeable future.
In addition, we believe that sales to these customers will be focused on a
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 ten businesses since September 1999: Imedia Corporation in
September 1999; Radwiz Ltd. in November 1999; Telegate Ltd. in January 2000; the
Access Network Electronics business 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; Digital
Transmission Equipment in September 2000; Mainsail Networks, Inc. in September
2000; and TrueChat in December 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:
5.
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. 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
. 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.
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
6.
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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 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 Digital
Video Audio Council ("DAVIC")/Digital Video Broadcasting ("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 2001, 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 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.
7.
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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 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
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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 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
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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, 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.
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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 $300,100,000 as of September
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. 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
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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. 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
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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.
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.
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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 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
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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 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
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of our competitors who join or have joined the DOCSIS intellectual property pool
will have access to some aspects of our technology without being required to pay
us any royalties or other compensation. If and when we submit S-CDMA to the
DOCSIS Intellectual Property pool, we are in no way restricted from entering
into royalty-bearing license agreements with companies that wish to use the S-
CDMA technology for purposes other than implementing DOCSIS compatible products,
or that do not wish to enter into the DOCSIS intellectual property pool.
Further, some of our competitors have been successful in reverse engineering the
technology of other companies, and the inclusion of S-CDMA in a future DOCSIS
specification would expose some aspects of our technology to those competitors.
DOCSIS specifications are available on an open basis once they are approved, not
only to companies that are members of the DOCSIS IP Pool. If a competitor is
able to duplicate the functionality and capabilities of our technology, we could
lose all or some of the time-to-market advantage we might otherwise have. Under
the terms of the proposed license agreement, if we sue certain parties to the
proposed license agreement on claims of infringement of any copyright or patent
right or misappropriation of any trade secret, those parties may terminate our
license to the patents or copyrights they contributed to the DOCSIS intellectual
property pool. If a termination like this were to occur, we would continue to
have access to some aspects of the DOCSIS intellectual property pool, but we
would not be able to develop products that fully comply with the DOCSIS cable
modem specification. Also, even if we were to be removed from the IP pool, we
would not be prevented from developing and selling products that fully comply
with the DOCSIS specifications, but we would not be able to do this with the
benefit of a royalty-free license, which would increase the cost of our
products, assuming we were able to obtain a license agreement for the required
technology. Because of these terms, we may find it difficult to enforce our
intellectual property rights against certain companies, even in areas that are
not directly related to DOCSIS specifications and products.
We anticipate that developers of cable modems increasingly will be subject
to infringement claims as the number of products and competitors in our industry
segment grows. We have received letters from two individuals claiming that our
technology infringes patents held by these individuals. We have reviewed the
allegations made by these individuals and, after consulting with our patent
counsel, we do not believe that our technology infringes any valid claim of
these individuals' patents. If the issues are submitted to a court, the court
could find that our products infringe these patents. In addition, these
individuals may continue to assert infringement. If we are found to have
infringed these individuals' patents, we could be subject to substantial damages
and/or an injunction preventing us from conducting our business. In addition,
other third parties may assert infringement claims against us in the future. An
infringement claim, whether meritorious or not, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements may not
be available on terms acceptable to us or at all. Litigation also may be
necessary to enforce our intellectual property rights.
We pursue the registration of our trademarks in the United States and have
applications pending to register several of our trademarks. However, the laws of
certain foreign countries might not protect our products or intellectual
property rights to the same extent as the laws of the United States. This means
that effective trademark, copyright, trade secret and patent protection might
not be available in every country in which our products might be manufactured,
marketed or sold.
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.
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If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which our products do not comply,
we will be unable to offer products in those countries until our products comply
with those standards or specifications. In addition, we may have to incur
substantial costs to comply with those standards or specifications. For
instance, should the DAVIC standards for ATM-based digital video be established
internationally, we will need to conform our cable modems to compete. Further,
many countries do not have regulations for installation of cable modem systems
or for upgrading existing cable network systems to accommodate our products.
Whether we currently operate in a country without these regulations or enter
into the 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, 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 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;
17.
<PAGE>
. 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
. 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 weeks and 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. Defendants filed a motion to
dismiss the consolidated compliant on October 30, 2000, and plaintiffs filed an
opposition. Defendants filed a reply in support of their motion to dismiss on
December 22, 2000. The hearing on this motion is currently scheduled for January
8, 2001. We consider the lawsuit to be without merit and we intend to defend
vigorously against these allegations.
Risks Related to the Notes
Our indebtedness could adversely affect our financial condition; we may incur
substantially more debt.
After issuing the 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, including the Notes;
. 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
18.
<PAGE>
. 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.
We may have insufficient cash flow to meet our debt service obligations.
We are required to generate cash sufficient to pay all amounts due on the
Notes and to conduct our business operations. Currently, we have net losses, and
we may not be able to cover our anticipated debt service obligations. This may
materially hinder our ability to make payments on the Notes. Our ability to meet
our future debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control.
The Notes are subordinated to Senior Indebtedness.
The Notes are unsecured and subordinated in right of payment to all of our
existing and future Senior Indebtedness, as defined in "Description of
Notes-Subordination." As a result, in the event of bankruptcy, liquidation or
reorganization or upon acceleration of the Notes due to an event of default, as
defined below and in specific other events, our assets will be available to pay
obligations on the Notes only after all Senior Indebtedness has been paid in
full in cash or other payment satisfactory to the holders of Senior
Indebtedness. There may not be sufficient assets remaining to pay amounts due on
any or all of the Notes then outstanding. The Notes are also effectively
subordinated to the indebtedness and other liabilities, including trade payables
of our subsidiaries. The Indenture does not prohibit or limit the incurrence of
Senior Indebtedness or the incurrence of other indebtedness and other
liabilities by us. The incurrence of additional indebtedness and other
liabilities by us could adversely affect our ability to pay our obligations on
the Notes. As of June 30, 2000, we had no significant amount of indebtedness
that would have constituted Senior Indebtedness, and our subsidiaries had a
total of approximately $17 million of indebtedness and other liabilities
(excluding intercompany liabilities and liabilities of a type not required to be
disclosed on a balance sheet) to which the Notes would have been effectively
subordinated in right of payment. We anticipate that from time to time, we will
incur additional indebtedness, including Senior Indebtedness.
We may not be able to repurchase the Notes in the event of a change in control.
Upon the occurrence of certain change in control events, holders of the
Notes may require us to offer to repurchase all of their Notes. We may not have
sufficient funds at the time of the change in control to make the required
repurchases. Additionally, a "change in control" (as defined in the indenture)
may be an event of default under any future credit facility, which could permit
the lenders to accelerate the debt, which could also cause an event of default
under the indenture.
The source of funds for any repurchase required as a result of any change
in control will be our available cash or cash generated from operating
activities or other sources, including borrowings, sales of assets, sales of
equity or funds provided by a new controlling entity. We cannot assure you,
however, that sufficient funds will be available at the time of any change in
control to make any required repurchases of the Notes tendered. Furthermore, the
use of available cash to fund the potential consequences of a change in control
may impair our ability to obtain additional financing in the future.
19.
<PAGE>
Because there is no current market for the Notes, you cannot be sure that an
active trading market will develop.
There is no established trading market for the Notes. We were informed by
the initial purchasers that they intend to make markets in the Notes after the
offering of the Notes. However, the initial purchasers may cease their market-
making at any time. Furthermore, the market price for the Notes may be adversely
affected by changes in our financial performance, changes in the overall market
of similar securities and performance or prospects for companies in our
industry.
20.
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
Our earnings were insufficient to cover fixed charges in the years ended
December 31, 1997, 1998 and 1999 and the nine month periods ended September 30,
1999 and 2000. Additional earnings of $22.5 million, $47.1 million, $64.1
million, $45.1 million and $89.2 million were necessary to provide a 1:1
coverage ratio for the years ended December 31, 1997, 1998, 1999 and for the
periods ended September 30, 1999 and 2000, respectively. For the purpose of
these calculations, "earnings" consist of income before taxes, plus fixed
charges, and "fixed charges" consist of interest expense incurred and the
portion of rental expense deemed by us to be representative of the interest
factor of rental payment under leases.
USE OF PROCEEDS
The net proceeds from the sale of the Notes was approximately $484,475,000,
after deducting the initial purchasers' discount and estimated offering
expenses.
We intend to use the net proceeds of this offering for general corporate
purposes, including capital expenditures and research and development. In
addition, we may use an unspecified portion of the net proceeds for strategic
transactions such as acquisitions, joint ventures, joint development projects,
strategic investments and other transactions. The amounts and timing of our
actual expenditures will depend upon numerous factors, including the status of
our product development and commercialization efforts, the amount of cash
generated by our operations, competition and sales and marketing activities.
Pending application of the net proceeds as described above, we intend to invest
the net proceeds of the offering in short-term, investment-grade, interest-
bearing securities.
21.
<PAGE>
SELLING SECURITY HOLDERS
We originally issued the Notes and the Notes were sold by the initial
purchasers in a transaction exempt from the registration requirements of the
Securities Act to persons reasonably believed by the initial purchasers to be
qualified institutional buyers or other institutional accredited investors.
Selling holders, including their transferees, pledgees or donees or their
successors, may from time to time offer and sell pursuant to this prospectus any
or all of the Notes and common stock into which the Notes are convertible. We
agreed to use reasonable efforts to keep the registration statement effective
until July 26, 2002. Our registration of the Notes and the shares of common
stock into which the Notes are convertible does not necessarily mean that the
selling holders will sell any or all of the Notes or the shares of the common
stock into which the Notes are convertible.
The following table sets forth information, as of January 11, 2001, with
respect to the selling holders and the principal amounts of Notes beneficially
owned by each selling holder that may be offered under this prospectus. The
information is based on information provided by or on behalf of the selling
holders. The selling holders may offer all, some or none of the Notes or common
stock into which the Notes are convertible. Because the selling holders may
offer all or some portion of the Notes or the common stock, no estimate can be
given as to the amount of the Notes or the common stock that will be held by the
selling holders upon termination of any sales. In addition, the selling holders
identified below may have sold, transferred or otherwise disposed of all or a
portion of their Notes since the date on which they provided the information
regarding their Notes in transactions exempt from the registration requirements
of the Securities Act.
<TABLE>
<CAPTION>
Principal Amount Common Stock
of Notes Issuable
Beneficially Owned upon Conversation Common Stock
Selling Holder and Offered of the Notes (1) Offered
------------------------------------ ------------------ ----------------- --------------
<S> <C> <C> <C>
J.P. Morgan Securities, Inc. 17,270,000 205,571 205,571
JMG Capital Partners, LP 2,500,000 29,758 29,758
JMG Triton Offshore Fund, Ltd. 13,000,000 154,743 154,743
AAM/Zazove Institutional Income Fund, 1,200,000 14,284 14,284
L.P.
San Diego County 3,100,000 36,901 36,901
Employees Retirement Association
Zurich HFR Master Hedge Fund Index Ltd. 300,000 3,571 3,571
Delphi Financial Group, Inc. 500,000 5,952 5,952
Argent Convertible Arbitrage Fund Ltd. 1,000,000 11,904 11,904
Argent Classic Convertible Arbitrage Fund 15,000,000 178,551 178,551
(Bermuda) L.P.
Kentfield Trading, Ltd. 2,850,000 33,925 33,925
LibertyView Funds L.P. 750,000 8,928 8,928
Lydian Overseas Partners Master Fund 15,000,000 178,551 178,551
Peoples Benefit Life Insurance Company 6,250,000 74,395 74,395
(Teamsters Separate Account)
Deeprock + Co. 2,000,000 23,807 23,807
St. Albans Partners Ltd. 4,000,000 47,613 47,613
BankAmerica Pension Plan 2,000,000 23,807 23,807
Duckbill + Co. 630,000 7,500 7,500
Principal Amount Common Stock
of Notes Issuable
Beneficially Owned upon Conversation Common Stock
Selling Holder and Offered of the Notes (1) Offered
------------------------------------ ------------------ ----------------- --------------
<S> <C> <C> <C>
General Motors Welfare Benefit Trust 2,000,000 23,807 23,807
(St. Veba)
Retail Clerks Pension Trust 2,000,000 23,807 23,807
Peoples Benefit Life Insurance Company 4,220,000 50,233 50,233
Retail Clerks Pension Trust #2 1,000,000 11,904 11,904
Jersey (IMA) Ltd. 250,000 2,976 2,976
AIG Soundshore Strategic Holding 2,185,000 26,008 26,008
Fund Ltd. (2)
AIG Soundshore Opportunity Holding 2,488,000 29,615 29,615
Fund Ltd. (2)
Elf Aquitaine 150,000 1,786 1,786
Lord Abbett Bond Debenture Fund 5,850,000 69,635 69,635
Fuji U.S. Income Open 500,000 5,952 5,952
Cova Bond Debenture Fund 500,000 5,952 5,952
Oxford Lord Abbett + Co. 1,000,000 11,904 11,904
Value Realization Fund, L.P. 8,000,000 95,227 95,227
Value Realization Fund B, LP 500,000 5,952 5,952
Canyon Value Realization (Cayman) Ltd. 11,000,000 130,937 130,937
Black Diamond Offshore, Ltd. 665,000 7,916 7,916
Double Black Diamond Offshore, LDC 2,708,000 32,235 32,235
CIBC World Markets 5,500,000 65,468 65,468
Janus Venture Fund 19,025,000 226,462 226,462
Janus Global Technology Fund 16,665,000 198,370 198,370
Aspen Global Technology Fund 674,000 8,023 8,023
JWF US Venture Fund 1,990,000 23,688 23,688
JWF Global Technology Fund 1,154,000 13,737 13,737
AST Janus Small Cap Growth Portfolio 8,185,000 97,429 97,429
Nomura/Janus Global Technology 1,507,000 17,939 17,939
Worldwide Transactions, Ltd. 127,000 1,512 1,512
CFFX, LLC 1,000,000 11,904 11,904
McMahan Securities Co. L.P. 1,000,000 11,904 11,904
Alexandria Global Investment Fund I LTD. 3,000,000 35,710 35,710
TQA Master Fund, LTD 1,000,000 11,904 11,904
TQA Master Plus Fund, Ltd. 435,000
Leonardo, L.P, 12,000,000 142,840 142,840
Principal Amount Common Stock
of Notes Issuable
Beneficially Owned upon Conversation Common Stock
Selling Holder and Offered of the Notes (1) Offered
------------------------------------ ------------------ ----------------- --------------
<S> <C> <C> <C>
United Mizrahi Bank LTD 50,000 595 595
Israel Brokerage & Investments IBI LTD 100,000 1,190 1,190
Ilanot Batucha Investment House LTD 300,000 3,571 3,571
Lumber Industries, Inc. 750,000 8,927 8,927
Wasserstein Perella Securities Inc. 7,600,000 90,465 90,465
Bank of America Securities, LLC 5,000,000 59,516 59,516
KBC Financial Products USA Inc. 4,500,000 53,565 53,565
Clinton Riverside Convertible Portfolio 2,100,000 24,997 24,997
Limited
Lehman Brothers Inc. 18,500,000 220,211 220,211
Nomura Securities International, Inc. 1,000,000 11,904 11,904
Daiwa Securities America Inc. (2) 17,500,000 208,308 208,308
Ramus Capital Group Holdings, Ltd. 1,300,000 15,474 15,474
Credit Research & Trading LLC 6,035,000 71,836 71,836
RCG Latitude Master Fund, Ltd. 200,000 2,380 2,380
Bank Austria Cayman Islands, Ltd. 5,500,000 65,468 65,468
Quattro Fund 1,000,000 11,904 11,904
Quattro Crestline Special Situations 500,000 5,951 5,951
Research Capital Corporation 9,650,000 114,867 114,867
Valentis Investors LLC 2,000,000 23,806 23,806
Standard Mortage Holding Corp. 500,000 5,951 5,951
Canyon Capital Arbitrage Master Fund 1,000,000 11,904 11,904
San Diego County Employee's 830,000 9,879 9,879
Retirement Association
IBM Retirement Plan - High Income 920,000 10,951 10,951
Julius Baer Securities, Inc. 250,000 2,975 2,975
UBS Warburg AG 2,000,000 23,806 23,806
UBS AG, London Branch 20,000,000 238,066 238,066
Deutsche Bank Securities Inc. 56,134,000 668,182 668,182
Merrill, Lynch, Pierce, Fenner and
Smith, Inc. 16,000 190 190
Pacific Life Insurance Company 1,000,000 11,904 11,904
Delta Airlines Master Trust 4,900,000 58,326 58,326
Van Waters & Rogers, Inc. 770,000 9,165 9,165
Retirement Plan
Principal Amount Common Stock
of Notes Issuable
Beneficially Owned upon Conversation Common Stock
Selling Holder and Offered of the Notes (1) Offered
------------------------------------ ------------------ ----------------- --------------
<S> <C> <C> <C>
Port Authority of Allegheny County 2,825,000 33,626 33,626
Retirement and Disability Allowance
Plan for the Employees Represented by
Local 85 of the Amalgamated Transit
Union
The Dow Chemical Company Employees' 5,325,000 63,385 63,385
Retirement Plan
Associated Electric & Gas Insurance 850,000 10,117 10,117
Services Limited
BS Debt Income Fund - Class A 15,000 178 178
City of Knoxville Pension System 640,000 7,618 7,618
CALAMOS(R)Convertible Portfolio - 150,000 1,785 1,785
CALAMOS(R) Advisors Trust
Knoxville Utilities Board Retirement 400,000 4,761 4,761
System
Boilermaker - Blacksmith Pension Trust 2,700,000 32,139 32,139
CALAMOS(R)High Yield Fund - CALAMOS(R) 145,000 1,725 1,725
Investment Trust
Aventis Pension Master Trust 440,000 5,237 5,237
Louisiana Workers' Compensation 360,000 4,285 4,285
Corporation
United Food and Commercial Workers 1,260,000 14,998 14,998
Local 1262 and Employees Pension Fund
City of Albany Pension Fund 245,000 2,916 2,916
Greek Catholic Union II 45,000 535 535
Unifi, Inc. Profit Sharing Plan and Trust 255,000 3,035 3,035
Kettering Medical Center Funded 160,000 1,904 1,904
Depreciation Account
SPT 1,100,000 13,093 13,093
The Fondren Foundation 165,000 1,964 1,964
CALAMOS(R)Convertible Technology Fund 160,000 1,904 1,904
- CALAMOS(R) Investment Trust
Magten Asset Management Corp. Pension 485,000 5,773 5,773
Plan & Trust
Department of Fire & Police Pensions 7,075,000 84,216 84,216
Systems
General Motors Employees Global 6,175,000 73,503 73,503
The Bakal Company Limited Partnership 150,000 1,785 1,785
Magten Group Trust 300,000 3,571 3,571
Lonestar Partners, L.P. 4,500,000 53,565 53,565
Any other holders of Notes or future 86,542,000 1,030,139 1,030,139
transferee from any holder (3)
----------------------------------------- ------------- ----------- -----------
Total $500,000,000 5,951,673 5,951,673
</TABLE>
(1) Assumes a conversion rate of 11.9033 shares of common stock per $1,000
principal amount of Notes and a cash payment in lieu of any fractional
interest.
(2) AIG Soundshare Strategic Holding Fund Ltd. and AIG Soundshare
Opportunity Holding Fund Ltd. each hold 75 shares of our common stock,
Daiwa Securities America Inc. holds 35,166 shares of our common stock
and Lumber Industries, Inc. holds 4,000 shares of our common stock in
addition to any shares they would acquire upon conversion of the Notes.
(3) Assumes that any other holders of Notes or any future transferee from
any holder do not or will not beneficially own any common stock other
than common stock into which the Notes are convertible at the conversion
rate of 11.9033 shares of common stock per $1,000 principal amount of
Notes.
None of the selling holders nor any of their affiliates, officers,
directors or principal equity holders has held any position or office or has had
any material relationship with us within the past three years with the exception
of Deutsche Bank Securities Inc. and Lehman Brothers Inc. In the past three
years, Deutsche Bank and Lehman Brothers have acted as underwriters of the
Company's initial public offering and follow-on public offering and were initial
purchasers in the offering of the Notes. The selling holders purchased all of
the Notes in a private transaction. All of the Notes and the shares of common
stock into which the Notes are convertible are "restricted securities" under the
Securities Act.
Information concerning the selling holders may change from time to time
and any changed information will be set forth in supplements to this prospectus
if and when necessary. In addition, the conversion price, and therefore, the
number of shares of common stock issuable upon conversion of the Notes, is
subject to adjustment under certain circumstances. Accordingly, the aggregate
principal amount of Notes and the number of shares of common stock into which
the Notes are convertible may increase or decrease.
22.
<PAGE>
PLAN OF DISTRIBUTION
The selling holders and their successors, including their transferees,
pledgees or donees or their successors, may sell the Notes and the common stock
into which the Notes are convertible directly to purchasers or through
underwriters, broker-dealers or agents, who may receive compensation in the form
of discounts, concessions or commissions from the selling holders or the
purchasers. These discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.
The Notes and the common stock into which the Notes are convertible may be
sold in one or more transactions at fixed prices, at prevailing market prices at
the time of sale, at prices related to the prevailing market prices, at varying
prices determined at the time of sale, or at negotiated prices. These sales may
be effected in transactions, which may involve crosses or block transactions:
. on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the Notes or the
common stock may be listed or quoted at the time of sale;
. in the over-the-counter market;
. in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
. through the writing of options, whether the options are listed on an
options exchange or otherwise;
. by pledge to secure debts and other obligations;
. through the settlement of short sales; or
. a combination of any of the above transactions.
In connection with the sale of the Notes and the common stock into which
the Notes are convertible or otherwise, the selling holders may enter into
hedging transactions with broker-dealers or other financial institutions, which
may in turn engage in short sales of the Notes or the common stock into which
the Notes are convertible in the course of hedging the positions they assume.
The selling holders may also sell the Notes or the common stock into which the
Notes are convertible short and deliver these securities to close out their
short positions, or loan or pledge the Notes or the common stock into which the
Notes are convertible to broker-dealers that in turn may sell these securities.
The aggregate proceeds to the selling holders from the sale of the Notes or
common stock into which the Notes are convertible offered by them will be the
purchase price of the Notes or common stock less discounts and commissions, if
any. Each of the selling holders reserves the right to accept and, together with
their agents from time to time, to reject, in whole or in part, any proposed
purchase of Notes or common stock to be made directly or through agents. We will
not receive any of the proceeds from this offering.
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the Notes for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the Notes.
In order to comply with the securities laws of some states, if applicable,
the Notes and common stock into which the Notes are convertible may be sold in
these jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the Notes and common stock into which the Notes are
convertible may not be sold unless they have been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.
The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the Notes and common stock into which the Notes are
convertible may be "underwriters" within the meaning of Section 2(11) of
23.
<PAGE>
the Securities Act. Any discounts, commissions, concessions or profit they earn
on any resale of the shares may be underwriting discounts and commissions under
the Securities Act. Selling holders who are "underwriters" within the meaning of
Section 2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The selling holders have acknowledged that
they understand their obligations to comply with the provisions of the Exchange
Act and the rules thereunder relating to stock manipulation, particularly
Regulation M.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling holder
may not sell any Notes or common stock described in this prospectus and may not
transfer, devise or gift these securities by other means not described in this
prospectus.
To the extent required, the specific Notes or common stock to be sold, the
names of the selling holders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.
We entered into a registration rights agreement for the benefit of holders
of the Notes to register their Notes and common stock under applicable federal
and state securities laws under specific circumstances and at specific times.
The registration rights agreement provides for cross-indemnification of the
selling holders and us and their and our respective directors, officers and
controlling persons against specific liabilities in connection with the offer
and sale of the Notes and the common stock, including liabilities under the
Securities Act.
A prospectus had not been and will not be filed under the securities laws
of any province or territory of Canada to qualify the sale of Notes in such
jurisdictions. The Notes are not being offered and may not be offered or sold,
directly or indirectly, in Canada or to or for the account of any resident of
Canada except in compliance with or pursuant to an exemption from the
registration and prospectus requirements of applicable securities laws in
Canada.
24.
<PAGE>
DESCRIPTION OF NOTES
The Notes were issued under an Indenture between us and State Street
Bank and Trust Company of California, N.A., as trustee (the "Trustee"). The
following description is only a summary of the material provisions of the
Indenture, the Notes and the registration rights agreement. We urge you to read
the Indenture, the Notes and the registration rights agreement in their entirety
because they, and not this description, define your rights as holders of the
Notes. You may request copies of these documents at our address shown under the
caption "Where You Can Find More Information." The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended. For purposes of this section,
references to "we," "us," "ours" and "Terayon" include only Terayon
Communication Systems, Inc. and not its subsidiaries.
General
We issued the Notes with a principal amount limited to $500,000,000. The
Notes are unsecured, subordinated obligations of Terayon and will mature on
August 1, 2007, unless earlier redeemed at our option as described under
"Optional Redemption of the Notes" or repurchased by us at a holder's option
upon a change in control of Terayon as described under "Right to Require
Purchase of Notes upon a Change in Control." Interest on the Notes will accrue
at 5% per annum shown and will be payable semiannually in arrears on February 1
and August 1 of each year, commencing on February 1, 2001. Interest on the Notes
will accrue from July 20, 2000 or, if interest has already been paid, from the
date it was most recently paid. We will make each interest payment to the
holders of record of the Notes on the immediately preceding January 15 and July
15, whether or not this day is a business day. Interest on the Notes will be
computed on the basis of a 360-day year comprised of twelve 30-day months. The
Indenture does not contain any restriction on:
. the payment of dividends;
. the issuance of Senior Indebtedness (as defined below) or other
indebtedness; or
. the repurchase of securities of Terayon
and does not contain any financial covenants. Other than as described under
"Right to Require Purchase of Notes upon a Change in Control," the Indenture
contains no covenants or other provisions to afford protection to holders of
Notes in the event of a highly leveraged transaction or a change in control of
Terayon.
We will pay the principal of, premium, if any, and interest on the Notes at
the office or agency maintained by us in the Borough of Manhattan in New York
City. Holders may register the transfer of their Notes at the same location.
We reserve the right to pay interest to holders of the Notes by check mailed to
the holders at their registered addresses or by wire transfer to holders of at
least $5,000,000 aggregate principal amount of Notes. Except under the limited
circumstances described below, the Notes will be issued only in fully-registered
book-entry form, without coupons, and will be represented by one or more global
Notes. There will be no service charge for any registration of transfer or
exchange of Notes. We may, however, require holders to pay a sum sufficient to
cover any tax or other governmental charge payable in connection with any
transfer or exchange.
Conversion Rights
A holder may, at any time after October 24, 2000 and before August 1, 2007,
convert a Note or any portion of a Note (if the portions are $1,000 or whole
multiples of $1,000) into shares of common stock initially at a conversion price
of $84.01 per share (which is equivalent to a conversion rate of approximately
11.9033 shares per $1,000 principal amount of Notes), unless the Note or a
portion of the Note has been previously redeemed or repurchased. The right to
convert a Note called for redemption will terminate at the close of business on
August 1, 2007 unless we default in making the payment due on the redemption
date. For information as to notices of redemption, see "Redemption of the
Notes." If a holder of a Note has delivered notice of its election to have the
Note repurchased as a result of a Change in Control, the Note may be converted
only if the notice of election is withdrawn as described under "Right to
Require Purchase of Notes upon a Change in Control."
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We will adjust the conversion price if (without duplication):
(1) we issue common stock as a dividend or distribution on our common stock;
(2) we subdivide, combine or reclassify our common stock;
(3) we issue to substantially all holders of our common stock rights,
warrants or options entitling them to subscribe for or purchase common stock at
less than the then current market price;
(4) we distribute to substantially all holders of common stock evidences of
our indebtedness, shares of capital stock, securities, cash, property, rights,
warrants or options, excluding:
. those rights, warrants or options referred to in clause (3) above;
. any dividend or distribution paid exclusively in cash referred to in
clause (5) below; and
. any dividend or distribution referred to in clause (1) above;
(5) we make a cash distribution to substantially all holders of our common
stock, that together with all other all-cash distributions and consideration
payable in respect of any tender or exchange offer by us or one of our
subsidiaries for our common stock made within the preceding 12 months exceeds
15% of our aggregate market capitalization on the date of the distribution; or
(6) we complete a repurchase (including by way of a tender offer) of our
common stock which involves an aggregate consideration that, together with:
. any cash and other consideration payable in respect of any tender or
exchange offer by us or one of our subsidiaries for our common stock
concluded within the preceding 12 months and
. the amount of any all-cash distributions to all holders of our common
stock made within the preceding 12 months
exceeds 15% of our aggregate market capitalization on the expiration of the
tender or exchange offer; or the conversion price will not be adjusted until
adjustments amount to 1% or more of the conversion price as last adjusted. We
will carry forward any adjustment we do not make and will include it in any
future adjustment.
If our common stock is converted into the right to receive other securities,
cash or other property as a result of reclassifications, consolidations,
mergers, sales or transfers of assets or other transactions, each Note then
outstanding would, without the consent of any holders of Notes, become
convertible only into the kind and amount of securities, cash and other property
receivable upon the transaction by a holder of the number of shares of common
stock which would have been received by a holder immediately prior to the
transaction if the holder had converted the Note.
We will not issue fractional shares of common stock to a holder who converts
a Note. In lieu of issuing fractional shares, we will pay cash based upon the
market price.
Except as described in this paragraph, no holder of Notes will be entitled,
upon conversion of the Notes, to any actual payment or adjustment on account of
accrued and unpaid interest or on account of dividends on shares of common stock
issued in connection with the conversion. If any holder surrenders a Note for
conversion between the close of business on any record date for the payment of
an installment of interest and the opening of business on the related interest
payment date the holder must deliver payment to us of an amount equal to the
interest payable on the interest payment date on the principal amount converted
together with the Note being surrendered. The foregoing sentence shall not
apply to Notes called for redemption on a redemption date within the period
between and including the record date and interest payment date.
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If we make a distribution of property to our stockholders which would be
taxable to them as a dividend for federal income tax purposes and the conversion
price of the Notes is reduced, this reduction may be deemed to be the receipt of
taxable income to holders of the Notes.
In addition, we may make any reductions in the conversion price that our
board of directors deems advisable to avoid or diminish any income tax to
holders of our common stock resulting from any dividend or distribution of
stock, or rights to acquire stock, or from any event treated as such for income
tax purposes or for any other reasons.
Subordination
The payment of the principal of, premium, if any, and interest on the Notes
will, to the extent described in the Indenture, be subordinated in right of
payment to the prior payment in full of all our Senior Indebtedness. The
holders of all Senior Indebtedness will first be entitled to receive payment in
full of all amounts due or to become due on the Senior Indebtedness, or
provision for payment in money or money's worth, before the holders of the Notes
will be entitled to receive any payment in respect of the Notes, when there is a
payment or distribution of assets to creditors upon our:
. liquidation;
. dissolution;
. winding up;
. reorganization;
. assignment for the benefit of creditors;
. marshaling of assets;
. bankruptcy;
. insolvency; or
. similar proceedings.
No payments on account of the Notes or on account of the purchase or
acquisition of Notes may be made if a default in any payment with respect to
Senior Indebtedness has occurred and is continuing. If (1) there is a default
on any Designated Senior Indebtedness other than a payment default that occurs
that permits the holders of that Designated Senior Indebtedness to accelerate
its maturity and (2) the Trustee and we receive the notice required by the
Indenture, no payments may be made on the Notes for up to 179 days in any 365-
day period unless the default is cured or waived. By reason of this
subordination, in the event of our insolvency, holders of the Notes may recover
less, ratably, than holders of our Senior Indebtedness.
"Senior Indebtedness" means:
. the principal of and premium, if any, and interest on, and fees, costs,
enforcement expenses, collateral protection expenses and other
reimbursement or indemnity obligations in respect of all of our
indebtedness or obligations of us to any person for money borrowed that is
evidenced by a Note, bond, debenture, loan agreement, or similar
instrument or agreement;
. commitment or standby fees due and payable to lending institutions with
respect to credit facilities available to us;
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If we opt to redeem less than all of the Notes at any time, the Trustee
will select or cause to be selected the Notes to be redeemed by any method that
it deems fair and appropriate. In the event of a partial redemption, the Trustee
may provide for selection for redemption of portions of the principal amount of
any Note of a denomination larger than $1,000.
Mandatory Redemption
Except as set forth below under "Right to Require Purchase of Notes upon a
Change of Control," we are not required to make mandatory redemption or sinking
fund payments with respect to the Notes.
Right to Require Purchase of Notes upon a Change in Control
If a Change in Control (as defined below) occurs, each holder of Notes may
require that we repurchase the holder's Notes on the date fixed by us that is
not less than 45 nor more than 60 days after we give notice of the Change in
Control. We will repurchase the Notes for an amount of cash equal to 100% of
the principal amount of the Notes on the date of purchase, plus accrued and
unpaid interest, if any, to the date of repurchase.
"Change in Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of
Terayon and its subsidiaries, taken as a whole, to any person or group of
related persons, as defined in Section 13(d) of the Exchange Act (a "Group");
(ii) the approval by the holders of our capital stock of any plan or proposal
for the liquidation or dissolution of Terayon (whether or not otherwise in
compliance with the provisions of the applicable indenture); (iii) any person or
Group shall become the owner, directly or indirectly, beneficially or of record,
of shares representing more than 50% of the aggregate ordinary voting power
represented by our issued and outstanding voting stock of or any successor to
all or substantially all of our assets; or (iv) the first day on which a
majority of the members of our board of directors are not Continuing Directors.
The definition of Change in Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Terayon and its subsidiaries taken as a whole. Although there
is a developing body of case law interpreting the phrase "substantially all",
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Notes to require us to repurchase such
Notes as a result of a sale, lease, transfer, conveyance or other disposition of
less than all of the assets of Terayon and its subsidiaries taken as a whole to
another person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member
of the board of directors of Terayon who (i) was a member of such board of
directors on the date of the original issuance of the Notes or (ii) was
nominated for election or elected to such board of directors with the approval
of a majority of the Continuing Directors who were members of such board at the
time of such nomination or election.
On or prior to the date of repurchase, we will deposit with a paying agent
an amount of money sufficient to pay the aggregate repurchase price of the Notes
which is to be paid on the date of repurchase.
We may not repurchase any Note at any time when the subordination
provisions of the Indenture otherwise would prohibit us from making payments of
principal in respect of the Notes. If we fail to repurchase the Notes when
required under the preceding paragraph, this failure will constitute an event of
default under the Indenture whether or not repurchase is permitted by the
subordination provisions of the Indenture.
On or before the 30th day after the Change in Control, we must mail to the
Trustee and all holders of the Notes a notice of the occurrence of the Change in
Control, stating:
. the repurchase date;
. the date by which the repurchase right must be exercised;
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If we opt to redeem less than all of the Notes at any time, the Trustee
will select or cause to be selected the Notes to be redeemed by any method that
it deems fair and appropriate. In the event of a partial redemption, the Trustee
may provide for selection for redemption of portions of the principal amount of
any Note of a denomination larger than $1,000.
Consolidation, Merger and Sale of Assets
We may, without the consent of the holders of any of the Notes, consolidate
with or merge into any other person or convey, transfer or lease our properties
and assets substantially as an entirety to, any other person, if:
. we are the resulting or surviving corporation or the successor,
transferee or lessee, if other than us, is a corporation organized
under the laws of any U.S. jurisdiction and expressly assumes our
obligations under the Indenture and the Notes by means of a
supplemental Indenture entered into with the Trustee; and
. after giving effect to the transaction, no event of default and no
event which, with notice or lapse of time, or both, would constitute
an event of default, shall have occurred and be continuing.
Under any consolidation, merger or any conveyance, transfer or lease of our
properties and assets as described in the preceding paragraph, the successor
company will be our successor and shall succeed to, and be substituted for, and
may exercise every right and power of, Terayon under the Indenture. Except in
the case of a lease, if the predecessor is still in existence after the
transaction, it will be released from its obligations and covenants under the
Indenture and the Notes.
Modification and Waiver
We and the Trustee may enter into one or more supplemental Indentures that
add, change or eliminate provisions of the Indenture or modify the rights of the
holders of the Notes with the consent of the holders of at least a majority in
principal amount of the Notes then outstanding. However, without the consent of
each holder of an outstanding Note, no supplemental Indenture may, among other
things:
. change the stated maturity of the principal of or any installment of
interest on any Note;
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. reduce the principal amount of, or the premium or rate of interest on,
any Note;
. change the currency in which the principal of any Note or any premium
or interest is payable;
. impair the right to institute suit for the enforcement of any payment
on or with respect to any Note when due;
. adversely affect the right provided in the Indenture to convert any
Note;
. modify the subordination provisions of the Indenture in a manner
adverse to the holders of the Notes;
. modify the provisions of the Indenture relating to our requirement to
offer to repurchase Notes upon a Change in Control in a manner
adverse to the holders of the Notes;
. reduce the percentage in principal amount of the outstanding Notes
necessary to modify or amend the Indenture or to consent to any
waiver provided for in the Indenture; or
. waive a default in the payment of principal of or any premium or
interest on any Note.
The holders of a majority in principal amount of the outstanding Notes may,
on behalf of the holders of all Notes:
. waive compliance by us with restrictive provisions of the Indenture
other than as provided in the preceding paragraph; and
. waive any past default under the Indenture and its consequences,
except a default in the payment of the principal of or any premium or
interest on any Note or in respect of a provision which under the
Indenture cannot be modified or amended without the consent of the
holder of each outstanding Note affected.
Without the consent of any holders of Notes, we and the Trustee may enter
into one or more supplemental Indentures for any of the following purposes:
. to cure any ambiguity, omission, defect or inconsistency in the
Indenture;
. to evidence a successor to us and the assumption by the successor of
our obligations under the Indenture and the Notes;
. to make any change that does not adversely affect the rights of any
holder of the Notes;
. to comply with any requirement in connection with the qualification of
the Indenture under the Trust Indenture Act; or
. to complete or make provision for certain other matters contemplated
by the Indenture.
Events of Default
Each of the following is an "event of default":
(1) a default in the payment of any interest upon any of the Notes when
due and payable, continued for 30 days;
(2) a default in the payment of the principal of and premium, if any, on
any of the Notes when due, including on a redemption date;
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(3) failure to pay when due the principal of or interest on indebtedness
for money borrowed by us or our subsidiaries in excess of $20.0 million, or the
acceleration of that indebtedness that is not withdrawn within 15 days after the
date of written notice to us by the Trustee or to us and the Trustee by the
holders of at least 25% in principal amount of the outstanding Notes;
(4) a default by us in the performance, or breach, of any of our other
covenants in the Indenture which are not remedied by the end of a period of 60
days after written notice to us by the Trustee or to us and the Trustee by the
holders of at least 25% in principal amount of the outstanding Notes; or
(5) events of bankruptcy, insolvency or reorganization of Terayon or any
significant subsidiary of Terayon.
If an event of default described in clauses (1), (2), (3) or (4) occurs and
is continuing, either the Trustee or the holders of at least 25% in principal
amount of the outstanding Notes may declare the principal amount of and accrued
interest on all Notes to be immediately due and payable. This declaration may
be rescinded if the conditions described in the Indenture are satisfied. If an
event of default of the type referred to in clause (5) occurs, the principal
amount of and accrued interest on the outstanding Notes will automatically
become immediately due and payable.
Within 90 days after a default, the Trustee must give to the registered
holders of Notes notice of all uncured defaults known to it. The Trustee will
be protected in withholding the notice if it in good faith determines that the
withholding of the notice is in the best interests of the registered holders,
except in the case of a default in the payment of the principal of, or premium,
if any, or interest on, any of the Notes when due or in the payment of any
redemption obligation.
The holders of not less than a majority in principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceedings for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee. Subject to the provisions of the Indenture
relating to the duties of the Trustee, if an event of default occurs and is
continuing, the Trustee will be under no obligation to exercise any of the
rights or powers under the Indenture at the request or direction of any of the
holders of the Notes unless the holders have offered to the Trustee reasonable
indemnity or security against any loss, liability or expense. Except to enforce
the right to receive payment of principal, premium, if any, or interest when due
or the right to convert a Note in accordance with the Indenture, no holder may
institute any proceeding or pursue any remedy with respect to the Indenture or
the Notes unless it complies with the conditions provided in the Indenture,
including:
. holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy; and
. holders have offered the Trustee security or indemnity satisfactory to
the Trustee against any loss, liability or expense.
We are required to deliver to the Trustee annually a certificate indicating
whether the officers signing the certificate know of any default by us in the
performance or observance of any of the terms of the Indenture. If the officers
know of a default, the certificate must specify the status and nature of all
defaults.
Book-Entry, Delivery and Form
We issued the Notes sold in the United States in reliance on Rule 144A and
in offshore transactions in reliance on Regulation S in the form of a Global
Note. The Global Note was deposited with DTC, the clearing agency that was
designated to act as depositary for the Notes, and registered in the name of
DTC.
Investors who are "qualified institutional buyers" (as defined in Rule 144A
under the Securities Act) and who purchase Notes in reliance on Rule 144A under
the Securities Act may hold their interests in a Global Note directly through
DTC if they are DTC participants, or indirectly through organizations that are
DTC participants.
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Investors who purchase Notes in offshore transactions in reliance on
Regulation S under the Securities Act may hold their interests in a Global Note
directly through Morgan Guaranty Trust Company of New York, Brussels office, as
operator of the Euroclear System and Clearstream Banking, if they are
participants in these systems, or indirectly through organizations that are
participants in these systems. Euroclear and/or Clearstream Banking will hold
interests in a Global Note on behalf of their participants through their
respective depositaries, which in turn will hold the interests in a Global Note
in customers' securities accounts in the depositaries' names on the books of
DTC. Citibank, N.A., is acting initially as depositary for Clearstream Banking
and The Chase Manhattan Bank is acting initially as depositary for Euroclear.
Except as set forth below, a Global Note may be transferred, in whole or in
part, only to another nominee of DTC or to a successor of DTC or its nominee.
DTC has advised us that DTC is:
. a limited-purpose trust company organized under the laws of the State
of New York;
. a member of the Federal Reserve System;
. a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
. a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act.
DTC was created to hold securities of institutions that have accounts with
DTC and to facilitate the clearance and settlement of securities transactions
among its participants in securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include:
. securities brokers and dealers;
. banks;
. trust companies;
. clearing corporations; and
. certain other organizations.
Access to DTC's book-entry system is also available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
We expect that pursuant to the procedures established by DTC (1) upon the
issuance of the Global Note, DTC credited, on its book-entry registration and
transfer system, the respective principal amount of the individual beneficial
interests represented by the Global Note to the accounts of participants and
(2) ownership of beneficial interests in a Global Note will be shown on, and
the transfer of those ownership interests will be effected only through,
records maintained by DTC (with respect to participants' interests) and the
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). Ownership of beneficial interests in the Global
Note is limited to participants or persons that may hold interests through
participants.
So long as DTC or its nominee is the registered holder and owner of a
Global Note, DTC or its nominee, as the case may be, will be considered the sole
legal owner of the Notes represented by the Global Note for all purposes under
the indenture and the Notes. Except as set forth below, owners of beneficial
interests in a Global Note will not be entitled to receive definitive Notes and
will not be considered to be the owners or holders of any Notes under the Global
Note. We understand that under existing industry practice, in the event an owner
of a beneficial interest in a Global Note desires to take any action that DTC,
as the holder of the Global Note, is entitled to take, DTC
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would authorize the participants to take the action, and that participants would
authorize beneficial owners owning through the participants to take the action
or would otherwise act upon the instructions of beneficial owners owning through
them. No beneficial owner of an interest in a Global Note will be able to
transfer the interest except in accordance with DTC's applicable procedures, in
addition to those provided for under the indenture and, if applicable, those of
Euroclear and Clearstream Banking.
We will make payments of the principal of, and interest on, the Notes
represented by a Global Note registered in the name of and held by DTC or its
nominee to DTC or its nominee, as the case may be, as the registered owner and
holder of the Global Note.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of a Global Note, will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of the Global Note as shown on the records of DTC or its
nominee. We also expect that payments by participants and indirect participants
to owners of beneficial interests in a Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for accounts of customers registered in
the names of nominees for these customers. The payments, however, will be the
responsibility of the participants and indirect participants, and neither we,
the Trustee nor any paying agent will have any responsibility or liability for:
. any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in a Global Note;
. maintaining, supervising or reviewing any records relating to the
beneficial ownership interests;
. any other aspect of the relationship between DTC and its participants;
or
. the relationship between the participants and indirect participants
and the owners of beneficial interests in a Global Note.
Unless and until it is exchanged in whole or in part for definitive Notes,
a Global Note may not be transferred except as a whole by DTC to a nominee of
DTC or by a nominee of DTC to DTC or another nominee of DTC.
Participants in DTC will effect transfers with other participants in the
ordinary way in accordance with DTC rules and will settle transfers in same-day
funds. Participants in Euroclear and Clearstream Banking will effect transfers
with other participants in the ordinary way in accordance with the rules and
operating procedures of Euroclear and Clearstream Banking, as applicable. If a
holder requires physical delivery of a definitive Note for any reason, including
to sell Notes to persons in jurisdictions which require physical delivery or to
pledge Notes, the holder must transfer its interest in a Global Note in
accordance with the normal procedures of DTC and the procedures set forth in the
indenture.
Cross-market transfers between DTC, on the one hand, and directly or
indirectly through Euroclear or Clearstream Banking participants, on the other,
will be effected in DTC in accordance with DTC rules on behalf Euroclear or
Clearstream Banking, as the case may be, by its respective depositary; however,
these cross-market transactions will require delivery of instructions to
Euroclear or Clearstream Banking, as the case may be, by the counterparty in the
system in accordance with its rules and procedures and within its established
deadlines (Brussels time). Euroclear or Clearstream Banking, as the case may
be, will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to effect final
settlement on its behalf by delivering or receiving interests in a Global Note
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream Banking participants may not deliver instructions directly to the
depositaries for Euroclear or Clearstream Banking.
Because of time zone differences, the securities account of a Euroclear or
Clearstream Banking participant purchasing an interest in a Global Note from a
DTC participant will be credited during the securities settlement processing day
(which must be a business day for Euroclear or Clearstream Banking, as the case
may be) immediately following the DTC settlement date, and the credit of any
transactions interests in a Global Note settled
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during the processing day will be reported to the relevant Euroclear or
Clearstream Banking participant on that day. Cash received in Euroclear or
Clearstream Banking as a result of sales of interests in a Global Note by or
through a Euroclear or Clearstream Banking participant to a DTC participant will
be received with value on the DTC settlement date, but will be available in the
relevant Euroclear or Clearstream Banking cash account only as of the business
day following settlement in DTC.
We expect that DTC will take any action permitted to be taken by a holder
of Notes (including the presentation of Notes for exchange as described below)
only at the direction of one or more participants to whose accounts at the DTC
interests in a Global Note are credited and only in respect of the portion of
the aggregate principal amount of the Notes as to which the participant or
participants has or have given direction. However, if there is an event of
default under the Notes, DTC will exchange the Global Notes for definitive
Notes, which it will distribute to its participants. These definitive Notes are
subject to certain restrictions on registration of transfers and will bear
appropriate legends restricting their transfer. Although we expect that DTC,
Euroclear and Clearstream Banking will agree to the foregoing procedures in
order to facilitate transfers of interests in Global Notes among participants of
DTC, Euroclear, and Clearstream Banking, DTC, Euroclear and Clearstream Banking
are under no obligation to perform or continue to perform these procedures, and
these procedures may be discontinued at any time. Neither we nor the trustee
have any responsibility for the performance by DTC, Euroclear or Clearstream
Banking or their participants or indirect participants of their obligations
under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
Global Notes or ceases to be a clearing agency registered under the Securities
Exchange Act and we do not appoint a successor depositary within 90 days, we
will issue definitive Notes in exchange for the Global Notes. The definitive
Notes will be subject to certain restrictions on registration of transfers and
will bear appropriate legends concerning these restrictions.
Registration Rights
We entered into a registration rights agreement with the initial
purchasers of the Notes for the benefit of the holders of the Notes and the
common stock issuable on conversion of the Notes. Under this agreement, we
will, at our cost:
. on or prior to October 24, 2000, file a registration statement with
the Securities and Exchange Commission covering resales of the Notes
and the common stock issuable on conversion of the Notes;
. use all reasonable efforts to cause the registration statement to be
declared effective under the Securities Act no later than January 22,
2001; and
. use all reasonable efforts to keep the registration statement of
which this prospectus forms a part effective after its effective date
for as long as required to permit sales under Rule 144(k) under the
Securities Act or any successor rule or regulation.
We have the right to suspend use of the registration statement during
specified periods of time relating to pending corporate developments and public
filings with the SEC and similar events. If we fail to file the registration
statement on or prior to October 24, 2000, or if after the registration
statement has been declared effective, we fail to keep the registration
statement effective or usable in accordance with and during the periods
specified in the registration rights agreement, then, in each case, we will pay
liquidated damages to all holders of Notes and all holders of common stock
issued on conversion of the Notes equal to 0.5% per annum until such failure is
cured.
A holder who elects to sell any securities pursuant to the registration
statement:
. will be required to be named as selling security holder;
. will be required to deliver a prospectus to purchasers;
. will be subject to the civil liability provisions under the Securities
Act in connection with any sales; and
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. will be bound by the provisions of the registration rights agreement
which are applicable, including indemnification obligations.
We refer to the Notes and the common stock issuable on conversion of the
Notes as "registrable securities." Promptly upon request from any holder of
registrable securities, we will provide a form of notice and questionnaire to be
completed and delivered by that holder to us at least three business days before
any intended distribution of registrable securities under the shelf registration
statement. If we receive from a holder of registrable securities a completed
questionnaire, together with such other information as may be reasonably
requested by us, after the effectiveness of the registration statement, we will
file an amendment to the registration statement or supplement to the related
prospectus to permit the holder to deliver a prospectus to purchasers of
registrable securities. Any holder that does not complete and deliver a
questionnaire or provide such other information will not be named as a selling
securityholder in the prospectus and therefore will not be permitted to sell any
registrable securities under the registration statement.
Governing Law
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflict
of laws.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares of common
stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par
value $0.001 per share.
Common Stock
As of January 16, 2001, there were 67,278,774 shares of our common stock
outstanding held of record by approximately 744 stockholders.
The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of our stockholders. Subject
to preferences that may be applicable to any outstanding shares of our
preferred stock, the holders of our common stock are entitled to receive
ratably such dividends as may be declared by our Board of Directors out of
funds legally available therefor. In the event of a liquidation, dissolution
or winding up of our company, holders of our common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of our preferred stock.
Holders of our common stock have no preemptive rights and no right to convert
our common stock into any other securities. There are no redemption or sinking
fund provisions applicable to our common stock. All outstanding shares of our
common stock are fully paid and non-assessable.
Preferred Stock
Pursuant to our Restated Certificate of Incorporation, our Board of
Directors has the authority, without further action by our stockholders, to
issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of our common stock. None of the preferred stock has been issued. Our
Board of Directors, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of our common stock. Preferred stock could thus
be issued quickly with terms calculated to delay, defer or prevent a change in
control of our company or make removal of management more difficult.
Additionally, the issuance of our preferred stock may have the effect of
decreasing the market price of our common stock and may adversely affect the
voting and other rights of the holders our common stock. No shares of preferred
stock currently are outstanding, and we have no current plans to issue any
shares of our preferred stock.
Warrants
In April 1998, we issued to Shaw a warrant that gives Shaw the right to
purchase an indeterminate number of shares of our common stock for an aggregate
price of $1.00. This warrant allows Shaw to purchase additional shares of our
common stock when we issue certain new equity securities at a price per share
below $19.50. Shaw's right to receive additional shares of our common stock
pursuant to this warrant terminates when Shaw ceases to own shares of our common
stock. As of December 15,2000, Shaw had the right to receive 72,318 shares
pursuant to this warrant.
In October 1999, one of our customers entered into an agreement with
Telegate whereby the customer committed to an investment in Telegate in
connection with our acquisition of all the outstanding shares of Telegate. The
customer committed to provide this investment in the event that our acquisition
of Telegate was not to have closed. In consideration of the customer making this
commitment, we agreed to issue a warrant to purchase 2,000,000 shares of our
common stock to be issued on the date of the Telegate closing. In January 2000,
we issued the customer a warrant to purchase 2,000,000 shares of our common
stock at a price of $30.75 per share, the closing price of our common stock on
the date the warrant was issued. The warrant is fully vested, non-forfeitable,
and immediately exercisable and has a term of three years.
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Pursuant to a registration rights agreement between us and the holders of
the Notes, the holders of the Notes are entitled to have their Notes and
Shares of common stock into which the Notes convert registered on a registration
statement and keep the registration statement effective until July 26, 2002.
Convertible Notes
In July 2000, we issued $500,000,000 of 5% Convertible Subordinate Notes
due in August 2007. The 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
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 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 Notes at any time on or after August
7, 2003 at specified prices plus accrued and unpaid interest. Interest is
payable semiannually.
Registration Rights
Pursuant to an agreement between us and the holders (or their permitted
transferees) of approximately 12,472,318 shares of our common stock ("Holders"),
the Holders are entitled to certain rights with respect to registration of such
shares for sale in the public market. The Holders are entitled to certain
rights with respect to the registration of such shares under the Securities Act.
If we propose to register our common stock, subject to certain exceptions, under
the Securities Act, the Holders are entitled to notice of the registration and
are entitled at our expense to include such shares therein, provided that the
managing underwriters have the right to limit the number of such shares included
in the registration or exclude such shares entirely. In addition, certain of
the Holders may require us, at our expense, on no more than six occasions, to
file a registration statement under the Securities Act with respect to their
shares of our common stock. Further, certain Holders may require us at our
expense on no more than four occasions, to register all or portion of their
shares on Form S-3, subject to certain conditions and limitations. These rights
expire in August 2005.
Pursuant to a registration rights agreement between us and the holders of
the Notes, the holders of the Notes are entitled to have their Notes and
shares of common stock into which the Notes convert registered on a registration
statement and to have the registration statement remain effective until July
26, 2002. See "Description of Notes--Registration Rights."
Anti-Takeover Effects of Provisions of Charter Documents and Delaware Law
Charter Documents
Our Restated Certificate and Restated Bylaws include a number of provisions
that may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of our company. First, the Restated
Certificate provides that all stockholder action must be effected at a duly
called meeting of holders and not by a consent in writing. Second, the Restated
Bylaws provide that special meetings of the holders may be called only by (i)
the Chairman of the Board of Directors, (ii) the Chief Executive Officer or
(iii) Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors. Third, the Certificate and the Bylaws
provide for a classified Board of Directors. The Certificate includes a
provision requiring cumulative voting for directors only if required by
applicable California law. Under cumulative voting, a minority stockholder
holding a sufficient percentage of a class of shares may be able to ensure the
election of one or more directors. As a result of the provisions of the
Certificate and applicable California and Delaware law, at any annual meeting
whereby the Company had at least 800 stockholders as of the end of the fiscal
year prior to the record date for such annual meeting, stockholders will not be
able to cumulate votes for directors. Finally, the Restated Bylaws establish
procedures, including advance notice procedures with regard to the nomination of
candidates for election as directors and stockholder proposals. These
provisions of the Restated Certificate and Restated Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
or management of our company. These provisions also may have the effect of
preventing changes in the management of our company.
Delaware Takeover Statute
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction pursuant to which the person became an interested stockholder,
unless the business combination is approved in a manner prescribed by Delaware
law. For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the Notes
and common stock into which Notes may be converted, but does not purport to be a
complete analysis of all the potential tax considerations relating thereto. This
summary is based on laws, regulations, rulings and decisions now in effect, all
of which are subject to change or differing interpretation possibly with
retroactive effect. Except as specifically discussed below with regard to Non-
U.S. Holders (as defined below), this summary applies only to beneficial owners
that will hold Notes and common stock into which Notes may be converted as
"capital assets" (within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code")) and who, for U.S. federal income tax
purposes, are (i) individual citizens or residents of the U.S., (ii)
corporations, partnerships or other entities created or organized in or under
the laws of the U.S. or of any political subdivision thereof (unless, in the
case of a partnership, Treasury Regulations otherwise provide), (iii) estates,
the incomes of which are subject to U.S. federal income taxation regardless of
the source of such income or (iv) trusts subject to the primary supervision of a
U.S. court and the control of one or more U.S. persons ("U.S. Holders") or any
trust that has a valid election in effect under applicable Treasury Regulations
to be treated as a U.S. person. Persons other than U.S. Holders ("Non-U.S.
Holders") are subject to special U.S. federal income tax considerations, some of
which are discussed below. This discussion does not address tax considerations
applicable to an investor's particular circumstances or to investors that may be
subject to special tax rules, such as banks or other financial institutions,
holders subject to the alternative minimum tax, tax-exempt organizations,
insurance companies, regulated investment companies, foreign persons or entities
(except to the extent specifically set forth below), dealers in securities,
commodities or currencies, initial holders whose "functional currency" is not
the U.S. dollar, persons that will hold Notes as a position in a hedging
transaction, "straddle" or "conversion transaction" for tax purposes or persons
deemed to sell Notes or common stock under the constructive sale provisions of
the Code. This summary discusses the tax considerations applicable to initial
holders of the Notes who purchase the Notes at their "issue price" as defined in
Section 1273 of the Code and does not discuss the tax considerations applicable
to subsequent purchasers of the Notes. We have not sought any ruling from the
Internal Revenue Service (the "IRS") or an opinion of counsel with respect to
the statements made and the conclusions reached in the following summary, and
there can be no assurance that the IRS will agree with such statements and
conclusions. In addition, the IRS is not precluded from successfully adopting a
contrary position. This summary does not consider the effect of the federal
estate or gift tax laws or the tax laws (except as set forth below with respect
to Non-U.S. Holders) of any applicable foreign, state, local or other
jurisdiction.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL
OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
U.S. Holders
Taxation of Interest
Interest paid on the Notes will be included in the income of a U.S. Holder
as ordinary income at the time it is treated as received or accrued, in
accordance with such holder's regular method of accounting for U.S. federal
income tax purposes. Under Treasury Regulations, the possibility of an
additional payment under a Note may be disregarded for purposes of determining
the amount of interest or original issue discount income to be recognized by a
holder in respect of such Note (or the timing of such recognition) if the
likelihood of the payment, as of the date the Notes are issued, is remote. Our
failure to file or cause to be declared effective a shelf registration statement
as described under "Description of Notes--Registration Rights" may result in the
payment of predetermined liquidated damages in the manner described therein. In
addition, a holder may require us to redeem any and all of his Notes in the
event of a Change in Control. We believe that the likelihood of a liquidated
damages payment with respect to the Notes is remote and do not intend to treat
such possibility as affecting the yield to maturity of any Note. Similarly, we
intend to take the position that a Change in Control is remote under the
Treasury Regulations, and likewise do not intend to treat the possibility of a
"Change in Control" as affecting the yield to maturity of any Note. In the event
either contingency occurs, it would affect the amount and timing of the income
that must be recognized by a U.S. Holder of Notes. There can be no assurance
that the IRS will agree with such positions. Our
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determination that there is a remote likelihood of paying additional interest on
the Notes is binding on each U.S. Holder unless the holder explicitly discloses
in the manner required by applicable Treasury Regulations that its determination
is different from ours.
Sale, Exchange or Redemption of the Notes
Upon the sale, exchange (other than a conversion) or redemption of a Note,
a U.S. Holder generally will recognize capital gain or loss equal to the
difference between (i) the amount of cash proceeds and the fair market value of
any property received on the sale, exchange or redemption (except to the extent
such amount is attributable to accrued interest income not previously included
in income, which will be taxable as ordinary income, or is attributable to
accrued interest that was previously included in income, which amount may be
received without generating further income) and (ii) such holder's adjusted tax
basis in the Note. A U.S. Holder's adjusted tax basis in a Note generally will
equal the cost of the Note to such holder. Such capital gain or loss will be
long-term capital gain or loss if the U.S. Holder's holding period in the Note
is more than one year at the time of sale, exchange or redemption. Long-term
capital gains recognized by certain noncorporate U.S. Holders, including
individuals, will generally be subject to a maximum federal rate of tax of 20%.
The deductibility of capital losses is subject to limitations.
Market Discount
The resale of the Notes may be affected by the impact on a purchaser of the
"market discount" provisions of the Code. For this purpose, the market discount
on the Notes generally will be equal to the amount, if any, by which the stated
redemption price at maturity of the Notes immediately after acquisition (other
than at original issue) exceeds the holder's adjusted tax basis in the Notes.
Subject to a de minimis exception, these provisions generally require a U.S.
Holder who acquires Notes at a market discount to treat as ordinary income any
gain recognized on the disposition of such Notes to the extent of the "accrued
market discount" on such Notes at the time of disposition, unless the holder
elects to include accrued market discount in income currently. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies and may not be revoked without the consent of the IRS. In
general, market discount will be treated as accruing on a straight-line basis
over the remaining term of the Notes at the time of acquisition, or, at the
election of the holder, under a constant yield method. A holder who acquires
Notes at a market discount and who does not elect to include accrued market
discount in income currently may be required to defer the deduction of 89.a
portion of the interest on any indebtedness incurred or maintained to purchase
or carry the Notes until such Notes are disposed of in a taxable transaction. If
a holder acquires Notes with market discount and receives our common stock upon
conversion of such Notes, the amount of accrued market discount not previously
included in income with respect to the converted Notes through the date of
conversion will be treated as ordinary income upon the disposition of the common
stock.
Under the President's recent budget proposal, accrual basis taxpayers could
be required to accrue market discount currently, subject to certain limitations.
Amortizable Premium
A holder who purchases a Note at a premium over its stated principal
amount, plus accrued interest, generally may elect to amortize such premium
("Section 171 premium") from the purchase date to the Note's maturity date under
a constant-yield method that reflects semiannual compounding based on the Note's
payment period. Amortizable premium, however, will not include any premium
attributable to a Note conversion feature. The premium attributable to the
conversion feature is the excess, if any, of the Note's purchase price over what
the Note's fair market value would be if there were no conversion feature.
Amortized Section 171 premium is treated as an offset to interest income on a
Note and not as a separate deduction. The election to amortize a premium on a
constant yield method, once made, applies to all debt obligations held or
subsequently acquired by the electing U.S. Holder on or after the first day of
the first taxable year to which the election applies and may not be revoked
without the consent of the IRS.
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Deductibility of Interest
Generally, under Section 279 of the Code, an interest deduction in excess
of $5.0 million per year is not permitted with respect to certain "corporate
acquisition indebtedness." Corporate acquisition indebtedness includes any
indebtedness that is:
. issued to provide consideration for the direct or indirect acquisition
of stock or assets of another corporation;
. subordinated;
. convertible directly or indirectly into the stock of the issuing
corporation; and
. issued by a corporation that has a debt to equity ratio that exceeds 2
to 1.
Our ability to deduct all of the interest payable on the Notes will depend
on the application of the foregoing tests to us. The availability of an interest
deduction with respect to the Notes was not determinative in our issuance of the
Notes pursuant to this offering.
Under Section 163(l) of the Code, no deduction is permitted for interest
paid or accrued on any indebtedness of a corporation that is "payable in equity"
of the issuer or a related party. Debt is treated as debt payable in equity of
the issuer if the debt is part of an arrangement designed to result in payment
of the instrument with or by reference to the equity. Such arrangements could
include debt instruments that are convertible at the holder's option if it is
substantially certain that the option will be exercised. The legislative history
indicates that it is not expected the provision will affect debt with a
conversion feature where the conversion price is significantly higher than the
market price of the stock on the date of the debt issuance. Accordingly, we do
not believe that our interest deduction with respect to interest payments on the
Notes will be adversely affected by these rules.
Conversion of the Notes
A U.S. Holder generally should not recognize any income, gain or loss upon
conversion of a Note into common stock except with respect to cash received in
lieu of a fractional share of common stock and with respect to market discount,
as described above under "Market Discount." A U.S. Holder's tax basis in the
common stock received on conversion of a Note should be the same as such
holder's adjusted tax basis in the Note at the time of conversion (reduced by
any basis allocable to a fractional share interest), and the holding period for
the common stock received on conversion should generally include the holding
period of the Note converted.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in capital gain or loss (measured by the difference
between the cash received for the fractional share and the holder's adjusted tax
basis in the fractional share).
Distributions on Common Stock
Distributions, if any, made on the common stock after a conversion
generally will be included in the income of a U.S. Holder as ordinary dividend
income to the extent of our current or accumulated earnings and profits.
Distributions in excess of Terayon's current and accumulated earnings and
profits will be treated as a return of capital to the extent of the U.S.
Holder's basis in the common stock and thereafter as capital gain. A dividend
distribution to a corporate U.S. holder may qualify for a dividends received
deduction.
Adjustment of Conversion Price
Holders of convertible debt instruments such as the Notes may, in certain
circumstances, be deemed to have received distributions of stock if the
conversion price of such instruments is adjusted. Adjustments to the conversion
price made pursuant to a bona fide reasonable adjustment formula which has the
effect of preventing the
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dilution of the interest of the holders of the debt instruments, however, will
generally not be considered to result in a constructive distribution of stock.
Certain of the possible adjustments provided in the Notes (including, without
limitation, adjustments in respect of taxable dividends to our stockholders)
will not qualify as being pursuant to a bona fide reasonable adjustment formula.
If such adjustments are made, the U.S. Holders of Notes will be deemed to have
received constructive distributions taxable as dividends to the extent of our
current and accumulated earnings and profits even though they have not received
any cash or property as a result of such adjustments. In certain circumstances,
the failure to provide for such an adjustment may result in taxable dividend
income to the U.S. Holders of common stock.
Sale of Common Stock
Upon the sale or exchange of common stock a U.S. Holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any property received upon the sale or
exchange and (ii) such U.S. Holder's adjusted tax basis in the common stock.
Such capital gain or loss will be long-term capital gain or loss if the U.S.
Holder's holding period in common stock is more than one year at the time of the
sale or exchange. Long-term capital gains recognized by certain non-corporate
U.S. Holders, including individuals, will generally be subject to a maximum
federal rate of tax of 20%. A U.S. Holder's basis and holding period in common
stock received upon conversion of a Note are determined as discussed above under
"Conversion of the Notes." The deductibility of capital losses is subject to
limitations.
Backup Withholding and Information Reporting
Backup withholding of U.S. federal income tax at a rate of 31% may apply to
payments pursuant to the terms of a Note or common stock to a U.S. Holder that
is not an "exempt recipient" and that fails to provide certain identifying
information (such as the holder's TIN) in the manner required. Generally,
individuals are not exempt recipients, whereas corporations and certain other
entities are exempt recipients. Payments made in respect of a Note or common
stock must be reported to the Service, unless the U.S. Holder is an exempt
recipient or otherwise establishes an exemption. The amount of any backup
withholding from a payment to a U.S. Holder will be allowed as a credit against
the U.S. Holder's federal income tax liability and may entitle such holder to a
refund, provided that the required information is furnished to the IRS.
Treasury Regulations, generally effective after December 31, 2000, subject
to certain transition rules, modify the currently effective information
withholding and backup withholding procedures and requirements. U.S. Holders
should consult their own tax advisors concerning the application of the new
withholding regulations.
Special Tax Rules Applicable to Non-U.S. Holders
Taxation of Interest
In general, subject to the discussion below concerning backup withholding:
Payments of interest on the Notes by us or any paying agent to a beneficial
owner of a Note that is a Non-U.S. Holder will not be subject to U.S.
withholding tax, provided that, (i) such Non-U.S. Holder does not own, actually
or constructively, 10% or more of the total combined voting power of all classes
of stock entitled to vote within the meaning of Section 871(h)(3) of the Code,
(ii) such Non-U.S. Holder is not a "controlled foreign corporation" with respect
to which we are a "related person" within the meaning of the Code, (iii) such
Non-U.S. Holder is not a bank receiving interest described in Section
881(c)(3)(A) of the Code, and (iv) the certification requirements under Section
871(h) or Section 881(c) of the Code and Treasury Regulations thereunder
(discussed below) are satisfied.
Conversion of the Notes
A Non-U.S. Holder generally will not be subject to U.S. federal withholding
tax on the conversion of a Note into common stock. To the extent a Non-U.S.
Holder receives cash in lieu of a fractional share of common stock upon
conversion, such cash may give rise to gain that would be subject to the rules
described above with respect to
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the sale or exchange of a Note or common stock. See "Sale, Exchange or
Redemption of the Notes or Common Stock" below.
Adjustment of Conversion Price
The conversion price of the Notes is subject to adjustment in certain
circumstances. Any such adjustment could, in certain circumstances, give rise to
a deemed distribution to Non-U.S. Holders of the Notes. See "U.S. Holders --
Adjustment of Conversion Price" above. In such case, the deemed distribution
would be subject to the rules below regarding withholding of U.S. federal tax on
dividends in respect of common stock.
Distributions on Common Stock
Distributions on common stock will constitute a dividend for U.S. federal
income tax purposes to the extent of our current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Dividends paid
on common stock held by a Non-U.S. Holder will be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate, if applicable) unless
the dividend is effectively connected with the conduct of a U.S. trade or
business by the Non-U.S. Holder and, if required by a tax treaty, is
attributable to a permanent establishment maintained in the United States, in
which case the dividend will be subject to U.S. federal income tax on net income
that applies to U.S. persons generally (and with respect to corporate holders
under certain circumstances, the branch profits tax). A Non-U.S. Holder may be
required to satisfy certain requirements in order to claim a reduction of or
exemption from withholding under the foregoing rules. However, prior to January
1, 2001, for purposes of an applicable tax treaty, if a stockholder's address is
outside the United States it will be assumed that such stockholder is a citizen
or resident of that country absent the payor's knowledge to the contrary.
Sale, Exchange or Redemption of the Notes of Common Stock
A Non-U.S. Holder of a Note or common stock will not be subject to U.S.
federal income tax on gains realized on the sale, exchange or other disposition
of such Note or common stock unless (i) such Non-U.S. Holder is an individual
who is present in the U.S. for 183 days or more in the taxable year of sale,
exchange or other disposition, and certain conditions are met, (ii) such gain is
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business in the U.S. and, if certain U.S. income tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the Non-U.S.
Holder, (iii) the Non-U.S. Holder is subject to Code provisions applicable to
certain U.S. expatriates, or (iv) in the case of a Note or common stock held by
a person who holds more than 5% of such stock, we are or have been, at any time
within the shorter of the five-year period preceding such sale or other
disposition or the period such Non-U.S. Holder held the common stock, a U.S.
real property holding corporation (a "USRPHC") for U.S. federal income tax
purposes. We do not believe that we currently are a USRPHC or that it will
become one in the future.
Interest on Notes not excluded from U.S. withholding tax as described above
generally will be a subject to U.S. withholding tax at a 30% rate, except where
an applicable tax treaty provides for the reduction or elimination of such
withholding tax.
To satisfy the certification requirements referred to in (iv) above,
Sections 871(h) and 881(c) of the Code and currently effective Treasury
Regulations thereunder require that either (i) the beneficial owner of a Note
must certify, under penalties of perjury, to us or our paying agent, as the case
may be, that such owner is a Non-U.S. Holder and must-provide such owner's name
and address, and U.S. taxpayer identification number ("TIN"), if any, or (ii) a
securities clearing organization, bank or other financial institution that holds
customer securities in the ordinary course of its trade or business (a
"Financial Institution") and holds the Note on behalf of the beneficial owner
thereof must certify, under penalties of perjury, to us or our paying agent, as
the case may be, that such certificate has been received from the beneficial
owner and must furnish the payor with a copy thereof. Such requirement will be
fulfilled if the beneficial owner of a Note certifies on IRS Form W-8BEN or
successor form, under penalties of perjury, that it is a Non-U.S. Holder and
provides its name and address or any Financial Institution holding the Note on
behalf of the beneficial owner files a statement with the withholding agent to
the effect that it has received such a statement from the beneficial owner (and
furnishes the withholding agent with a copy thereof).
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Treasury Regulations effective for payments made after December 31, 2000,
will provide alternative methods for satisfying the certification requirements
described above and below, subject to certain grandfathering provisions. These
new regulations also require, in the case of Notes held by a foreign
partnership, that (i) the certification be provided by the partners rather than
by the foreign partnership and (ii) the partnership provide certain information,
including a TIN. A look-through rule will apply in the case of tiered
partnerships.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
U.S. and if interest on the Note is effectively connected with the conduct of
such trade or business (and, if certain tax treaties apply, is attributable to a
U.S. permanent establishment maintained by the Non-U. S. Holder in the U.S.),
the Non-U.S. Holder, although exempt from U.S. withholding tax (provided that
the certification requirements discussed in the next sentence are met), will
generally be subject to U.S. federal income tax on such interest on a net income
basis in the same manner as if it were a U.S. Holder. In lieu of the certificate
described above, such a Non-U. S. Holder will be required, under currently
effective Treasury Regulations, to provide us with a properly executed IRS Form
W-8ECI or 4224 or successor form in order to claim an exemption from withholding
tax. In addition, if such Non-U.S. Holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% (or such lower rate provided by an
applicable treaty) of its effectively connected earnings and profits for the
taxable year, subject to certain adjustments.
U.S. Federal Estate Tax
A Note held by an individual who at the time of death is not a citizen or
resident of the U.S. (as specially defined for U.S. federal estate tax purposes)
will not be subject to U.S. federal estate tax if the individual did not
actually or constructively own 10% or more of the total combined voting power of
all classes of our stock and, at the time of the individual's death, payments
with respect to such Note would not have been effectively connected with the
conduct by such individual of a trade or business in the U.S. Common stock held
by an individual who at the time of death is not a citizen or resident of the
U.S. (as specially defined for U.S. federal estate tax purposes) will be
included in such individual's estate for U.S. federal estate tax purposes,
unless an applicable estate tax treaty otherwise applies.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes and common stock.
Backup Withholding and Information Reporting
In the case of payments of interest on a Note to a Non-U.S. Holder,
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments with respect to which either requisite certification
has been received or an exemption has otherwise been established (provided that
neither we nor our paying agent has actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not in fact satisfied).
Dividends on the common stock paid to Non-U.S. Holders that are subject to
U.S. withholding tax, as described above, generally will be exempt from U.S.
backup withholding tax but will be subject to certain information reporting.
Payments of the proceeds of the sale of a Note or common stock to or
through a foreign office of a U.S. broker or a foreign broker that is a
"controlled foreign corporation" within the meaning of the Code or a foreign
person, 50% or more of whose gross income from all sources for the three-year
period ending with the close of its taxable year preceding the payment was
effectively connected with the conduct of a trade or business within the U.S.
are currently subject to certain information reporting requirements, unless the
payee is an exempt recipient or such broker has evidence in its records that the
payee is a non-U.S. holder and no actual knowledge that such evidence is false
and certain other conditions are met. Temporary Treasury Regulations indicate
that such payments are not currently subject to backup withholding.
Under current Treasury Regulations, payments of the proceeds of a sale of a
Note or common stock to or through the U.S. office of a broker will be subject
to information reporting and backup withholding unless the payee
43.
<PAGE>
certifies under penalties of perjury as to his or her status as a Non-U.S.
Holder and satisfies certain other qualifications (and no agent of the broker
who is responsible for receiving or reviewing such statement has actual
knowledge that it is incorrect) and provides his or her name and address or the
payee otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder of a Note or common stock will be allowed as a credit against
such holder's U.S. federal income tax, if any, or will be otherwise refundable
provided that the required information is furnished to the IRS in a timely
manner.
As noted above, new regulations will generally be applicable to payments
made after December 31, 2000. In general, these new regulations do not
significantly alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
reliance standards. Under these new regulations, special rules apply which
permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A Non-U.S.
Holder of a Note or common stock should consult with its tax advisor regarding
the application of the backup withholding rules to its particular situation, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the impact of these new regulations on payments
made with respect to Notes or common stock after December 31, 2000.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO THE PARTICULAR
U.S. FEDERAL, STATE, AND LOCAL TAX CONSEQUENCES OF PURCHASING, HOLDING AND
DISPOSING OF THE NOTES AND OUR COMMON STOCK. TAX ADVISORS SHOULD ALSO BE
CONSULTED AS TO THE U.S. ESTATE AND GIFT TAX CONSEQUENCES AND THE FOREIGN TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR NOTES AND COMMON STOCK,
AS WELL AS THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
44.
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Notes offered by
this prospectus and the common stock issuable upon conversion of the
Notes are being passed upon for us by Cooley Godward LLP, San Francisco,
California.
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 statements 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.
Kost, Forer and Gabbay, a member of Ernst and Young International,
independent auditors, have audited the financial statements of Telegate Ltd.
included in Terayon Communication 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.
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 Kost, Forer and Gabbay's report, given on their
authority as experts in accounting and auditing.
Kost, Forer and Gabbay, a member of Ernst and Young International,
independent auditors, have audited the consolidated financial statements of
ComBox Ltd. included in Terayon Communication 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 Kost, Forer and Gabbay's report,
given on their authority 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.
45.
<PAGE>
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 March 31, 2000;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;
. Quarterly Report on Form 10-Q for the quarter ended September 30,
2000; as amended on the Form 10-Q/A filed on November 15, 2000;
. Current Report on Form 8-K filed on May 3, 2000, as amended on Form 8-
K/A filed on May 8, 2000 and as amended on Form 8-K/A filed 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 and as amended on
Form 8-K/A on October 18, 2000;
. Current Report on Form 8-K filed on October 23, 2000;
. Current Report on Form 8-K filed on January 9, 2001; 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.
46.
<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 _____________, 2001. You should not assume that this prospectus is
accurate as of any other date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Forward-Looking Statements................................... 1
Prospectus Summary........................................... 2
Risk Factors................................................. 4
Ratio of Earnings to Fixed Charges........................... 21
Use of Proceeds.............................................. 21
Selling Holders.............................................. 22
Plan of Distribution......................................... 23
Description of Notes......................................... 25
Description of Capital Stock................................. 36
Certain United States Federal Income Tax Considerations...... 38
Legal Matters................................................ 45
Experts...................................................... 45
You Can Find More Information................................ 46
</TABLE>
$500,000,000 OF 5% CONVERTIBLE
SUBORDINATED NOTES
DUE AUGUST 1, 2007
5,951,673 SHARES OF
COMMON STOCK ISSUABLE UPON
CONVERSION OF THE 5%
CONVERTIBLE NOTES
DUE AUGUST 1, 2007
PROSPECTUS
TERAYON COMMUNICATION SYSTEMS, INC.
___________, 2001
<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:
<TABLE>
<S> <C>
SEC registration fee............................ $132,000
Accounting fees................................. 70,000
Legal fees and expenses......................... 150,000
Miscellaneous................................... 20,000
Printing and engraving.......................... 40,000
--------
Total........................................... $412,000
========
</TABLE>
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
* 4.1 Form of Security for Terayon Communication Systems, Inc.'s 5%
Convertible Subordinated Notes due August 1, 2007.
* 4.2 Indenture between Terayon Communication Systems, Inc., as Issuer,
and State Street Bank and Trust Company of California, N.A., as
Trustee, dated July 26, 2000.
* 4.3 Purchase Agreement by and among Terayon Communication Systems,
Inc. and Deutsche Bank Securities, Inc. and Lehman Brothers, Inc.
dated July 20, 2000.
* 4.4 Registration Rights Agreement by and among Terayon Communication
Systems, Inc. and Deutsche Bank Securities, Inc. and Lehman
Brothers, Inc..
5.1 Opinion of Cooley Godward LLP.
*12.1 Statement regarding computation of ratios.
*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.
<PAGE>
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.
*25.1 Statement of Eligibility of Trustee.
* 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
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.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe it meets all of
the requirements for filing on Registration Statement 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 19 day of January, 2001.
TERAYON COMMUNICATION SYSTEMS, INC.
By: /s/ Dr.Zaki Rakib
-------------------------------
Dr. Zaki Rakib
Chief Executive Officer
POWER OF ATTORNEY
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>
Chief Executive Officer and Director (Principal January 19, 2001
/s/ Dr. Zaki Rakib
--------------------------------
Dr. Zaki Rakib Executive Officer)
Chief Financial Officer (Principal Financial and January 19, 2001
/s/ Ray M. Fritz
--------------------------------
Ray M. Fritz Accounting Officer)
President and Chairman of the Board of Directors January 19, 2001
/s/ Shlomo Rakib
--------------------------------
Shlomo Rakib Director
Director January 19, 2001
/s/ Michael D'Avella
--------------------------------
Michael D'Avella
Director January 19, 2001
/s/ Alek Krstajic
--------------------------------
Alek Krstajic
Director January 19, 2001
/s/ Christopher J. Schaepe
--------------------------------
Christopher J. Schaepe
Director January 19, 2001
/s/ Lewis Solomon
--------------------------------
Lewis Solomon
Director January 19, 2001
/s/ Mark Stevens
--------------------------------
Mark Stevens
By: /s/ Dr. Zaki Rakib
--------------------------------
Dr. Zaki Rakib
Attorney-in-fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Document
*4.1 Form of Security for Terayon Communication Systems, Inc.'s 5% Convertible
Subordinated Notes due August 1, 2007.
*4.2 Indenture between Terayon Communication Systems, Inc., as Issuer, and
State Street Bank and Trust Company of California, N.A., as Trustee,
dated July 26, 2000.
*4.3 Purchase Agreement by and among Terayon Communication Systems, Inc. and
Deutsche Bank Securities, Inc. and Lehman Brothers, Inc. dated July 20,
2000.
*4.4 Registration Rights Agreement by and among Terayon Communication Systems,
Inc. and Deutsche Bank Securities, Inc. and Lehman Brothers, Inc..
5.1 Opinion of Cooley Godward LLP.
*12.1 Statement regarding computation of ratios.
*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.
*25.1 Statement of Eligibility of Trustee.
* Previously filed.
