e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark one) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD
FROM TO . |
COMMISSION FILE NUMBER: 000-24647
TERAYON COMMUNICATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION |
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77-0328533
(IRS EMPLOYER
IDENTIFICATION NO.) |
4988 GREAT AMERICA PARKWAY
SANTA CLARA, CALIFORNIA 95054
(408) 235-5500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF THE
REGISTRANTS PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Title of Each Class: |
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Name of Each Exchange on Which Registered: |
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None |
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None |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
COMMON STOCK, par value $0.001 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirement for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $140,449,000
on June 30, 2004. For purposes of this calculation only,
the registrant has excluded stock beneficially owned by
directors and officers. By doing so, the registrant does not
admit that such persons are affiliates within the meaning of
Rule 405 under the Securities Act of 1933 or for any other
purpose.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date: Common Stock, $0.001 par value,
76,786,521 shares outstanding as of February 28, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
LIST HEREUNDER THE DOCUMENTS FROM WHICH PARTS THEREOF HAVE BEEN
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K
INTO WHICH SUCH INFORMATION IS INCORPORATED:
Terayon Communication Systems, Inc definitive Proxy Statement,
to be filed not later than 120 days after the end of the
fiscal year covered by this report Part III
INDEX
TERAYON COMMUNICATION SYSTEMS, INC.
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 which are subject to the safe harbor
created by those sections. All statements included or
incorporated by reference in this report, other than statements
that are purely historical in nature, are forward-looking
statements. Forward-looking statements are generally written in
the future tense and/or are preceded by words such as may, will,
should, expect, plan, anticipate, believe, estimate, predict,
future, intend, or certain or the negative of these terms or
similar expressions to identify forward-looking statements.
Forward-looking statements include statements regarding:
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Our belief our current cash balances will be sufficient to
satisfy our cash requirements for at least the next
12 months; |
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Our belief that we are well positioned to capitalize on the
emerging video market because of the success our digital video
solution (DVS) products have had with the major U.S. cable
operators and satellite providers, as well as our current
success in digital ad insertion; |
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Our belief that our full transition to an original design
manufacturer in Asia during 2005 may allow us to remain
competitive in the marketplace and maintain favorable margins on
our products; |
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Our expectation that, to the extent we are successful in
shifting our product mix to higher margin DVS product revenues,
our margins may increase; |
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Our belief that we are well positioned to capitalize on the
growing demand for broadband providers to provide advanced video
services to their subscribers; |
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Our belief that the ongoing migration of major broadband
providers to all-digital networks represents a significant
opportunity for companies like us with products and technologies
that enable them to maximize their bandwidth and to utilize
important new transport methods; |
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Our belief that television providers will increasingly rely on
overlay to maintain or even increase their advertising revenues
and that our digital video processing systems will enable them
to more cost-effectively do this; |
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Our belief that cable, digital broadcast satellite and
telecommunications companies will continue their investments in
equipment to provide advanced services in a cost-effective
manner to increase average revenues per unit from their
subscribers; |
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Our expectation that research and development expenses will
continue to decrease in 2005; and |
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Our expectation that general and administrative expenses will
continue to decrease in 2005. |
Forward-looking statements are not guarantees of
future performance and involve risks and uncertainties.
The forward-looking statements contained in this report
are based on information that is currently available to us and
expectations and assumptions that we deemed reasonable at the
time the statements were made. We do not undertake any
obligation to update any forward-looking statements in this
report or in any of our other communications, except as required
by law. All such forward-looking statements should be read as of
the time the statements were made and with the recognition that
these forward-looking statements may not be complete or
accurate at a later date. The business risks discussed in
Item 7 of this Report on Form 10-K, among other
things, should be considered in evaluating our prospects and
future financial performance.
This Report on Form 10-K includes trademarks and registered
trademarks of Terayon Communication Systems, Inc. (Terayon or
Company). Products or service names of other companies mentioned
in this Report on Form 10-K may be trademarks or registered
trademarks of their respective owners.
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PART I
Overview
We were founded in 1993 to provide cable operators with a cable
data system enabling them to offer high-speed, broadband
Internet access to their subscribers. By 1999, we were primarily
selling this cable data system composed of cable
modems and cable modem termination systems (CMTS)
which utilized our proprietary Synchronous Code Division
Multiple Access (S-CDMA) technology. Also in 1999, we initiated
an acquisition strategy to expand our product offerings within
the cable industry and outside of the cable industry to the
telecom and satellite industries. With the market downturn in
2000, we refocused our business to target the cable industry and
began selling data and voice products based on industry standard
specifications, particularly the Data Over Cable System
Interface Specification (DOCSIS), thereby beginning our
transition from proprietary-based products to standards-based
products, and our digital video solutions (DVS) products to
cable operators and satellite providers. Since 2000, we have
terminated all of our acquired telecom and satellite-focused
businesses and incurred restructuring charges in connection with
these actions.
In 2004, we decided to refocus our business and make DVS the
center of our strategic direction. In particular, we have begun
expanding our focus beyond cable operators to more aggressively
pursue opportunities for our DVS products with television
broadcasters, telecom carriers and satellite television
providers. Additionally, as part of this decision, we also
determined that we would continue to sell equipment for home
access solutions (HAS), including cable modems, embedded
multimedia terminal adapters (eMTA) and home networking devices,
but ceased future investment in our CMTS product line. This
decision was based on weak sales of the CMTS products and the
anticipated extensive research and development investment
required to support the product line in the future. As part of
our decision to cease investment in the CMTS product line, we
have incurred severance, restructuring charges and asset
impairment charges.
We were incorporated in California and reincorporated in
Delaware in 1998. Our principal executive headquarters are
located at 4988 Great America Parkway, Santa Clara,
California 95054. Our telephone number is (408) 235-5500.
We participate in the worldwide market for equipment sold
primarily to broadband providers, including cable operators,
television broadcasters, telecom carriers and satellite
providers. Our business is influenced by the following
significant trends in our industry:
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Expansion of the all-digital network |
During the next several years, we believe that broadband
providers will, if they have not already done so, migrate their
networks to all-digital operation in order to deliver new
services and substantially improve network efficiency. This
effort may require broadband providers to deploy new digital
video products.
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Ability to leverage network infrastructures to offer multiple
products and services |
Within the last few years, several broadband providers have
begun offering a triple play bundle of services that
includes video, voice and high-speed data, over a single
network, with the objective of capturing higher average revenues
per subscriber, typically referred to as average revenues per
unit. The delivery of triple play services has led
to increased competition between the broadband providers,
particularly among the various verticals, i.e. increased
competition between the cable operators and telecom carriers.
This competition has led the broadband providers to improve
their infrastructure by purchasing equipment that allows them to
provide the triple play of services.
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An example of the competition between the broadband providers is
the delivery of voice services where cable operators and other
Voice over Internet Protocol (VoIP) providers are challenging
the traditional telecom carriers. Consumer acceptance of VoIP
telephony services has increased substantially during 2004.
U.S. cable operators have been rolling out VoIP service in
many of their cable systems during the past year and are
currently expanding the service to new systems. In addition to
cable operators, there are several other growing VoIP service
providers such as Vonage which do not
have their own physical networks, but utilize existing cable and
telecom broadband networks. To offer voice service, cable
operators and other VoIP service providers require that their
residential subscribers use an eMTA or other consumer premise
equipment (CPE) device.
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Broadband providers must combat ad skipping technologies |
Consumers increasing use of personal video recorders
(PVR) capable of skipping over commercial advertisements is
a growing threat to broadband providers who face the possibility
of lower advertising revenues from advertisers who are charged
in large part on the number of viewers watching a program. To
overcome the reduction of ad viewers because of ad skipping
PVRs, broadband providers are increasingly seeking solutions of
digital overlay techniques to directly insert ads into the
program being aired. These overlaid ads typically
appear in a lower corner of the television picture and cannot be
skipped by PVRs as they appear within the TV program itself. We
feel that television broadcasters will increasingly rely on
overlay to maintain or even increase their advertising revenues.
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Continued network investment to support new product
requirements in competitive markets |
The cable, digital broadcast satellite, and telecommunications
companies will continue their investments in equipment to
provide advanced services in a cost-effective manner to increase
ARPU from their subscribers. Though U.S. cable operators
continued to decrease their capital spending in 2004, the amount
of the decline was substantially lower than the previous year.
According to Kagen Research, LLC in 2004 U.S. cable
operators spent $9.5 billion on capital equipment, compared
to $10.6 billion in 2003, a decline of $1.1 billion or
10% year over year. However, this compares favorably to the
$3.6 billion or 27% decrease from the $14.5 billion
spent in 2002 to 2003s $10.6 billion. In addition, we
believe that telecom carriers (in particular regional bell
operating companies) offering low-priced broadband Internet
services will become an increasing source of competition to
traditional home video providers as they continue to upgrade
their networks to offer video services including high definition
digital television (HDTV) services.
We develop, market and sell equipment for DVS including our
CherryPicker line of products and equipment for HAS including
cable modems, eMTAs and home networking devices. Our DVS
equipment allows broadband providers to deliver advanced digital
video services, such as HDTV to generate advertising revenue by
carrying ads for local advertisers and to build their brand
awareness by overlaying their corporate logo directly into their
programming. Our HAS enable cable operators to deliver and
manage cost-effective broadband Internet access and VoIP
telephony service.
The delivery of broadband voice, video and data services
requires expertise in radio frequency (RF) modulation,
Motion Picture Experts Group (MPEG) digital video formats
and Internet Protocol (IP). Our products leverage our expertise
in these technologies and our experience in designing,
developing and manufacturing complex equipment, such as digital
video processing equipment. We provide our customers hardware
and software products that allow them to deliver and manage
cost-effective, robust broadband offerings for subscribers.
In the digital video management system market, our expertise in
MPEG processing technologies has helped us secure a leadership
position in statistical remultiplexing and providing the cable
and satellite operators with bandwidth management capabilities
for standard definition (SD) and HDTV. Our DVS products
enable broadband providers to maximize their SD and HDTV digital
programming through rate shaping, grooming and advertisement
insertion. We believe we are well positioned to capitalize on
the growing
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demand for broadband providers to provide advanced video
services to their subscribers, including bandwidth intensive
applications such as HDTV and Video on Demand (VOD).
We believe our DVS processing systems enable broadband providers
to more cost-effectively overlay ads directly into their
programming. Currently, our DM 6400 Network CherryPicker (for
cable operators and satellite providers) and our BP 5100 (for
television broadcasters) enable the overlay of ads completely
within the digital domain. This approach is more efficient
compared to the traditional approach which requires the ad and
the program to first be converted from digital to analog video,
at which point the ad is overlaid and then both are re-encoded
back to digital. Since our method works entirely in the digital
domain, there is no need for costly decoders to convert the
digital video to analog and separate re-encoders to then convert
the analog video back to digital.
Our goal is to be the leading provider of DVS and HAS in order
to optimize the delivery of video, voice and data for broadband
service providers on a worldwide solution basis. To achieve this
goal, we are pursuing the following strategies:
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capitalize on the increasing demand for advanced video services,
including HDTV and VOD, by leveraging our strength in the market
for digital video bandwidth management products; |
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use our expertise in DOCSIS, IP, MPEG and RF technologies to
evolve our solutions into an intelligent access platform capable
of more effectively delivering and managing triple
play bundled services for broadband providers; |
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increase the distribution capabilities of our DVS products
through reseller channels including developing new and expanding
existing system integration partnerships such as Harmonic, Inc,
Tandberg Television, Ltd, and Thomson Electronics |
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selectively enhance our HAS product portfolio to increase the
value-added services for broadband providers to offer to their
subscribers; and |
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improve margins through focused product cost-reduction efforts
and by streamlining operational activities across all product
lines. |
The ongoing migration of major broadband providers to
all-digital networks represents a significant opportunity for
companies like us with products and technologies that enable
them to maximize their bandwidth and to utilize important new
transport methods such as Gigabit Ethernet. We feel we are well
positioned to capitalize on this emerging market in large part
because of the success our proven DVS products have had with the
major U.S. cable operators and satellite providers.
Our CherryPicker line of digital video processing systems give
cable, telecom and satellite operators exceptional flexibility
in managing their digital video content, including the rate
shaping of video content to maximize the bandwidth for SD and
high definition (HD) programming, grooming customized
channel line-ups, carrying ads for local advertisers and
branding themselves by inserting their corporate logos into
their programming.
The CherryPicker line currently includes two models, the
DM 6400 and the DM 3200. Our DM 6400 helps cable
operators seamlessly insert commercials for local advertisers
into their digital programming without the need for a cumbersome
and inefficient digital-to-analog-back-to-digital process that
requires additional equipment. According to Kagen Research LLC,
in 2004, U.S. cable operators earned more than
$4.3 billion running ads for local advertisers, a 13%
increase over the $3.8 billion billed in 2003. We believe
this market will continue to grow and that we are well
positioned in this space based on our current success in digital
ad insertion and the relationships we have with the major
advertising server companies, primarily
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SeaChange and C-Cor. Our DM6200 provides statistical
remultiplexing functionality, ad insertion, and advance stream
processing.
Our BP5100 digital video processing system has been developed
specifically for television broadcasters, utilizing the same
proven statistical remultiplexing technology and components from
the CherryPicker line. The BP5100 provides broadcasters with
exceptional flexibility in managing their digital video content,
including the rate shaping of video content to maximize the
bandwidth for SD and HD programming, grooming customized channel
line-ups, carrying ads for local advertisers and branding
themselves by inserting their corporate logos into their
programming.
Our CP 7600 professional grade digital-to-analog multichannel
integrated decoder enables operators to optimize their digital
infrastructure by reducing the need for analog equipment and
pushing what is needed to the edge of their
networks. This in turn allows operators to focus their efforts
on transitioning the rest of the networks to all digital
operation.
Our CP 7585 off-air demodulator allows cable and satellite
operators to convert SD or HDTV programming transmitted
over-the-air by television broadcasters from the 8VSB format to
the ASI format used by cable and satellite operators. This
allows cable and satellite providers to retransmit broadcasters
programming over their own networks.
Our Terayon TJ 700x series cable modems have been deployed by
cable operators worldwide to deliver high-speed Internet access,
online gaming and other broadband services. The TJ 700x cable
modem series currently includes the TJ 715x DOCSIS 2.0 certified
modem, the Euro-DOCSIS 1.1 certified TJ 720x and the TJ 735x,
which has been designed specifically for Japanese cable
television operators.
Our terminal adapter (TA) series of eMTA are cable modems
that support the delivery of VoIP-based cable telephony service,
in addition to high-speed Internet access. The TA eMTAs are
designed specifically for VoIP cable telephony and are based on
the PacketCable standard, which Cable Television Laboratories,
Inc (CableLabs) has developed for cable VoIP. Our eMTAs are also
based on the DOCSIS and Euro-DOCSIS specifications so they can
be deployed by cable operators worldwide.
Our Wx-54G wireless networking module can be attached to any
member of our TJ 700x family of cable modems to provide
high-speed, wireless Internet connectivity to multiple PCs and
other devices within a cable subscribers home.
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Product research and development |
We maintain ongoing research and development activities for our
current product lines and to determine the potential of possible
future products.
For current product lines, our research and development efforts
are focused on developing new features and functionality that
address customer requirements and which keep our products
competitive with products from other vendors. Another key goal
of our ongoing research and development activities is to improve
the gross margins for our existing products by reducing the
component and manufacturing costs of these products.
We are engaged in substantial research and development
activities to investigate the potential of possible future
products and to improve our existing products by adding new
functionality and by reducing their cost of manufacture. We
currently anticipate that overall research and development
spending in 2005 will decrease compared to 2004, but will be
more focused on DVS products and applications, which have
strategic importance to the company. A key area for ongoing
research and development will be to develop new applications for
our DVS products.
Developing new and innovative solutions is important for us to
remain competitive with larger companies that devote
considerably more resources to product development.
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Customers
We market and sell our DVS and HAS products to multiple vertical
target markets consisting of the largest cable and satellite
operators and broadcasters in each major geographic area,
including North America; Europe, Middle East and Africa
(EMEA), and Asia.
Our principal customers include the following:
Comcast
Cox Communications
EchoStar
Harmonic
Hughes Electronics (DirectTV)
i-CABLE Communications
J-Com (Cross Beam Networks), a subsidiary of Sumitomo
Corporation (Sumitomo)
Thomson Electronics (a prime technology partner of FOX
Broadcasting Company)
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. For example, two
customers, Adelphia and Comcast accounted for approximately 18%
and 12%, respectively, of our total revenues for the year ended
December 31, 2004. Three customers Adelphia, Cross Beam
Networks and Comcast accounted for approximately 22%, 16% and
13%, respectively of our total revenues for the year ended
December 31, 2003. In connection with our decision in
October 2004 to cease future investment in our CMTS product
line, Adelphia, one of our largest CMTS customers, indicated
that it will no longer purchase CMTS products from us. Although
the majority of revenue in prior years from Adelphia has
primarily been derived from the sale of CMTS products, we have
also sold our DVS and HAS products to Adelphia and may be unable
to continue to sell DVS and HAS products to Adelphia, and this
loss may have a material adverse effect on our business or
results of operations in 2005. Additionally, the loss of any
other of our significant customers, especially customers who
generate a significant amount of DVS revenue, generally could
have a material adverse effect on our business and results of
operations.
Market Competition
The market for broadband equipment vendors is extremely
competitive and is characterized by rapid technological change,
and more recently, market consolidation. In the past, most cable
data systems were based on vendors proprietary technology.
As a result, modems only worked with CMTSs from the same vendor,
and therefore operators generally had to purchase CMTSs and
modems from the same vendor. With the advent of DOCSIS certified
and qualified products, customers can purchase interoperable
CMTSs and CPE products from a variety of equipment
manufacturers. The move to standards-based products may lead to
additional pricing pressures and further declining gross margins
in our HAS product line. Additionally, we believe that there may
be pressure to develop industry standards and specifications for
video products and applications, and such standards and
specifications could impact pricing and gross margins of our DVS
products in the same way it has affected the cable data systems.
In the market for DVS solutions, we believe we are the market
leader in video grooming and remultiplexing with our
CherryPicker digital video processing system. However, several
companies have entered this market from time to time, including
Motorola and privately held BigBand Networks. We believe that
there may be pressure to develop industry standards and
specifications for DVS products and applications, and such
standards and specifications could impact pricing and gross
margins of the DVS products and applications in the same way it
has affected the cable data systems.
Our main competitors in the sale of HAS products are Ambit,
Arris, Motorola, Scientific-Atlanta and Thomson.
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The principal competitive factors in our market include the
following:
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product performance, features and reliability; |
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price; |
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size and financial stability of operations; |
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breadth of product line; |
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sales and distribution capabilities; |
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technical support and service; |
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relationships with service providers; and |
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in the HAS market, compliance with industry specifications and
standards. |
Some of the above competitive factors are outside of our
control. Conditions in the 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 products that are less
costly, provide superior performance or achieve greater market
acceptance than our products. Many of our current and potential
competitors have greater financial, technical, marketing,
distribution, customer support and other resources, as well as
better name recognition and access to customers than we do.
These competitive pressures have impacted and are likely to
continue to adversely impact our business.
Sales and Marketing
We market and sell our products directly to broadband providers
through our direct sales forces in North America, EMEA, and
Asia. We also market and sell our products through distributors,
system integrators, and resellers throughout the world.
We support our sales activities through marketing communication
vehicles, such as industry press, trade shows, advertising and
the Internet. Through our marketing efforts, we strive to
educate broadband service providers on the technological and
business benefits of our products, as well as our ability to
provide quality support and service. We participate in the major
trade shows and industry events in the United States and
throughout the world. Industry referrals and reference accounts
are significant marketing tools we develop and utilize.
We also make our products available for customers to test, which
is very often a prerequisite for making a sale of our more
complex products. These tests can be very comprehensive and
lengthy, which can dramatically increase the sales cycle for
these products. Participating in these tests often requires us
to devote considerable time and resources from our engineering
and customer support organizations.
International Sales
We have international sales offices in Brussels, Belgium, Hong
Kong, Shanghai, China and Tel Aviv, Israel. In fiscal 2004, 2003
and 2002, approximately 45%, 44% and 68%, respectively of our
net revenues were from customers outside of the U.S. Sales to
Japan which is the only other country into which we made sales
in excess of 10% of net revenues in the preceding three years,
were 6%, 16% and 28%, in fiscal 2004, 2003 and 2002,
respectively. During 2004, we emphasized sales to U.S., Japanese
and EMEA customers while placing a lower emphasis on other
locations, such as Canada and South America. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Risks Related to Our
Business, including the information under the heading We
are dependent upon international sales and there are many risks
associated with international operations for information
about the risks associated with our international operations.
Also see Note 13 in the Notes to Consolidated Financial
Statements.
The majority of our international sales are currently invoiced
in U.S. dollars. However, we do enter into certain
transactions in Euros and other currencies. Invoicing in other
currencies subjects us to risks associated
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with foreign exchange rate fluctuations. Although we do not
currently have any foreign currency hedging arrangements in
place, we will consider the need for hedging or other strategies
to minimize these risks if the amount of invoicing in non-dollar
denominated transactions materially increases.
Our international operations are subject to certain risks common
to foreign operations in general, such as governmental
regulations and import restrictions. In addition, there are
social, political, labor and economic conditions in specific
countries or regions as well as difficulties in staffing and
managing foreign operations, and potential adverse foreign tax
consequences, among other factors that could also have an impact
on our business and results of operations outside of the United
States.
Customer Service and Technical Support
We believe that our ability to provide consistently high quality
service and support will continue to be a key factor in
attracting and retaining customers. Our technical services and
support organization, with personnel in North America, EMEA and
Asia, offers support 24 hours a day, seven days per week.
Prior to the deployment of our products, each customers
needs are assessed and proactive solutions are implemented,
including various levels of training, periodic management and
coordination meetings and problem escalation procedures.
Backlog
Most of our revenues are generated from orders booked and
shipped within the current quarter. Assuming product
availability, our practice is to ship our products promptly upon
the receipt of purchase orders from our customers. Therefore, we
believe that backlog information is not material to an
understanding of our business.
Manufacturing
Our finished goods are produced by subcontract manufacturers.
Our video equipment is single sourced from a manufacturer in
San Jose, California. Our modems are sourced from a
manufacturer in China.
Our manufacturing operations employ semiconductors,
electromechanical components and assemblies and raw materials
such as plastic resins and sheet metal. Although we believe the
materials and supplies necessary for our manufacturing
operations are currently available in the quantities required,
we sometimes experience a short supply of certain component
parts as a result of strong demand in the industry for those
parts.
Our subcontractors purchase materials, supplies and product
subassemblies from a substantial number of vendors. For many of
our products, there are existing alternate sources of supply.
However, we sole source certain components contained in our
products, such as the semiconductors used in our products. While
this has not resulted in material disruptions in the past,
should any change in these relationships or disruptions to our
vendors operations occur, our business and results of
operations could be adversely affected.
In an effort to prevent shortages of supplies used in the
manufacturing process by some of our subcontractors, we source
and inventory various raw products and components, as part of
our supply chain program. In doing so we may put ourselves at
risk of carrying inventory that may become excessive for our
future sales, based on current sales forecasts or become
obsolete before utilization by those manufactures.
Intellectual Property
We rely on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and
protect proprietary rights in our products. Even though we seek
to establish and protect proprietary rights in our products,
there are risks. Our pending patent applications may not be
granted. Even if they are granted, the claims covered by the
patent 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 a license from us.
9
We have entered into confidentiality and invention assignment
agreements with our employees, and we enter into non-disclosure
agreements with many of our suppliers, distributors and
appropriate customers so as to limit access to and disclosure of
our proprietary information. These contractual arrangements, as
well as statutory protections, may not prove to be sufficient to
prevent misappropriation of our technology or deter independent
third-party development of similar technologies. In addition,
the laws of some foreign countries may not protect our
intellectual property rights to the same extent as do the laws
of the United States. Litigation may be necessary to enforce our
intellectual property rights.
In connection with the development of the DOCSIS 2.0
specification by CableLabs, the research and development
consortium, which the cable operators help fund we entered into
an agreement with CableLabs whereby we licensed to CableLabs on
a royalty-free basis all of our intellectual property rights to
the extent that such rights may be asserted against a party
desiring to design, manufacture or sell DOCSIS based products,
including DOCSIS 2.0 based products. This license agreement
grants to CableLabs the right to sublicense our intellectual
property, including our intellectual property rights in our
S-CDMA patents, to others, including manufacturers that compete
with us in the marketplace for DOCSIS based products.
To migrate their networks to all-digital operation, Comcast,
Time-Warner and Cox, the three largest cable operators in the
U.S., started their Next-Generation Network Architecture
(NGNA) initiative in 2003 to develop a common approach to
transform their cable systems into all-digital networks. Working
as a group the operators can work more effectively with
equipment vendors in defining the products and product
capabilities required for the migration. In 2004 the
participating operators commissioned CableLabs to manage the
NGNA initiative and to develop a set of standards to which
equipment vendors like us can build our products. The NGNA
initiative is so far following the model successfully proven
with the earlier DOCSIS initiative, which enabled the
development of interoperable cable modems, CMTSs and other
associated equipment that allowed U.S. operators to rollout
broadband cable modem service much faster, more broadly and with
greater success than telecom carriers could offer their
competing DSL service. As it has with data services, CableLabs
may request companies to contribute their video technologies to
a DOCSIS-like technology pool on a royalty-free basis.
The contractual arrangements, as well as statutory protections,
we employ may not prove to be sufficient to prevent
misappropriation of our technology or deter independent
third-party development of similar technologies. We have in the
past received letters claiming that our technology infringes the
intellectual property rights of others. We have consulted with
our patent counsel and have or are in the process of reviewing
the allegations made by such third parties. If these allegations
were submitted to a court, the court could find that our
products infringe third party intellectual property rights. If
we are found to have infringed third party rights, 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.
A claim of infringement, whether meritorious or not, could be
time-consuming, result in costly litigation, divert our
managements resources, cause product shipment delays or
require us to enter into royalty or licensing arrangements.
These royalty or licensing arrangements may not be available on
terms acceptable to us, if at all.
We pursue the registration of our trademarks in the United
States and have applications pending to register several of our
trademarks throughout the world. 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. Effective trademark, copyright, trade secret and patent
protection may not be available in every country in which our
products may be manufactured, marketed or sold.
Access to our reports
Our Internet Web site address is www.terayon.com. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15
(d) of the Exchange Act are available free of charge
through our Web site as soon as reasonably practicable after
they are electronically filed with, or furnished to, the
Securities and Exchange Commission (SEC). We will also provide
those reports in electronic or paper form free of charge upon a
10
request made to Mark A. Richman, Chief Financial Officer,
c/o Terayon Communication Systems, Inc., 4988 Great America
Parkway, Santa Clara, CA 94054. Furthermore, all reports we
file with the Commission are available free of charge via EDGAR
through the Commissions Web site at www.sec.gov. In
addition, the public may read and copy materials filed by us at
the Commissions public reference room located at
450 Fifth St., N.W., Washington, D.C., 20549 or by
calling 1-800-SEC-0330.
Employees
As of December 31, 2004, we had 255 employees, of which 178
were located in the United States, 37 in Israel and an aggregate
of 40 in Canada, Europe, South America and Asia. We had 124
employees in research and development, 65 in marketing, sales
and customer support, 21 in operations and 45 in general and
administrative functions. In connection with our most recent
restructuring plans that occurred throughout 2004, we terminated
the employment of approximately 168 employees or 40% of our
workforce. In addition, as a result of our ongoing restructuring
activities and sale of certain assets to ATI Technologies Inc.,
(ATI) as of March 11, 2005, we had approximately 182
employees. None of our employees are represented by collective
bargaining agreements. We believe that our relations with our
employees are good.
Our principal executive offices are located in Santa Clara,
California where we lease approximately 141,000 square feet
under a lease that expires in October 2009. In connection with
our restructuring plans announced January 27, 2004, we are
seeking to sublease approximately 56,400 square feet of
this space. In the United States, we have additional facilities
in Costa Mesa, California. One of the facilities in Costa Mesa
is subleased.
In addition, we lease properties worldwide. We have a facility
in Tel Aviv, Israel consisting of approximately
136,000 square feet under a lease that expires in October
2005. We currently sublease approximately 107,000 square
feet of the Israel property. We have offices in Brussels,
Belgium, Hong Kong, Shanghai, China, and Ottawa, Ontario,
Canada. We currently sublease the facility in Ottawa, Ontario,
Canada. We believe that our existing facilities are adequate to
meet our needs for the foreseeable future. For additional
information regarding obligations under leases, see Note 4
to the Notes to Consolidated Financial Statements.
|
|
Item 3. |
Legal Proceedings |
Beginning in April 2000, several plaintiffs filed class action
lawsuits in federal court against us and certain of our officers
and directors. Later that year, the cases were consolidated in
the United States District Court, Northern District of
California as In re Terayon Communication Systems, Inc.
Securities Litigation. The Court then appointed lead plaintiffs
who filed an amended complaint. In 2001, the Court granted in
part and denied in part defendants motion to dismiss, and
plaintiffs filed a new complaint. In 2002, the Court denied
defendants motion to dismiss that complaint, which, like
the earlier complaints, 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. On February 24, 2003,
the Court certified a plaintiff class consisting of those who
purchased or otherwise acquired our securities between
November 15, 1999 and April 11, 2000.
On September 8, 2003, the Court heard defendants
motion to disqualify two of the lead plaintiffs and to modify
the definition of the plaintiff class. On September 10,
2003, the Court issued an order vacating the hearing date for
the parties summary judgment motions, and, on
September 22, 2003, the Court issued another order staying
all discovery until further notice and vacating the trial date,
which had been November 4, 2003.
On February 23, 2004, the Court issued an order
disqualifying two of the lead plaintiffs. The order also states
that plaintiffs counsel must provide certain information
to the Court about counsels relationship with the
disqualified lead plaintiffs, and it provides that defendants
may serve certain additional discovery. On March 24, 2004,
plaintiffs submitted certain documents to the Court in response
to its order, and, on April 16,
11
2004, we responded to this submission. We also have initiated
discovery pursuant to the Courts February 23, 2004
order.
On October 16, 2000, a lawsuit was filed against us and the
individual defendants (Zaki Rakib, Selim Rakib and Raymond
Fritz) in the California Superior Court, San Luis Obispo
County. This lawsuit is titled Bertram v. Terayon
Communications Systems, Inc. The factual allegations in the
Bertram complaint were similar to those in the federal class
action, but the Bertram complaint sought remedies under state
law. Defendants removed the Bertram case to the United States
District Court, Central District of California, which dismissed
the complaint and transferred the case to the United States
District Court, Northern District of California. That Court
eventually issued an order dismissing the case. Plaintiffs have
appealed this order, and their appeal was heard on
April 16, 2004. On June 9, 2004, the United States
Court of Appeals for the Ninth Circuit affirmed the order
dismissing the Bertram case.
The Court of Appeals opinion affirming dismissal of the
Bertram case does not end the class action. We believe that the
allegations in the class action are without merit, and we intend
to contest this matter vigorously. This matter, however, could
prove costly and time consuming to defend, and there can be no
assurances about the eventual outcome.
In 2002, two shareholders filed derivative cases purportedly on
behalf of us against certain of our current and former
directors, officers, and investors. (The defendants differed
somewhat in the two cases.) Since the cases were filed, the
investor defendants have been dismissed without prejudice, and
the lawsuits have been consolidated as Campbell v. Rakib in
the California Superior Court, Santa Clara County. We are a
nominal defendant in these lawsuits, which allege claims
relating to essentially the same purportedly misleading
statements that are at issue in the pending securities class
action. In the securities class action, we dispute making any
misleading statements. The derivative complaints also allege
claims relating to stock sales by certain of the director and
officer defendants.
We believe that there are many defects in the Campbell and
OBrien derivative complaints.
On January 19, 2003, Omniband Group Limited, a Russian
company (Omniband), filed a request for arbitration with the
Zurich Chamber of Commerce, claiming damages in the amount of
$2,094,970 allegedly caused by the breach of an agreement by us,
Terayon Communications Systems Ltd. (Terayon Ltd.), a wholly
owned subsidiary, Radwiz Ltd, (Radwiz), a former wholly-owned
subsidiary to sell to Omniband certain equipment pursuant to an
agreement between Omniband and Radwiz. On December 18,
2003, the panel of arbiters with the Zurich Chamber of Commerce
allowed the arbitration proceeding to continue against Radwiz
but dismissed the proceeding against us and Terayon Ltd.
Omniband appealed the Zurich Chamber of Commerces decision
to dismiss the proceeding against us and Terayon Ltd. and the
decision was affirmed on October 15, 2004. On
January 13, 2005, the Zurich Chamber of Commerce dismissed
the case with prejudice after Omniband failed to respond and pay
the arbitration fees.
In January 2005, Adelphia Corporation sued us in the District
Court of the City and County of Denver, Colorado.
Adelphias complaint alleges, among other things, breach of
contract and misrepresentation in connection with our sale of
CMTS products to Adelphia and our announcement to cease future
investment in the CMTS market. Adelphia seeks unspecified
monetary damages and declaratory relief. We filed a motion to
dismiss the complaint on February 24, 2005. As we believe
that Adelphias allegations are without merit, we intend to
contest this matter vigorously. This matter, however, could
prove costly and time consuming to defend, and there can be no
assurances about the eventual outcome
We have received letters claiming that our technology infringes
the intellectual property rights of others. We have consulted
with our patent counsel and have or are in the process of
reviewing the allegations made by such third parties. If these
allegations were submitted to a court, the court could find that
our products infringe third party intellectual property rights.
If we are found to have infringed third party rights, 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. A claim of infringement, whether meritorious or not,
could be time-consuming, result in costly litigation, divert our
managements resources,
12
cause product shipment delays or require us to enter into
royalty or licensing arrangements. These royalty or licensing
arrangements may not be available on terms acceptable to us, if
at all.
Furthermore, we have in the past agreed to, and may from time to
time in the future agree to, indemnify a customer of its
technology or products for claims against the customer by a
third party based on claims that our technology or products
infringe intellectual property rights of that third party. These
types of claims, meritorious or not, can result in costly and
time-consuming litigation; divert managements attention
and other resources; require us to enter into royalty
arrangements; subject us to damages or injunctions restricting
the sale of our products; require us to indemnify our customers
for the use of the allegedly infringing products; require us to
refund payment of allegedly infringing products to our customers
or to forgo future payments; require us to redesign certain of
our products; or damage our reputation, any one of which could
materially and adversely affect our business, results of
operations and financial condition.
We are currently a party to various other legal proceedings, in
addition to those noted above, and may become involved from time
to time in other legal proceedings in the future. While we
currently believe that the ultimate outcome of these other
proceedings, individually and in the aggregate, will not have a
material adverse effect on our financial position or overall
results of operations, litigation is subject to inherent
uncertainties. Were an unfavorable ruling to occur in any of our
legal proceedings, there exists the possibility of a material
adverse impact on our results of operations for the period in
which the ruling occurs. The estimate of the potential impact on
our financial position and overall results of operations for any
of the above legal proceedings could change in the future.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
(a) The registrants Annual Meeting of Stockholders
was held on December 16, 2004.
(b) The meeting involved the election of three directors:
Jerry D. Chase, Zaki Rakib and Mark Slaven. The following
directors terms continued after the meeting: Alek
Krstajic, Matthew D. Miller, Selim (Shlomo) Rakib, Lewis
Solomon, Howard W. Speaks, Jr. and David Woodrow.
(c) There were two matters voted on at the Meeting. A brief
description of each of these matters and the results of the
votes thereon, are as follows:
|
|
|
|
|
|
|
|
|
Nominee |
|
For | |
|
Withheld | |
|
|
| |
|
| |
Jerry D. Chase
|
|
|
67,458,655 |
|
|
|
1,038,909 |
|
Zaki Rakib
|
|
|
67,227,409 |
|
|
|
1,270,155 |
|
Mark Slaven
|
|
|
67,334,317 |
|
|
|
1,163,247 |
|
|
|
2. |
Ratification of the appointment of Ernst & Young LLP as
the registrants auditors for the fiscal year ended
December 31, 2004 |
|
|
|
|
|
|
|
|
|
For |
|
Against | |
|
Abstain | |
|
|
| |
|
| |
67,855,478
|
|
|
558,429 |
|
|
|
53,657 |
|
PART II
|
|
Item 5. |
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is traded on the NASDAQ National Market under
the symbol TERN. Public trading of our common stock
commenced on August 18, 1998. Prior to that time, there was
no public market
13
for our common stock. The following table sets forth, for the
periods indicated, the high and low per share sale prices of our
common stock, as reported by the NASDAQ National Market.
|
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2004:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
6.25 |
|
|
$ |
2.96 |
|
|
Second Quarter
|
|
$ |
3.99 |
|
|
$ |
1.66 |
|
|
Third Quarter
|
|
$ |
2.38 |
|
|
$ |
1.44 |
|
|
Fourth Quarter
|
|
$ |
2.98 |
|
|
$ |
1.52 |
|
2003:
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
2.84 |
|
|
$ |
1.39 |
|
|
Second Quarter
|
|
$ |
3.20 |
|
|
$ |
1.57 |
|
|
Third Quarter
|
|
$ |
8.25 |
|
|
$ |
2.52 |
|
|
Fourth Quarter
|
|
$ |
8.04 |
|
|
$ |
4.05 |
|
As of February 28, 2005, there were approximately 588
holders of record of our common stock, as shown on the records
of our transfer agent. The number of record holders does not
include shares held in street name through brokers.
We do not pay any cash dividends on our common stock. We
currently expect to retain future earnings, if any, for use in
the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
The following table summarizes our equity compensation plan
information as of December 31, 2004. Information is
included for both equity compensation plans approved by our
stockholders and equity compensation plans not approved by our
stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock | |
|
|
|
|
|
|
available for | |
|
|
|
|
|
|
future issuance | |
|
|
Common stock to | |
|
|
|
under equity | |
|
|
be issued upon | |
|
Weighted-average | |
|
compensation | |
|
|
exercise of | |
|
exercise price of | |
|
plans (excluding | |
|
|
outstanding options | |
|
outstanding options | |
|
securities reflected | |
|
|
and rights | |
|
and rights | |
|
in column (a)) | |
Plan Category |
|
(a) | |
|
(b) | |
|
(c) | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by Terayon stockholders(1)
|
|
|
9,875,526 |
|
|
$ |
4.16 |
|
|
|
6,704,961 |
|
Equity compensation plans not approved by Terayon stockholders(2)
|
|
|
6,927,312 |
|
|
$ |
6.96 |
|
|
|
5,212,115 |
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
16,802,838 |
|
|
$ |
5.32 |
|
|
|
11,917,076 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
1. |
Includes options to purchase common stock outstanding under the
Terayon Communication Systems, Inc. 1995 Stock Option Plan as
amended, Terayon Communication Systems, Inc. 1997 Equity
Incentive Plan as amended, Terayon Communication Systems, Inc.
1998 Employee Stock Purchase Plan as amended, Terayon
Communication Systems, Inc. 1998 Non-Employee Directors Stock
Option Plan as amended, and the Terayon Communication Systems,
Inc. 1998 Employee Stock Purchase Plan Offering for Foreign
Employees. |
|
2. |
Includes options to purchase common stock outstanding under the
Terayon Communication Systems, Inc. 1999 Non-Officer Equity
Incentive Plan, as amended. See Note 10 in Notes to
Consolidated Financial Statements. |
|
3. |
Includes 1,202,733 shares of common stock available for
purchase under the Terayon Communication Systems, Inc. 1998
Employee Stock Purchase Plan. |
14
In March 1995, our Board of Directors approved a stock option
plan (1995 Plan) that authorized shares for future issuance to
be granted as options to purchase shares of our common stock. As
of December 31, 2004 a total of 4,229,494 shares have
been authorized for issuance related to the 1995 Plan.
In March 1997, our Board of Directors approved an equity
incentive plan (1997 Plan) that authorized 1,600,000 shares
for future issuance to be granted as options to purchase shares
of our common stock. In June 1998, our Board of Directors
authorized the adoption of the amended 1997 Plan, increasing the
aggregate number of shares authorized for issuance under the
1997 Plan to 6,600,000 shares (5,000,000 additional
shares). The amendment also provided for an increase to the
authorized shares each year on January 1, starting with
January 1, 1999, if the number of shares reserved for
future issuance was less than 5% of our outstanding common
stock, then the authorized shares would be increased to a
balance equal to 5% of the common stock outstanding. There were
no increases to the 1997 Plan in 1998 or 1999. On
January 1, 2000, 2,384,528 shares were added to the
1997 Plan for a total of 8,984,528 shares.
The 1997 Plan was amended on June 13, 2000 to increase the
shares authorized for issuance by 3,770,000 additional shares
and to provide for an increase in the number of shares of common
stock beginning January 1, 2000 through January 1,
2007, by the lesser of 5% of the common stock outstanding on
such January 1 or 3,000,000 shares. In May 2003, the
Companys Board of Directors authorized the adoption of an
amendment to reduce the number of authorized shares in the 1997
Plan by 6,237,826 shares. As of December 31, 2004, a
total of 15,516,702 shares have been authorized for
issuance related to the 1997 Plan.
In June 1998, our Board of Directors authorized the adoption of
the 1998 Non-Employee Directors Stock Option Plan (1998
Plan), pursuant to which 400,000 shares of our common stock
have been reserved for future issuance to our non-employee
directors. In 2002, our Board of Directors amended the 1998 Plan
to increase the shares authorized for issuance by 400,000
additional shares. As of December 31, 2004, a total of
800,000 shares have been authorized for issuance related to
the 1998 Plan.
In September 1999, our Board of Directors authorized the
adoption of the 1999 Non-Officers Equity Incentive Plan (1999
Plan), pursuant to which 6,000,000 shares of our common
stock have been reserved for future issuance to our non-officer
employees. Additionally, in May 2003, our Board of Directors
authorized the adoption of an amendment to reduce the number of
authorized shares in the 1999 Plan by 13,762,174 shares. As
of December 31, 2004, a total of 14,737,826 shares
have been authorized for issuance related to the 1999 Plan.
The 1995 and 1997 Plans provide for incentive stock options or
nonqualified stock options to be issued to our employees,
directors, and consultants. Prices for incentive stock options
may not be less than the fair market value of the common stock
at the date of grant. Prices for nonqualified stock options may
not be less than 85% of the fair market value of the common
stock at the date of grant. Options are immediately exercisable
and vest over a period not to exceed five years from the date of
grant. Any unvested stock issued is subject to repurchase by us
at the original issuance price upon termination of the option
holders employment. Unexercised options expire ten years
after the date of grant.
The 1998 Plan provides for non-discretionary nonqualified stock
options to be issued to our non-employee directors automatically
as of the effective date of their election to the Board of
Directors and annually following each annual stockholder
meeting. Prices for nonqualified options may not be less than
100% of the fair market value of the common stock at the date of
grant. Options generally vest and become exercisable over a
period not to exceed three years from the date of grant.
Unexercised options expire ten years after the date of grant.
15
The 1999 Plan provides for nonqualified stock options to be
issued to our non-officer employees and consultants. Prices for
nonqualified stock options may not be less than 85% of the fair
market value of the common stock at the date of the grant.
Options generally vest and become exercisable over a period not
to exceed five years from the date of grant. Unexercised options
expire ten years after date of grant.
|
|
Item 6. |
Selected Financial Data |
The following tables contain selected financial data as of and
for each of the five years ended December 31, 2004, 2003,
2002, 2001 and 2000 and are derived from our financial
statements. The selected financial data are qualified by
reference to, and should be read in conjunction with, our
financial statements and the notes to those financial statements
and Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
150,538 |
|
|
$ |
133,485 |
|
|
$ |
129,403 |
|
|
$ |
279,481 |
|
|
$ |
339,549 |
|
Cost of goods sold
|
|
|
106,920 |
|
|
|
101,034 |
|
|
|
100,949 |
|
|
|
263,117 |
|
|
|
289,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
43,618 |
|
|
|
32,451 |
|
|
|
28,454 |
|
|
|
16,364 |
|
|
|
50,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
33,959 |
|
|
|
42,839 |
|
|
|
58,696 |
|
|
|
79,927 |
|
|
|
68,270 |
|
Cost of product development assistance agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,563 |
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,535 |
|
|
Sales and marketing
|
|
|
24,145 |
|
|
|
26,781 |
|
|
|
35,704 |
|
|
|
55,701 |
|
|
|
45,261 |
|
|
General and administrative
|
|
|
11,216 |
|
|
|
12,127 |
|
|
|
14,715 |
|
|
|
31,309 |
|
|
|
24,809 |
|
|
Goodwill amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,410 |
|
|
|
59,057 |
|
|
Restructuring charges (net), executive severance and asset
write-offs(1)
|
|
|
11,159 |
|
|
|
2,803 |
|
|
|
8,922 |
|
|
|
587,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80,479 |
|
|
|
84,550 |
|
|
|
118,037 |
|
|
|
779,496 |
|
|
|
237,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(36,861 |
) |
|
|
(52,099 |
) |
|
|
(89,583 |
) |
|
|
(763,132 |
) |
|
|
(187,477 |
) |
Interest income (expense) and other income (expense), net
|
|
|
254 |
|
|
|
2,062 |
|
|
|
(3,481 |
) |
|
|
44 |
|
|
|
6,710 |
|
Gain on early retirement of debt(2)
|
|
|
|
|
|
|
|
|
|
|
49,089 |
|
|
|
185,327 |
|
|
|
|
|
Income tax benefit (expense)
|
|
|
76 |
|
|
|
(316 |
) |
|
|
(238 |
) |
|
|
13,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(36,531 |
) |
|
$ |
(50,353 |
) |
|
$ |
(44,213 |
) |
|
$ |
(563,846 |
) |
|
$ |
(180,767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(0.48 |
) |
|
$ |
(0.68 |
) |
|
$ |
(0.61 |
) |
|
$ |
(8.25 |
) |
|
$ |
(2.95 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share(3)
|
|
|
75,861 |
|
|
|
74,212 |
|
|
|
72,803 |
|
|
|
68,331 |
|
|
|
61,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
97,735 |
|
|
$ |
138,640 |
|
|
$ |
206,503 |
|
|
$ |
333,888 |
|
|
$ |
562,457 |
|
Working capital
|
|
|
109,054 |
|
|
|
137,548 |
|
|
|
172,829 |
|
|
|
316,175 |
|
|
|
547,938 |
|
Total assets
|
|
|
153,734 |
|
|
|
215,240 |
|
|
|
275,710 |
|
|
|
466,646 |
|
|
|
1,426,727 |
|
Long-term obligations (less current portion)
|
|
|
68,049 |
|
|
|
68,199 |
|
|
|
68,580 |
|
|
|
178,641 |
|
|
|
500,477 |
|
Accumulated deficit
|
|
|
(1,024,091 |
) |
|
|
(987,560 |
) |
|
|
(937,207 |
) |
|
|
(892,994 |
) |
|
|
(329,148 |
) |
Total stockholders equity
|
|
$ |
56,341 |
|
|
$ |
91,388 |
|
|
$ |
137,142 |
|
|
$ |
180,304 |
|
|
$ |
702,681 |
|
|
|
(1) |
See Notes 5 and 6 of Notes to Consolidated Financial
Statements for an explanation for restructuring charges,
executive severance and asset write-offs. |
|
(2) |
See Note 8 of Notes to Consolidated Financial Statements
for an explanation of the repurchase of subordinated convertible
notes and reclassification of related gains. |
|
(3) |
See Note 2 of Notes to Consolidated Financial Statements
for an explanation of the method employed to determine the
number of shares used to compute per share amounts. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion and analysis is intended to provide an
investor with a narrative of our financial results and an
evaluation of our financial condition and results of operations.
The discussion should be read in conjunction with our
consolidated financial statements and notes thereto.
We sell our DVS products to cable operators, satellite providers
and television broadcasters. Additionally, we sell our HAS
products, including cable modems, eMTAs, home networking
devices, and CMTS product line to cable operators. However, in
2004 we ceased investment in our CMTS product line and currently
anticipate very limited sales of this product line in 2005.
When the downturn in the communications industry started in
fiscal 2000 and became fully evident to us in fiscal 2001, we
began to implement restructuring plans to cease certain product
lines, reduce operating expenses and capital spending and to
narrow the focus of our business. Furthermore, in 2002, 2003 and
2004, as part of our restructuring efforts to refocus our
business, we sold or ceased investing in certain product lines
and took additional measures to align our cost structure with
revenues. Our most recent restructuring plans, beginning in the
first quarter of 2004 and continuing throughout 2004, resulted
in a worldwide reduction in force of approximately 168
employees, or 40% of the workforce, consolidation of certain
facilities, and reduction or elimination of certain
discretionary costs and programs. We may continue to divest
unprofitable product lines in an effort to focus on growing our
business profitably and redirect our resources to our DVS
product line. However, despite these actions, we may not be able
to meet expected revenue levels in any particular period or
attain profitability in any future period.
In 2004, we repositioned ourselves to make DVS the center of our
business strategy. As part of this vision, we began expanding
our focus and our efforts beyond cable operators to more
aggressively pursue opportunities for our DVS products with
other broadband providers and television broadcasters.
Additionally, as part of this decision, we also determined that
we would continue to sell HAS products but cease future
investment in our CMTS product line. This decision was based on
weak and declining sales of the CMTS products and the
anticipated costs associated with the extensive research and
development investment required to support the product line. As
part of our decision to cease investment in the CMTS product
line, we have incurred severance, restructuring charges and
asset impairment charges.
17
The emerging market trend to standardize the digital video
technology may challenge our ability to continue to grow our DVS
business. Comcast, Time-Warner and Cox, the three largest cable
operators in the U.S., started their NGNA initiative in 2003 to
develop a common approach to transform their cable systems into
all-digital networks. In 2004 the participating operators
commissioned CableLabs to manage the NGNA initiative and to
develop a set of standards to which equipment vendors can build
their products to enable the migration to all-digital networks.
As it has with data services, CableLabs may request or even
require companies to contribute their video technologies to a
DOCSIS-like technology pool on a royalty-free basis. If this
initiative is successful, we expect that cable operators would
seek to purchase video products that have been certified or
qualified by CableLabs, in which case we will not be able to
sell our video products until they achieve certification or
qualification, which can be a lengthy process. As a result, we
may incur significant research and development expenses to
develop new video products that may not receive certification or
qualification in which case we may not be able to recoup the
costs of these research and development expenses. Moreover,
there is no guarantee that we will be able to support all future
cable industry specifications relating to video products, which
would likely have an adverse impact on our future revenues.
Furthermore, a potential consequence of cable operators
purchasing only certified or qualified products is the increased
competition between equipment vendors, which could result in
declining prices. Consequently, our future success may depend on
our ability to compete effectively in the video marketplace by
developing, marketing and selling products that are certified
and qualified to industry standards in a timely fashion and in a
cost effective manner.
On February 8, 2005, we announced the signing of an
agreement with ATI Technologies, Inc (ATI) relating to the
sale of certain cable modem semiconductor assets. The agreement
calls for ATI to acquire our cable modem silicon intellectual
property and related software, assume a lease and hire
approximately twenty-five employees of our design team. Under
the terms of the agreement, ATI will pay us $6.95 million
upon closing, with a balance of $7.05 million subject to us
achieving milestones for certain conditions, services and
deliverables spanning a period of 15 months. On
March 9, 2005 we signed closing documents with ATI for this
agreement. Upon closing we received $8.6 million in cash
which was comprised of the $6.95 million for the initial
payment and $1.65 million of the $1.9 million for
having met the first milestone. The difference between the
$1.9 million milestone and the payment of
$1.65 million was money retained by ATI to pay for Company
funded retention bonuses for employees that accepted employment
with ATI. The balance of $5.2 million will be subject to
our achieving the remaining milestones over the subsequent
15 months. The maximum liability for us is set at
$11.5 million or the total amount of the purchase price
paid by ATI plus $1.5 million. Total purchase price payable
to us upon achieving all terms and conditions is
$14.0 million. As set forth in this agreement are
representations and warranties made by us that may cause us to
incur liabilities and penalties arising out of our failure to
meet certain conditions and milestones.
We have not been profitable since our inception. We had a net
loss of $36.5 million or $0.48 per share for the year
ended December 31, 2004, and a net loss of
$50.4 million or $0.68 per share for the year ended
December 31, 2003. Our ability to grow our business and
attain profitability is dependent on our ability to effectively
compete in the marketplace with our current products and
services, develop and introduce new products and services,
contain operating expenses and improve our gross margins, as
well as continued investment in equipment by the broadband
provider industry. Finally, we expect to benefit from a lower
expense base resulting in part from the series of restructurings
that occurred in 2004 along with continued focus on cost
containment. However, despite these efforts, we may not succeed
in attaining profitability in the near future, if at all.
At December 31, 2004, we had approximately
$97.7 million in cash, cash equivalents and short-term
investments as compared to approximately $138.6 million at
December 31, 2003. The decrease in the amount of cash and
cash equivalents in 2004 as compared to 2003 primarily resulted
from significant uses of cash for operating activities, payments
for inventory, restructuring charges and executive severance in
2004. Although we believe that our current cash balances will be
sufficient to satisfy our cash requirements for at least the
next 12 months, we may need to raise additional funds in
order to support more rapid expansion, develop new or enhanced
services, respond to competitive pressures, acquire
complementary businesses or technologies or
18
respond to unanticipated requirements. There can be no assurance
that additional financing will be available on acceptable terms,
if at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to continue
operations, develop products, take advantage of future
opportunities, respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our
business, financial condition and operating results
A more detailed description of the risks to our business can be
found in the section captioned Risk Factors in this
annual report.
Results of Operations
|
|
|
Comparison of the years ended December 31, 2004 and
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2004 |
|
2003 |
|
2004/2003 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues
|
|
$ |
150,538 |
|
|
$ |
133,485 |
|
|
|
13 |
% |
Our revenues increased 13% to $150.5 million for the twelve
months ended December 31, 2004 from $133.5 million in
2003, primarily due to increased sales of DVS and HAS products,
particularly in the second half of 2004, partially offset by
declining sales of our CMTS products and proprietary S-CDMA CMTS
products.
Revenues by Groups of Similar Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
December 31, | |
|
|
|
|
| |
|
Annual % Change | |
|
|
2004 | |
|
2003 | |
|
2004/2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Revenues by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DVS
|
|
$ |
36,979 |
|
|
$ |
17,710 |
|
|
|
109 |
% |
|
HAS
|
|
|
72,152 |
|
|
|
64,808 |
|
|
|
11 |
% |
|
CMTS
|
|
|
31,539 |
|
|
|
47,486 |
|
|
|
(34 |
)% |
|
Other
|
|
|
9,868 |
|
|
|
3,481 |
|
|
|
183 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
150,538 |
|
|
$ |
133,485 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
Revenues from DVS products increased 109% in 2004 compared to
2003, due to increased demand for our HD and Ad insertion
applications. We introduced several new products in 2004, one of
which (the BP5100) serves the Broadcast market segment.
HAS product revenues increased 11% in 2004 compared to 2003,
primarily due to an aggregate increase in modem volume,
1.9 million units in 2004 as compared to 1.5 million
units in 2003, offset by decreases in average selling price
(ASP). The number of DOCSIS modems sold increased to
1.7 million units in 2004 from 1.2 million units in
2003. The intensely competitive nature of the market for
broadband products resulted in significant price erosion. We
anticipate that modem unit price erosion will continue in the
first half of 2005. However, we believe that our full transition
to an Original Design Manufacturer (ODM) in Asia during
2005 may allow us to remain competitive in the marketplace and
maintain favorable margins on these products.
Our CMTS product revenues decreased 34% in 2004 compared to
2003, as new customer adoption of DOCSIS 2.0 CMTS platform was
not as robust as originally anticipated. Due to declining sales,
we made an announcement in October 2004 to cease investment in
the CMTS product line. We expect CMTS revenues to continue to
decline in 2005 as we phase out this product line and focus on
our growth areas.
19
Other product revenues increased 183% in 2004 compared to 2003,
due to large, last time purchases of our legacy voice products.
We do not expect any sales of our legacy voice products in 2005.
Revenues by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
December 31, | |
|
|
|
|
| |
|
Annual % Change | |
|
|
2004 | |
|
2003 | |
|
2004/2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Revenues by geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
83,212 |
|
|
$ |
74,341 |
|
|
|
12 |
% |
|
Americas, excluding United States
|
|
|
4,126 |
|
|
|
3,713 |
|
|
|
11 |
% |
|
EMEA, excluding Israel
|
|
|
29,348 |
|
|
|
17,635 |
|
|
|
66 |
% |
|
Israel
|
|
|
6,681 |
|
|
|
7,038 |
|
|
|
(5 |
)% |
|
Asia, excluding Japan
|
|
|
17,999 |
|
|
|
9,575 |
|
|
|
88 |
% |
|
Japan
|
|
|
9,172 |
|
|
|
21,183 |
|
|
|
(57 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
150,538 |
|
|
$ |
133,485 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
Revenues in the United States increased 12% to
$83.2 million in 2004, up from $74.3 million in 2003,
due to increased sales of HAS and DVS products to major system
operators (MSO) and television broadcasters. Revenues for
EMEA, excluding Israel, increased 66% to $29.3 million in
2004 up from $17.6 million in 2003. During 2004, we
emphasized sales to our U.S., EMEA, Japanese and other Asian
customers while placing a lower emphasis on other locations such
as Canada and South America. In 2005, we expect revenues to
increase in the United States, Asian and EMEA markets.
Two customers, Adelphia and Comcast, (18%, and 12%,
respectively) accounted for more than 10% of our total revenues
for the year ended December 31, 2004. Three customers,
Adelphia, Cross Beam Networks and Comcast, (22%, 16% and 13%,
respectively) accounted for more than 10% of our total revenues
for the year ended December 31, 2003. In connection with
our decision in October 2004 to cease future investment in our
CMTS product line and their related lawsuit, we do not expect
Adelphia to continue to purchase equipment from us. While sales
in prior years from Adelphia were primarily related to CMTS
products, we expect this to have a material adverse impact on
our HAS product line in 2005 and may affect DVS sales as well.
Related Party Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
December 31, | |
|
|
|
|
| |
|
Annual % Change | |
|
|
2004 | |
|
2003 | |
|
2004/2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Related party revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rogers revenues
|
|
$ |
0 |
|
|
$ |
1,453 |
|
|
|
(100 |
)% |
Harmonic revenues
|
|
|
9,916 |
|
|
|
3,241 |
|
|
|
206 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total related party revenues
|
|
$ |
9,916 |
|
|
$ |
4,694 |
|
|
|
111 |
% |
|
|
|
|
|
|
|
|
|
|
Related party revenues increased 111% in 2004 compared to 2003.
Related party revenues in 2004 were from Harmonic, Inc.
(Harmonic). Related party revenues in 2003 included revenues
from Harmonic and Rogers Communications, Inc. (Rogers). Lewis
Solomon, a member of our board of directors, is a member of the
board of directors of Harmonic. All revenues attributable to
Harmonic were included in related party revenues in 2004 and
2003. Alek Krstajic, another member of our board of directors,
was the Senior Vice President of Interactive Services, Sales and
Product Development for Rogers until January 2003. Effective in
20
April 2003, Rogers was no longer a related party to us.
Consequently, revenues attributable to Rogers are only
classified as related party revenues in the first quarter of
2003. The increase in related party revenues was primarily due
to increase in sales to Harmonic in 2004. Neither Harmonic nor
Rogers is a supplier to us.
In December 2001, we entered into co-marketing arrangements with
Shaw Communications, Inc. (Shaw) and Rogers. We paid
$7.5 million to Shaw and $0.9 million to Rogers, and
recorded these amounts as other current assets. In July 2002, we
began amortizing these prepaid assets and charging them against
related party revenues in accordance with Emerging Issues Task
Force (EITF) 01-09, Accounting for Consideration
given by a Vendor to a Customer or Reseller in Connection with
the Purchase or Promotion of the Vendors Products.
We charged $1.4 million per quarter of the amortization of
these assets against total revenues through December 31,
2003. Amounts charged against total revenues in the year ended
December 31, 2003, totaled approximately $5.6 million.
Of the co-marketing amortization charged to total revenues,
$0.15 million was charged to related party revenues in the
year ended 2003. These co-marketing arrangements were fully
amortized at December 31, 2003 and no further amortization
has occurred in 2004.
Cost of Goods Sold and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2004 |
|
2003 |
|
2004/2003 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Cost of product revenues
|
|
$ |
103,150 |
|
|
$ |
99,261 |
|
|
|
4 |
% |
Cost of related party revenues
|
|
|
3,770 |
|
|
|
1,773 |
|
|
|
113 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
106,920 |
|
|
|
101,034 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
43,618 |
|
|
$ |
32,451 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold consists of direct product costs as well as
the cost of our manufacturing operations. The cost of
manufacturing includes contract manufacturing, test and quality
assurance for products, warranty costs and associated costs of
personnel and equipment. In 2004, cost of goods sold was
approximately 71% of revenues compared to 76% of revenues in
2003. Cost of goods sold in 2004 and 2003 included the benefit
of reversals of approximately $3.3 million and
$10.0 million, respectively, in special charges taken in
2001 and 2000 for vendor cancellation charges and inventory
previously reserved as excess and obsolete. We reversed these
provisions as we were able to sell inventory originally
considered to be excess and obsolete. In addition, we were able
to negotiate downward certain vendor cancellation claims on
terms more favorable to us. During 2004, we recorded inventory
charges of $12.0 million, principally due to our decision
to cease investment in the CMTS product line. In 2003, we
recorded inventory charges of $4.1 million to reduce our
inventory due to excess and obsolescence.
In 2004, related party cost of goods increased compared to 2003
due to increased sales of our products to Harmonic.
Our gross profit increased $11.1 million or 34% to
$43.6 million or 29% of revenue in the year ended
December 31, 2004 compared to $32.5 million, or 24% of
revenue in 2003. The factors that contributed to the increase in
our gross profit in 2004 were primarily related to an improved
sales mix; increased sales of the higher margin DVS product line
and lower manufacturing costs for certain HAS products. These
positive factors were offset by sales of CMTS products during
the same period and increased CMTS reserve for excess and
obsolete inventory.
During 2005 we anticipate further decreases in our ASPs and
continued pressure on our HAS margins. Consequently, we continue
to focus on improving sales of higher margin products and
reducing product manufacturing costs for all our products, but
most particularly for our HAS products. We are now partnering
with contract manufacturers in Asia and the U.S. for our
HAS and DVS products, respectively, which may provide us with
more competitive component pricing, economies of scale and
improved manufacturing capabilities. In addition, we are
currently evaluating possible outsourcing partnerships for
certain of our supply chain functions, with the objective of
increasing our focus on our core competencies, reducing our
costs, and
21
leveraging our target partners capabilities. To the extent
that we are successful in shifting our product mix to higher
margin DVS product revenues, we expect our margins to increase.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2004 |
|
2003 |
|
2004/2003 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Research and development
|
|
$ |
33,959 |
|
|
$ |
42,839 |
|
|
|
(21 |
)% |
Sales and marketing
|
|
$ |
24,145 |
|
|
$ |
26,781 |
|
|
|
(10 |
)% |
General and administrative
|
|
$ |
11,216 |
|
|
$ |
12,127 |
|
|
|
(8 |
)% |
Research and Development Research and development
expenses consist primarily of personnel costs, internally
designed prototype material expenditures, and expenditures for
outside engineering consultants, equipment and supplies required
in developing and enhancing our products. Research and
development expenses decreased $8.9 million or 21% to
$34.0 million or 23% of revenue in the year ended
December 31, 2004 from $42.8 million or 32% of revenue
in 2003. The $8.9 million decrease in research and
development expenses was attributable to $4.0 million of
reductions in employee related expenses and $0.5 million in
depreciation and amortization. The decrease in research and
development expense also included reductions of
$0.5 million in expenses for outside engineering
consultants, $2.5 million of reductions in materials costs
incurred to develop prototypes, and $1.4 million in other
costs as a result of the reduction in research and development
personnel for CMTS product line. We believe it is critical to
continue to make significant investments in research and
development to create innovative technologies and products that
meet the current and future requirements of our customers.
Accordingly, we intend to continue our investment in research
and development although at slightly lower levels. In connection
with our ongoing restructuring activities, we currently expect
research and development expenses to continue to decrease in
2005.
Sales and Marketing Sales and marketing expenses consist
primarily of personnel costs, including salaries, commissions
for sales, marketing and support personnel, and costs related to
trade shows, consulting and travel. Sales and marketing expenses
decreased by $2.6 million or 10% to $24.1 million or
16% of revenue in the year ended December 31, 2004 from
$26.8 million or 20% of revenue in 2003. The largest
components of the decrease in sales and marketing expenses were
$2.5 million related to savings realized from subleasing
our corporate jet, $0.9 million of decreased travel and
facilities costs, and $0.4 million of reduction in
depreciation and amortization. These savings were offset by
increased expenses of $1.1 million for outside consultants.
In connection with our ongoing restructuring activities, we
currently expect sales and marketing expenses to continue to
decrease in 2005.
General and Administrative General and administrative
expenses consist primarily of personnel costs of administrative
officers and support personnel, travel expenses and legal,
accounting and consulting fees. General and administrative
expenses decreased by $0.9 million or 8% to
$11.2 million or 7% of revenue in the year ended
December 31, 2004 from $12.1 million or 9% of revenue
in 2003. The decrease was primarily due to $2.0 million in
reduced employee expenses due to lower headcount, partially
offset by an increase of $0.4 million attributable to
executive recruitment costs, $1.7 million of decreased
spending for facilities related to the restructuring plans and a
decrease of $0.8 million depreciation and amortization
costs. In connection with our ongoing restructuring activities,
we currently expect general and administrative expenses to
continue to decrease in 2005.
22
Restructuring Charges, Executive Severance and Asset
Write-offs
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Restructuring charges
|
|
$ |
6,792 |
|
|
$ |
2,745 |
|
Executive severance
|
|
|
3,451 |
|
|
|
|
|
Long-lived assets written-off
|
|
|
2,393 |
|
|
|
417 |
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,636 |
|
|
|
3,162 |
|
Restructuring (recovery/change in estimate in prior year plans)
|
|
|
(1,477 |
) |
|
|
(359 |
) |
|
|
|
|
|
|
|
Restructuring charges, executive severance and asset write-offs
|
|
$ |
11,159 |
|
|
$ |
2,803 |
|
|
|
|
|
|
|
|
Restructuring During the 2004 year, we initiated a
series of restructuring plans approved by our board of directors
to bring operating expenses in line with our revenue levels and
to cease investment in our CMTS product line. In the first
quarter, we incurred restructuring charges in the amount of
$3.3 million of which $1.0 million was related to
employee termination costs, $0.9 million related to
termination costs for an aircraft lease, and $1.4 million
related to costs for excess leased facilities. Net charges
accrued under this first quarter plan, included estimated
sublease income from the aircraft and the excess leased
facilities. We incurred restructuring charges in the amount of
$1.1 million in the second quarter of 2004 related to
additional costs for excess leased facilities, which were
contemplated in the first quarter restructuring plan. In the
fourth quarter to further conform our expenses to revenue and to
cease investment in the CMTS product line, we initiated a third
restructuring plan that resulted in a charge in the amount of
$1.3 million related to employee terminations
In the second, third and fourth quarters of 2004, we
re-evaluated the first and second quarter 2004 restructuring
charges for the employee severance, excess leased facilities and
the aircraft lease termination. Based on market conditions,
changes in estimates provided by our broker, and the terms of
the aircraft sublease agreement, which we entered into in the
third quarter of 2004, we increased the restructuring charge for
the aircraft lease by a total of $1.0 million, the
facilities accrual was increased $0.3 million and employee
severance accrual was decreased by $0.2 million.
Net charges for the 2004 restructuring plans totaled
$6.8 million, comprised of $2.0 million for employee
terminations, $1.9 million in aircraft lease and
$2.9 million for leased facilities. A total of 168
employees worldwide or 40% of our workforce has been terminated.
We anticipate the remaining 2004 restructuring accrual, net of
the sublease income related to the aircraft, to be substantially
utilized for servicing operating lease payments through January
2007, and the remaining restructuring accrual related to excess
leased facilities to be utilized for servicing operating lease
payments or negotiating a buyout of operating lease commitments
through October 2009.
The amount of net charges accrued under the 2004 restructuring
plans assumes that we will successfully sublease excess leased
facilities. The reserve for the aircraft lease and excess leased
facilities approximates the difference between our current costs
for the aircraft and excess leased facilities and the estimated
income derived from subleasing, which is based on information
derived by our brokers that estimated real estate market
conditions as of the date of our implementation of the
restructuring plan and the time it would likely take to fully
sublease the excess leased facilities. Even though it is our
intent to sublease our interests in the excess facility at the
earliest possible time, we cannot determine with certainty a
fixed date by which such events will occur, if at all. In light
of this uncertainty, we will continue to periodically
re-evaluate and adjust the reserve, as necessary.
As of December 31, 2004, $3.3 million remained accrued
for all of the 2004 plans. This is comprised of
$0.6 million for employee termination, $0.7 million
for aircraft lease and $2.0 million for facilities.
23
During the first quarter of 2003, our board of directors
approved a restructuring plan (2003 Plan) to conform our
expenses to our revenue levels and to better position us for
future growth and eventual profitability. We incurred
restructuring charges in the amount of $2.7 million related
to employee termination costs as part of the 2003 Plan. As of
December 31, 2003, 81 employees had been terminated and we
had paid $2.7 million in termination costs. In the second
quarter of 2003, we reversed $86,000 of previously accrued
termination costs due to a change in estimate. At
December 31, 2004, no restructuring charges remained
accrued for the 2003 Plan.
During 2001, a restructuring plan (2001 Plan) was approved by
our board of directors and we incurred restructuring charges in
the amount of $12.7 million of which $1.8 million
remained accrued at December 31, 2004 for excess leased
facilities in Israel. During 2002, another restructuring plan
(2002 Plan) was approved by the board of directors, which
increased the reserve for excess leased facilities due to the
exiting of additional space within the same facility in Israel.
We incurred restructuring charges in the amount of
$3.6 million for the 2002 Plan. Improving real estate
market conditions in Israel in the early part of 2004 gave rise
to our improved tenant sublease assumptions thereby creating a
change in estimate in the 2001 Plan and 2002 Plans of
$1.5 million, leaving an accrual of $1.8 million at
December 31, 2004 for these plans.
The restructuring accrual as of December 31, 2004 for all
plans totals $5.1 million of which $0.6 million is
accrued for employee terminations, $0.7 million for
aircraft lease termination and $3.8 million for leased
facilities. The balance of the employee termination charges were
paid in the first quarter of 2005.
Executive Severance In June 2004, we entered into an
employment agreement with an executive officer. This executive
officer resigned effective as of October 1, 2004, and we
recorded a severance provision of $1.4 million related to
termination costs for this officer in the third quarter of 2004.
Most of the severance costs related to this officer were paid in
the fourth quarter of 2004 with nominal amounts for employee
benefits payable into the fourth quarter of 2005.
In June 2004, we entered into separation agreements with two
executive officers. One officer resigned in the second quarter
of 2004 and the other officer resigned in the third quarter of
2004. We recorded a severance provision of $1.7 million
related to termination costs for these officers in the second
quarter of 2004. Most of the severance costs were paid in the
third quarter of 2004 with nominal amounts for employee benefits
payable through the third quarter of 2005.
In August 2004, we entered into an employment agreement with
another executive officer. The executive officer resigned
effective as of December 31, 2004. We recorded a severance
provision of $403,000 related to termination costs for this
officer in the fourth quarter of 2004. Most of the severance
costs related to this officer were paid in the first quarter of
2005 with nominal amounts for employee benefits payable into the
fourth quarter of 2005.
Asset Write-offs As a result of CMTS product line
restructuring activities in 2004, we recognized a fixed asset
impairment charge of $2.4 million. The impairment charge
reflects a write-down of the assets carrying value to a fair
value based on a third party valuation. In connection with our
restructuring activities in 2003, we wrote-off $0.4 million
of fixed assets which were determined to have no remaining
useful life.
Non-operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2004 |
|
2003 |
|
2004/2003 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Interest income
|
|
$ |
1,982 |
|
|
$ |
2,917 |
|
|
|
(32 |
)% |
Interest expense
|
|
$ |
(3,294 |
) |
|
$ |
(3,279 |
) |
|
|
0 |
% |
Other income
|
|
$ |
1,566 |
|
|
$ |
2,424 |
|
|
|
(35 |
)% |
Interest Income Interest income decreased 32% to
$2.0 million in 2004 compared to $2.9 million in 2003.
The decrease in interest income was primarily due to lower
invested average cash balances due to usage of cash for
operations, restructuring and management severances.
24
Interest Expense Interest expense, which related
primarily to interest on our Notes due in 2007, remained
constant at $3.3 million during 2004 compared to
$3.3 million in 2003.
Other Income Other income is generally comprised of
realization of foreign currency transactions and realized gains
or losses on investments. Other income of $1.6 million in
2004 is primarily comprised a gain on the sale of certain
foreign subsidiaries.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Income tax (expense) benefit
|
|
$ |
76 |
|
|
$ |
(316 |
) |
We have generated losses since our inception. In 2004 we
recorded an income tax benefit of $76,000 and in 2003 we
recorded an income tax expense of $316,000, which was related
primarily to foreign taxes. The current year foreign tax expense
of approximately $0.3 million is offset by a tax benefit
resulting principally from the reversal of tax accruals due to
the sale of certain subsidiaries.
Comparison of the years ended December 31, 2003 and
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2003 |
|
2002 |
|
2003/2002 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues
|
|
$ |
133,485 |
|
|
$ |
129,403 |
|
|
|
3 |
% |
Revenues consist primarily of sales of products to new and
existing customers providing broadband services. Prior to
December 31, 2002, we operated primarily in two principal
operating segments: Cable Broadband Access Systems (Cable) and
Telecom Carrier Access Systems (Telecom). Beginning in 2003, the
Telecom segment no longer met the quantitative threshold for
disclosure and we operated as one business segment.
Our revenues increased 3% to $133.5 million for the year
ended December 31, 2003 from $129.4 million in 2002,
primarily due to increased sales of DOCSIS CMTS and HAS
products, particularly in the second half of 2003. The revenue
increase derived from increased sales of DOCSIS CMTS and HAS
products was partially offset by declining sales of our
proprietary S-CDMA, CMTS and HAS products and Telecom products.
Revenues by Groups of Similar Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2003 |
|
2002 |
|
2003/2002 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMTS
|
|
$ |
47,486 |
|
|
$ |
28,159 |
|
|
|
69 |
% |
|
HAS
|
|
|
64,808 |
|
|
|
69,469 |
|
|
|
(7 |
)% |
|
DVS
|
|
|
17,710 |
|
|
|
20,832 |
|
|
|
(15 |
)% |
|
Other
|
|
|
3,481 |
|
|
|
10,943 |
|
|
|
(68 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
133,485 |
|
|
$ |
129,403 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
CMTS product revenues increased 69% in 2003 compared to 2002,
due to increased deployment of our DOCSIS products into new
markets, primarily in the U.S.
HAS product revenues decreased 7% in 2003 compared to 2002, due
to a continuing decline in ASPs, partially offset by increases
in the volume of modem sales. The number of DOCSIS modems sold
increased from 0.4 million units in 2002 to
1.2 million units in 2003. The intensely competitive nature
of the market for broadband products resulted in significant
price erosion. HAS revenues also decreased due to the shift in
product mix from our higher-priced proprietary S-CDMA modems to
our lower-priced DOCSIS modems. The number of S-CDMA modems sold
decreased from 0.4 million units in 2002 to
0.1 million units in 2003.
Revenues from video products decreased 15% in 2003 compared to
2002, due to decreased sales to U.S. MSOs. We attribute
this decline to lower capital spending by MSOs, primarily in the
first half of 2003.
Other product revenues decreased 68% in 2003 compared to 2002,
due to decreased sales of our legacy Telecom products.
Revenues by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2003 |
|
2002 |
|
2003/2002 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Revenues by geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
74,341 |
|
|
$ |
41,150 |
|
|
|
81 |
% |
|
Americas excluding United States
|
|
|
3,713 |
|
|
|
20,530 |
|
|
|
(82 |
)% |
|
EMEA excluding Israel
|
|
|
17,635 |
|
|
|
11,381 |
|
|
|
55 |
% |
|
Israel
|
|
|
7,038 |
|
|
|
8,283 |
|
|
|
(15 |
)% |
|
Asia excluding Japan
|
|
|
9,575 |
|
|
|
11,845 |
|
|
|
(19 |
)% |
|
Japan
|
|
|
21,183 |
|
|
|
36,214 |
|
|
|
(42 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
133,485 |
|
|
$ |
129,403 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the United States increased 81% to
$74.3 million in 2003, up from $41.2 million in 2002,
due to increased sales of DOCSIS 2.0 CMTSs, modems and video
products to U.S. MSOs. During 2003, we emphasized sales to
our U.S., EMEA, Japanese and other Asian customers while placing
a lower emphasis on other locations such as Canada, Israel and
South America.
Significant Customers
Three customers, Adelphia, Cross Beam Networks and Comcast,
(22%, 16% and 13%, respectively) each accounted for more than
10% of our total revenues for the year ended December 31,
2003. One customer, Cross Beam Networks, accounted for 28% of
our total revenues for the year ended December 31, 2002.
Related Party Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, |
|
|
|
|
|
|
Annual % Change |
|
|
2003 |
|
2002 |
|
2003/2002 |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Related party revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rogers revenues
|
|
$ |
1,453 |
|
|
$ |
8,040 |
|
|
|
(82 |
)% |
Harmonic revenues
|
|
|
3,241 |
|
|
|
1,057 |
|
|
|
207 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total related party revenues
|
|
$ |
4,694 |
|
|
$ |
9,097 |
|
|
|
(48 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party revenues decreased 48% in 2003 compared to 2002.
Related party revenues in 2002 included revenues from Rogers and
Harmonic. Alek Krstajic, a member of our board of directors, was
the
26
Senior Vice President of Interactive Services, Sales and Product
Development for Rogers until January 2003. Effective in April
2003, Rogers was no longer a related party to us. Consequently,
revenues attributable to Rogers are only classified as related
party revenues in the first quarter of 2003. Lewis Solomon,
another member of our board of directors, is a member of the
board of directors of Harmonic. All revenues attributable to
Harmonic were included in related party revenues in 2003 and
2002. The decline in related party revenues was primarily due to
the classification of revenues attributable to Rogers as general
revenues instead of related party revenues after the first
quarter of 2003, as well as lower overall sales to Rogers,
offset by an increase of sales to Harmonic in 2003. None of our
related parties is a supplier to us.
In December 2001, we entered into co-marketing arrangements with
Shaw and Rogers. We paid $7.5 million to Shaw and
$0.9 million to Rogers, and recorded these amounts as other
current assets. In July 2002, we began amortizing these prepaid
assets and charging them against related party revenues in
accordance with EITF 01-09, Accounting for
Consideration given by a Vendor to a Customer or Reseller in
Connection with the Purchase or Promotion of the Vendors
Products. We charged $1.4 million per quarter of the
amortization of these assets against total revenues through
December 31, 2003. Amounts charged against total revenues
in the year ended December 31, 2002 and December 31,
2003, totaled approximately $2.8 million and
$5.6 million, respectively. Of the co-marketing
amortization charged to total revenues, $0.15 million and
$0.3 million were charged to related party revenues in the
years ended 2003 and 2002, respectively.
Cost of Goods Sold and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
December 31, | |
|
|
|
|
| |
|
Annual % | |
|
|
2003 | |
|
2002 | |
|
Change 2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Cost of product revenues
|
|
$ |
99,261 |
|
|
$ |
92,497 |
|
|
|
7 |
% |
Cost of related party revenues
|
|
|
1,773 |
|
|
|
8,452 |
|
|
|
(79 |
)% |
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
$ |
101,034 |
|
|
$ |
100,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
32,451 |
|
|
$ |
28,454 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
In 2003, cost of goods sold was approximately 76% of revenues
compared to 78% of revenues in 2002. Cost of goods sold in 2003
and 2002 included the benefit of reversals of approximately
$10.0 million and $15.3 million, respectively, in
special charges taken in 2001 and 2000 for vendor cancellation
charges and inventory previously reserved for excess and
obsolete. We reversed those provisions as we were able to sell
inventory originally considered to be in excess and obsolete. In
addition, we were able to negotiate downward certain vendor
cancellation claims to terms more favorable to us. Additionally,
during 2003 and 2002, we recorded inventory charges of
$4.1 million and $6.1 million, respectively, to reduce
some of our inventory due to excess and obsolescence and to
reduce the inventory to the lower of cost or market value in
2002 as ASPs fell below the cost of these products and to record
charges for excess and obsolete inventory.
In 2003, related party cost of revenues decreased compared to
2002 due to increased sales of our higher margin DVS products to
Harmonic in 2003 as well as fewer sales of our lower margin HAS
products to Rogers classified as related party revenue in 2003
compared to 2002. Additionally, in the first quarter of 2003, we
sold $0.8 million of software to Rogers, which was
classified as related party revenues, with no cost of related
party revenues associated with this sale.
Our gross profit increased 14% to $32.5 million or 24% of
sales in the year ended December 31, 2003 compared to
$28.5 million, or 22% of sales in 2002. The increase in our
gross profit was primarily related to an improved sales mix,
with higher margin video and CMTS products constituting a larger
proportion of sales particularly in the second half of 2003, and
improved product manufacturing costs for modems.
27
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
December 31, | |
|
|
|
|
| |
|
Annual % Change | |
|
|
2003 | |
|
2002 | |
|
2003/2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Research and development
|
|
$ |
42,839 |
|
|
$ |
58,696 |
|
|
|
(27 |
)% |
Sales and marketing
|
|
$ |
26,781 |
|
|
$ |
35,704 |
|
|
|
(25 |
)% |
General and administrative
|
|
$ |
12,127 |
|
|
$ |
14,715 |
|
|
|
(18 |
)% |
Research and Development Research and development
expenses decreased 27% to $42.8 million or 32% of sales in
the year ended December 31, 2003 from $58.7 million or
45% of sales in 2002. The $15.9 million decrease in
research and development expenses was attributable to
$4.2 million of reductions in employee related expenses,
partially offset by an increase of $0.1 million
attributable to an executive incentive plan implemented in 2003.
The decrease in research and development expense also included
reductions of $0.6 million of outside engineering
consultants and $7.1 million of reductions in purchases of
materials, costs incurred to develop prototypes, and other
research and development expenses. Additionally, we have reduced
research and development efforts by $4.1 million due to the
elimination of our Telecom-related products.
Sales and Marketing Sales and marketing expenses
decreased by $8.9 million to $26.8 million or 20% of
sales in the year ended December 31, 2003 from
$35.7 million or 28% of sales in 2002. The decrease in
sales and marketing expenses was primarily due to
$5.2 million in reduced employee expenses due to lower
headcount, partially offset by an increase of $0.3 million
attributable to an executive incentive plan. The decrease in
sales and marketing expenses also included $0.8 million of
decreased spending for outside consultants, $0.9 million of
decreased travel costs, and $2.3 million of overall sales
and marketing cost reductions.
General and Administrative General and administrative
expenses decreased by $2.6 million or 18% of sales to
$12.1 million or 9% of sales in the year ended
December 31, 2003 from $14.7 million or 11% of sales
in 2002. The decrease was primarily due to $1.4 million in
reduced employee expenses due to lower headcount, partially
offset by an increase of $0.4 million attributable to an
executive incentive plan, $2.8 million of decreased
spending for outside consultants, partially offset by
$0.3 million of severance expense related to the
termination of an executive officer and $0.9 million of
overall general and administrative cost increases.
Restructuring Charges and Asset Write-offs
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Restructuring charges
|
|
$ |
2,745 |
|
|
$ |
3,641 |
|
Restructuring (recovery)
|
|
|
(359 |
) |
|
|
|
|
Long-lived assets written-off
|
|
|
417 |
|
|
|
1,309 |
|
Intangible assets written off
|
|
|
|
|
|
|
3,972 |
|
|
|
|
|
|
|
|
Restructuring charges and asset write-offs
|
|
$ |
2,803 |
|
|
$ |
8,922 |
|
|
|
|
|
|
|
|
Restructuring Charges During the first quarter of 2003,
we initiated a restructuring program to align our expenses to
our revenue levels and to better position us for future growth
and eventual profitability. We incurred restructuring charges in
the amount of $2.7 million related to employee termination
costs. At December 31, 2003, no restructuring charges
remain accrued, 81 of our employees have been terminated under
the 2003 restructuring plan, and we paid $2.7 million in
termination costs. In the second and third quarter of 2003, we
reversed $0.4 million of previously accrued termination
costs related to this restructuring.
In the third quarter of 2002, we initiated a restructuring
program to conform our expense to our revenue levels and to
better position us for future growth and eventual profitability.
As part of this program, we restructured our worldwide
operations including a worldwide reduction in workforce and the
consolidation of
28
excess facilities. We incurred additional restructuring charges
of $3.6 million in 2002. Of the total restructuring charge,
$2.3 million was related to employee termination costs. The
remaining $1.3 million related primarily to costs for
excess leased facilities. During 2002, 153 employees had been
terminated under the 2002 restructuring plan, and we made cash
payments of $2.2 million against the restructuring accrual.
Additionally, in 2002, we reclassified $0.1 million from
employee termination costs to excess leased facilities costs.
In 2001 we incurred restructuring charges of $12.7 million.
Of the total restructuring charges recorded, $3.2 million
related to employee termination costs covering 293 technical,
production, and administrative employees. The remaining
$9.5 million of restructuring charges related primarily to
costs for excess leased facilities. During 2003, we made cash
payments and recoveries of $1.9 million against the
restructuring accrual. As of December 31, 2003,
restructuring charges of $3.3 million remained accrued,
primarily related to excess facility costs. During 2003, we
reversed $0.3 million of previously accrued termination
costs due to a change in estimate.
Asset Write-offs In connection with our restructuring in
2003, we wrote-off $0.4 million of fixed assets which were
determined to have no remaining useful life. In connection with
our restructuring in 2002, we wrote-off $1.3 million of
fixed assets which were determined to have no remaining useful
life.
We adopted SFAS Goodwill and Other Intangible
Assets, (SFAS 142) on January 1, 2002. We tested
goodwill for impairment using the two-step process prescribed in
SFAS 142. The first step is a screen for potential
impairment, while the second step measures the amount of the
impairment, if any. We completed the initial goodwill impairment
review as of the beginning of 2002, and found no impairment. Due
to a difficult economic environment and heightened price
competition in the modem and telecom businesses during the three
months ended June 30, 2002, we experienced a significant
drop in our market capitalization, and therefore proceeded to
perform an interim test to measure goodwill and intangible
assets for impairment at June 30, 2002. Based on our
forecast, the estimated undiscounted future cash flows from the
use of the goodwill would be less than its carrying amount. We
determined that the outcome of this test reflected that the fair
value of the goodwill was zero. This resulted in a non-cash
charge of $4.0 million to write off the remaining goodwill
in 2002, of which $3.0 million was related to the Cable
segment and $1.0 million was related to the Telecom segment.
Non-operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
|
|
December 31, | |
|
|
|
|
| |
|
Annual % Change | |
|
|
2003 | |
|
2002 | |
|
2003/2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
Interest income
|
|
$ |
2,917 |
|
|
$ |
6,838 |
|
|
|
(57 |
)% |
Interest expense
|
|
$ |
(3,279 |
) |
|
$ |
(6,174 |
) |
|
|
(47 |
)% |
Other expense
|
|
$ |
(2,424 |
) |
|
$ |
(4,145 |
) |
|
|
(42 |
)% |
Gain on early retirement of debt
|
|
$ |
|
|
|
$ |
49,089 |
|
|
|
|
|
Interest Income Interest income decreased 57% to
$2.9 million in 2003 compared to $6.8 million in 2002.
The decrease in interest income was primarily due to lower
invested average cash balances due to the use of cash to
repurchase Convertible Subordinated Notes (Notes) in 2002 and
usage of cash for operations, as well as lower interest rates.
Interest Expense Interest expense, which related
primarily to interest on our Notes due in 2007, decreased 47% to
$3.3 million during 2003 compared to $6.2 million in
2002, primarily due to the repurchase of $109.1 million of
our Notes in 2002.
Other Expense Other expense is generally comprised of
realization of foreign currency transactions and realized gains
or losses on investments. Other expense of $2.4 million in
2003 was primarily comprised of a $0.9 million gain on the
sale of the Miniplex product line and related inventory to
Verilink, a $0.6 million reversal of a liability associated
with an overseas government grant which is now satisfied, and
$0.7 million
29
from a favorable legal settlement. Other expense in 2002
included a write-down of a $4.5 million long-term
investment.
Gain on early retirement of debt In 2002, we repurchased
approximately $109.1 million of our Notes for
$57.6 million in cash, resulting in a gain included in
operations of approximately $49.1 million net of related
unamortized issuance costs of $2.4 million. We did not
repurchase any Notes during 2003.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Income tax expense
|
|
$ |
(316 |
) |
|
$ |
(238 |
) |
We have generated losses since our inception. In 2003 and 2002,
we recorded an income tax expense of $316,000 and $238,000,
respectively, which was related primarily to foreign taxes.
Litigation
See Item 3 Legal Proceedings for a
discussion of litigation in which we are involved.
Off-Balance Sheet Financings and Liabilities
Other than lease commitments and unconditional purchase
obligations incurred in the normal course of business, we do not
have any off-balance sheet financing arrangements or
liabilities, guarantee contracts, retained or contingent
interests in transferred assets or any obligation arising out of
a material variable interest in an unconsolidated entity. We do
not have any majority-owned subsidiaries that are not included
in the consolidated financial statements.
Liquidity and Capital Resources
At December 31, 2004, we had approximately
$43.2 million in cash and cash equivalents and
$54.5 million in short-term investments.
Cash used in operating activities for the year ended
December 31, 2004 decreased to $39.5 million compared
to $68.4 million used in 2003. In 2004, significant uses of
cash from operating activities included $36.5 million net
loss from operations, $18.2 million decrease in accounts
payable, $2.3 million of settlement and payment of vendor
cancellation liabilities offset by a decrease of
$10.1 million in accounts receivable, an increase of
$12.8 million in inventory, offset by a $12.0 million
inventory provision. In 2003, significant uses of cash from
operating activities included $50.4 million loss from
operations, a $12.6 million increase in accounts
receivable, $12.3 million of settlement and payment of
vendor cancellation liabilities, and a $12.2 million
increase in gross inventory. Accounts receivable increased as
our sales in the fourth quarter of 2003 increased when compared
to the same period in 2002.
Cash provided by investing activities in 2004 was
$50.7 million compared to cash used in investing activities
of $23.3 million in 2003. Investing activities consisted
primarily of net sales of short-term investments and
$2.7 million and $3.8 million used in the purchases of
property and equipment in 2004 and 2003, respectively. Cash
provided by investing activities increased in 2004 due to our
usage of investments to fund operations and movement to cash and
cash equivalents from short-term investments.
Cash provided by financing activities was $1.6 million in
2004 compared to $3.7 million of cash provided by financing
activities in 2003. In 2004 we received proceeds from the
exercise of stock options and the sale of shares of common stock
through our Employee Stock Purchase Plan of $1.7 million
compared to $3.7 million in 2003.
In July 2000, we issued $500 million of Notes, resulting in
net proceeds to us of approximately $484.4 million. The
Notes are our general unsecured obligation and are subordinated
in right of payment to all
30
of our existing and future senior indebtedness and to all of the
liabilities of our subsidiaries. The Notes are convertible into
shares of our common stock at a conversion price of
$84.01 per share at any time on or after October 24,
2000 through maturity on August 2007, unless previously redeemed
or repurchased. Interest is payable semi-annually. Debt issuance
costs related to the Notes were approximately $15.6 million.
Through December 31, 2004, we had repurchased approximately
$434.9 million of the Notes. No Notes were repurchased in
2004 or 2003.
We believe that our current cash balances will be sufficient to
satisfy our cash requirements for at least the next
12 months. As noted previously, we are working to achieve
profitability. To do so, we will need to increase revenues,
primarily through sales of more profitable products, and
decrease costs. Starting in the first quarter of 2004 and
continuing throughout 2004, we initiated a series of worldwide
reductions in force of approximately 168 employees, or 40% of
the workforce, consolidations of certain facilities, and
reductions or eliminations of discretionary costs and programs.
These statements are forward-looking in nature and involve risks
and uncertainties. Actual results may vary as a result of a
number of factors, including those discussed under the risk
factor Our Operating Results May Fluctuate below and
elsewhere. We may need to raise additional funds in order to
support more rapid expansion, develop new or enhanced services,
respond to competitive pressures, acquire complementary
businesses or technologies or respond to unanticipated
requirements. We may seek to raise additional funds through
private or public sales of securities, strategic relationships,
bank debt, and financing under leasing arrangements or
otherwise. If additional funds are raised through the issuance
of equity securities, the percentage ownership of our current
stockholders will be reduced, stockholders may experience
additional dilution or such equity securities may have rights,
preferences or privileges senior to those of the holders of our
common stock. We cannot assure that additional financing will be
available on acceptable terms, if at all. If adequate funds are
not available or are not available on acceptable terms, we may
be unable to continue operations, develop our products, take
advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could have a
material adverse effect on our business, financial condition and
operating results.
On October 7, 2003, we filed a registration statement on
Form S-3 with the SEC. This shelf registration statement,
which was declared effective by the SEC on November 4,
2003, will allow us to issue various types of securities,
including common stock, preferred stock, debt securities and
warrants to purchase common stock from time to time up to an
aggregate of $125.0 million, subject to market conditions
and our capital needs.
Contractual Obligations
The following summarizes our contractual obligations at
December 31, 2004, and the effect such obligations are
expected to have on our liquidity and cash flows in future
periods (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
1-3 | |
|
4-5 | |
|
After | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Unconditional Purchase Obligations
|
|
$ |
30.0 |
|
|
$ |
30.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long Term Debt and other Long Term Obligations
|
|
|
67.2 |
|
|
|
0.1 |
|
|
|
65.8 |
|
|
|
|
|
|
|
1.3 |
|
Facilities Operating Lease Obligations
|
|
|
18.3 |
|
|
|
6.0 |
|
|
|
6.5 |
|
|
|
5.6 |
|
|
|
0.2 |
|
Aircraft Operating Lease Obligations
|
|
|
3.1 |
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Commitments
|
|
$ |
118.6 |
|
|
$ |
37.6 |
|
|
$ |
73.9 |
|
|
$ |
5.6 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have unconditional purchase obligations to certain of our
suppliers that support our ability to manufacture our products.
The obligations require us to purchase minimum quantities of the
suppliers products at a specified price. As of
December 31, 2004, we had approximately $30.0 million
of purchase obligations, of which $0.5 million is included
in the Consolidated Balance Sheets as accrued vendor
cancellation charges, and the remaining $29.5 million is
attributable to open purchase orders. The remaining open
purchase order obligations are expected to become payable at
various times through 2005.
31
Other commercial commitments, primarily required to support
operating leases, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per |
|
|
|
|
Period |
|
|
Total | |
|
|
|
|
Amounts | |
|
Less than | |
|
1-3 | |
|
4-5 | |
|
Over |
|
|
Committed | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years |
|
|
| |
|
| |
|
| |
|
| |
|
|
Deposits
|
|
$ |
7.5 |
|
|
$ |
0.0 |
|
|
$ |
7.5 |
|
|
$ |
|
|
|
$ |
|
|
Standby Letters of Credit
|
|
|
0.5 |
|
|
|
0.0 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Commitments
|
|
$ |
8.0 |
|
|
$ |
|
|
|
$ |
7.7 |
|
|
$ |
0.3 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2002, we entered into an operating lease arrangement to lease
a corporate aircraft. This lease arrangement was secured by a
$9.0 million letter of credit. The letter of credit was
reduced to $7.5 million in February 2003. During 2004 the
$7.5 million letter of credit was converted to a cash
deposit. This lease commitment is included in the table above.
In March 2004, in connection with our worldwide restructuring,
we notified the lessor of our intentions to locate a purchaser
for our remaining obligations under this lease. In August 2004,
we entered into a 28 month aircraft sublease terminating on
December 31, 2006 From time to time, our Chairman of the
Board, Dr. Rakib, used the aircraft for personal use and
the charge is reported by him as compensation. Dr. Rakib
did not use the aircraft for personal use in fiscal 2004 and was
charged approximately $62,000 for personal aircraft usage during
fiscal 2003.
Critical Accounting Policies
We consider certain accounting policies related to our use of
estimates, revenue recognition, bad debt reserves, inventory
valuation, impairment of long-lived assets, warranty returns,
restructuring, income taxes and contingencies to be critical
policies due to the estimation processes involved in each. We
discuss each of our critical accounting policies, in addition to
certain less significant accounting policies, with senior
members of management and the audit committee, as appropriate.
Use of Estimate The preparation of the consolidated
financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States
requires us to establish accounting policies that contain
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. We
base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. These policies
include:
|
|
|
|
|
revenue recognition; |
|
|
|
the allowance for doubtful accounts, which impacts revenue; |
|
|
|
the valuation of exposures associated with the contract
manufacturing operations and estimating future warranty costs,
which impact cost of good sold and gross margins; and |
|
|
|
the valuation of certain long-lived assets, especially goodwill
and other purchased intangible assets, which has resulted in
impairment, which impacts operating expenses. |
We employ other equally important accounting policies and
practices, which may not require us to make significant
estimates or assumptions. Despite our intention to establish
accurate estimates and assumptions, actual results could differ
from those estimates under different assumptions or conditions.
Revenue Recognition We recognize revenue in accordance
with SEC Staff Accounting Bulletin No. 104
Revenue Recognition (SAB 104). SAB 104
requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services were
rendered; (3) the selling price is fixed or determinable;
and (4) collectibility is reasonably assured.
Contracts and customer purchase orders are used to determine the
existence of an arrangement. Delivery occurs when product is
delivered to a common carrier. Certain of our products are
delivered on an FOB
32
destination basis. We defer our revenue associated with these
transactions until the delivery has occurred to the
customers premises. We assess whether the fee is fixed or
determinable based on the payment terms associated with the
transaction and whether the sales price is subject to
adjustment. We assess collectibility based primarily on the
creditworthiness of the customer as determined by credit checks
and analysis, as well as the customers payment history.
Should there be changes to managements judgments, revenue
recognized for any reporting period could be adversely affected.
We sell our products directly to broadband service providers,
and to a lesser extent resellers. Revenue arrangements with
resellers are recognized when product is shipped to the
resellers as we do not grant return rights beyond those provided
by the warranty.
Our service revenue, which is sold separately from product lines
represented approximately 2.4% and 1.3% of revenue for the year
ended December 31, 2004 and 2003, respectively. It is
generated from service arrangements for product support, which
is recognized ratably over the term of the arrangement,
typically one year. Product support includes internet access to
technical content, software updates, as well as internet and
telephone access to technical support personnel.
Allowance for Doubtful Accounts We perform ongoing credit
evaluations of our customers and generally require no
collateral. We evaluate our trade receivables based upon a
combination of factors. Credit losses have historically been
within managements expectations. When we become aware of a
customers inability to pay, such as in the case of
bankruptcy or a decline in the customers operating results
or financial position, we record an allowance to reduce the
related receivable to an amount we reasonably believe is
collectible. We maintain an allowance for potentially
uncollectible accounts receivable based on an assessment of
collectibility. We assess collectibility based on a number of
factors, including history, the number of days an amount is past
due (based on invoice due date), changes in credit ratings of
customers, current events and circumstances regarding the
business of our clients customers and other factors that
we believe are relevant. If circumstances related to a specific
customer change, our estimates of the recoverability of
receivables could be further reduced. In 2004, we experienced
better than expected collections of $2.1 million offset by
write-offs of $201,000. At December 31, 2004 and 2003, the
allowance for potentially uncollectible accounts was
$1.3 million and $3.6 million, respectively.
Inventory Valuation We record losses on commitments to
purchase inventory in accordance with Statement 10 of
Chapter 4 of Accounting Release Bulletin No. 43. Our
policy for valuation of inventory and commitments to purchase
inventory, including the determination of obsolete or excess
inventory, requires us to perform a detailed assessment of
inventory at each balance sheet date which includes a review of,
among other factors, an estimate of future demand for products
within specific time horizons, generally six months or less as
well as product lifecycle and product development plans. Given
the rapid technological change in the technology and
communications equipment industries as well as significant,
unpredictable changes in capital spending by our customers, we
believe that assessing the value of inventory using generally a
six month time horizon is appropriate.
The estimates of future demand that we use in the valuation of
inventory are the basis for the revenue forecast, which is also
consistent with our short-term manufacturing plan. Based on this
analysis, we reduce the cost of inventory that we specifically
identify and consider obsolete or excessive to fulfill future
sales estimates. We define excess inventory as inventory that
will no longer be used in the manufacturing process. Excess
inventory is generally defined as inventory in excess of
projected usage, and is determined using our best estimate of
future demand at the time, based upon information then available.
We purchase components from a variety of suppliers and use
several contract manufacturers to provide manufacturing services
for our products. During the normal course of business, in order
to manage manufacturing lead times (often ranging from three to
six months) and to help ensure adequate component supply, we
enter into agreements with contract manufacturers and suppliers
that either allow them to procure inventory based upon criteria
as defined by us or that establish the parameters defining our
component supply
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requirements. If we were to curtail or cease production of
certain products or terminate these agreements, we may be liable
for vendor cancellation charges.
We accrue for vendor cancellation charges (which increase cost
of goods sold) which represent managements estimate of our
financial exposure to vendors should our management curtail or
cease production of certain products or terminate a vendor or
supplier agreement. Estimates of exposure are determined using
vendor inventory data. Should we change our short-term
manufacturing plans such that further products or components
would no longer be used, additional vendor cancellation charges
may occur. At December 31, 2004, accrued vendor
cancellation charges were $0.5 million which are expected
to become payable in the next three to six months. From time to
time we have been able to reverse portions of our vendor
cancellation accrual as we were able to negotiate downward
certain vendor cancellation charges. Such reversals of vendor
cancellation charges cause a decrease in cost of goods sold in
the period during which such charges are reversed. For the
twelve months ended December 31, 2004, we reversed
approximately $2.3 million of vendor cancellation charges
as a result of consumed inventory and favorable negotiations
with vendors.
Impairment of Long-Lived Assets Our long-lived assets
have principally included long-term investments, goodwill and
other intangible assets. Our estimate of the fair value of the
long-term investments was dependent on the performance of the
companies in which we have invested, as well as the volatility
inherent in the external markets for these investments. If the
companies business forecasts were not met, we had to
record additional impairment charges. At December 31, 2003,
all of our long-term investments, goodwill and other intangible
assets had been written-off and we had no such assets recorded
on the Consolidated Balance Sheets at December 31, 2004 and
2003
Warranty Reserves We provide a standard warranty for most
of our products, ranging from one to five years from the date of
purchase. We provide for the estimated cost of product
warranties at the time revenue is recognized. Our warranty
obligations are affected by product failure rates, material
usage and service delivery costs incurred in correcting a
product failure. Our estimate of costs to service our warranty
obligations is based on historical experience and our
expectation of future conditions. Should actual product failure
rates, material usage or service delivery costs differ from our
estimates, revision to the warranty liability would be required,
resulting in decreased gross profits.
Restructuring and Other Related Charges During 2004, 2003
and 2002 we implemented restructuring programs to focus and
streamline our business and reduce operating expenses. In
connection with these programs, we reduced headcount, abandoned
facilities and wrote off inventory. As a result of these
actions, we recorded restructuring and other related charges
primarily consisting of cash severance payments made to
terminated employees, lease payments related to property
abandoned as a result of our facilities consolidation and lease
payments related to an aircraft lease. Each reporting period, we
review these estimates based on the execution of our
restructuring plans and changing market conditions, such as the
real estate market and other assumptions and, as needed, record
appropriate adjustments. To the extent that these assumptions
change, the ultimate restructuring expenses could vary.
Contingencies We are subject to proceedings, lawsuits and
other claims related to labor, acquisitions and other matters.
We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential
ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is made after
careful analysis of each individual issue. The required reserves
may change in the future due to new developments in each matter
or changes in approach such as a change in settlement strategy
in dealing with these matters, any of which may result in higher
net loss.
Taxes We determine our provision for income taxes using
the liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax effects of
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases. Future tax benefits of tax loss and credit
carryforwards are also recognized as deferred tax assets. We
evaluate the realizability of our deferred tax assets by
assessing the likelihood of future profitability and available
tax planning strategies that could be implemented to realize our
net deferred tax assets. The ultimate realization of our net
deferred tax assets will require profitability. We have assessed
the future profit plans and tax
34
planning strategies together with the years of expiration of
carryforward benefits, and have concluded that the deferred tax
assets will be not be currently realized and have recorded a
valuation allowance against the entire amount of the deferred
tax assets. Should our operating performance improve future
assessments could conclude that a reduction to the valuation
allowance will be needed to reflect deferred tax assets. In
addition, we operate within multiple taxing jurisdictions and
are subject to tax audits in these jurisdictions. These audits
can involve complex issues, which may require an extended period
of time to resolve. However, we believe we have made adequate
provision for income taxes for all years that are subject to
audit.
Impact of Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 123 (revised
2004) (SFAS 123(R)), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the
approach described in Statement 123. However,
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS 123(R) must be
adopted no later than July 1, 2005. Early adoption will be
permitted in periods in which financial statements have not yet
been issued. We expect to adopt SFAS 123(R) on July 1,
2005. A component of SFAS 123(R) includes one of the
following options: (a) modified-prospective method,
(b) the modified-retrospective method, restating all prior
periods or (c) the modified-retrospective method, restating
only the prior interim periods of 2005. A determination as to
which of the three options we will adopt will be made at a later
date.
As permitted by SFAS 123, we currently account for
share-based payments to employees using APB Opinion No 25s
intrinsic value method and, as such, generally recognize no
compensation expense for employee stock options. Accordingly,
the adoption of SFAS 123(R)s fair value method will
have a significant impact on our result of operations, although
it will have no impact on our overall financial position. The
impact of adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based
payments granted in the future. However, had we adopted
SFAS 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described
in the disclosure of pro forma net income and earnings per share
in Note 2 to our consolidated financial statements.
SFAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in periods after adoption. While we cannot estimate what those
amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), we have
not recognized any operating cash flows for such excess tax
deductions in any of the periods presented.
35
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 us.
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.
Risks Related to Our Business
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We have a history of losses and may continue to incur
losses in the future |
It is difficult to predict our future operating results. We
began shipping products commercially in June 1997, and we have
been shipping products in volume since the first quarter of
1998. As of December 31, 2004, we had an accumulated
deficit of approximately $1.0 billion. We believe that we
will continue to experience challenges in selling our products
at a profit and may continue to operate with net losses for the
foreseeable future. In the past few years, we experienced a
decrease in revenues compared to 2001 and 2000, which was, in
large part, due to the erosion of ASPs of our products due to
our transition from a proprietary platform to the DOCSIS
standards platform and a drop in CMTS sales volume. Although our
revenues increased throughout 2004 as compared to 2003 and 2003
compared to 2002, we still incurred losses of $36.5 million
and $50.4 million, respectively, in the twelve months ended
December 31, 2004 and 2003. As a result of the operating
deficiencies, we have had to use available cash and cash
equivalents to supplement the operation of our business. Cash
used in operating activities for the twelve months ended
December 31, 2004 was $39.5 million compared to
$68.4 million used in the same period in 2003.
Additionally, we generally have been unable to significantly
reduce our short-term expenses in order to compensate for
unexpected decreases in anticipated revenues or delays in
generating anticipated revenues. For example, we have fixed
commitments with some of our suppliers that require us to
purchase minimum quantities of their products at a specified
price irrespective of whether we can subsequently use such
quantities in our products. Further, we have experienced and
will likely continue to experience declining ASPs of our
products. We record an inventory charge to reduce our inventory
to the lower of cost or market if ASPs fall below the cost of
these products. In addition, we have significant operating lease
commitments for facilities and equipment that generally cannot
be cancelled in the short-term without substantial penalties.
Our business may be adversely affected by delays in or our
failure to, commercialize new products, or reduce the cost of
manufacturing our current products. Moreover, given the
conditions in the broadband equipment market, the profit
potential of our business remains unproven.
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We may experience fluctuations in our operating results
and face unpredictability in our future revenues |
Our quarterly revenues have fluctuated and are likely to
continue to fluctuate significantly in the future due to a
number of factors, many of which are outside our control.
Factors that affect our revenues include, among others, the
following:
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variations in the timing of orders and shipments of our products; |
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variations in the size of the orders by our customers and
pricing concessions on volume sales; |
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competitive market conditions; |
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unpredictable sales cycles; |
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new product introductions by competitors or by us; |
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delays in our introduction of new products; |
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delays in our introduction of added features to our products; |
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delays in the commercialization of products that are competitive
in the marketplace; |
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delays in our receipt of and cancellation of orders forecasted
by customers; |
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variations in capital spending budgets of cable operators and
other broadband service providers; |
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international conflicts, including the continuing conflict in
Iraq, and acts of terrorism and the impact of adverse economic,
market and political conditions worldwide; and |
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ability of our products to be qualified or certified as meeting
industry standards. |
Our quarterly results are affected by the gross margin we
achieve for the quarter relative to our gross revenues. A
variety of factors influence our gross margin for a particular
quarter, including, among others, the following:
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the sales mix of our products; |
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the volume of products manufactured; |
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the type of distribution channel through which we sell our
products; |
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the ASPs of our products; |
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the ability to manage excess and obsolete inventory; |
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delays in reducing the cost of our products; |
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the costs of manufacturing our products; and |
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the effectiveness of our cost reduction measures. |
We often recognize a substantial portion of our revenues in the
last month of the quarter. We establish our expenditure levels
for product development and other operating expenses based on
projected sales levels, and expenses are relatively fixed,
particularly in the short term. For example, a significant
percentage of these operating expenses are fixed due to
operating leases for our facilities and equipment. Also, we have
fixed commitments with some of our suppliers that require us to
purchase minimum quantities of their products at a specified
price. Because in the past, we have been unable to use all of
the products that we purchased from our suppliers, we have taken
vendor cancellation charges as a result of these fixed
commitments, and we may have to take additional charges in the
future if we are unable to use all of the products that we
purchase from our suppliers. As of December 31, 2004,
$30.0 million of purchase obligations were outstanding.
Accordingly, variations in timing of sales can cause significant
fluctuations in operating results. In addition, because a
significant portion of our business is derived from orders
placed by a limited number of large customers, the timing of
such orders can also cause significant fluctuations in our
operating results. Our expenses for any given quarter are
typically based on expected sales and if sales are below
expectations; our operating results may be adversely impacted by
our inability to adjust spending to compensate for the
shortfall. Moreover, our research and development expenses
fluctuate in response to new product development, and changing
industry requirements and customer demands.
Additionally, the unit ASPs of our products declined
considerably in 2004, 2003, and 2002, and we anticipate that
unit ASPs of our products will continue to decline in the
future. This has caused and will continue to cause a decrease in
our gross margins if we are unable to offset the decline in ASPs
with cost reduction measures. In addition, the gross margins we
realize from the sale of our products are affected by the mix of
product sales between higher margin, lower volume head-end
equipment, such as our DVS products and applications, and lower
margin, higher volume HAS products, such as modems. We are
attempting to increase our gross margin by shifting our product
mix from HAS revenues to higher margin DVS product and
application revenues and ceasing investment in our CMTS product
line. However, there are no assurances that we will succeed. For
2005, we expect that sales of our low-margin HAS products will
continue to make up a significant portion of our revenues.
Moreover, we are in the early stages of development with respect
to our DVS product line. Historically, DVS product revenues
represented less than 30% of our total revenues. If our DVS
product line does not receive broader market acceptance and we
do not generate a greater percentage of total revenues from DVS
product revenues, we will not succeed in greatly improving our
gross margin.
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We are dependent on a small number of customers and
resellers and our business could be harmed by the loss of any of
these customers or reductions in their purchasing volumes |
Our customers have undergone and continue to undergo significant
consolidation in both North America and internationally, as a
limited number of cable operators control an increasing number
of systems. For example, the top nine cable operators in the
United States operate systems that service approximately 90% of
homes that receive cable services in the United States. As a
result of the consolidation among cable operators, our revenue
has been and will continue to be dependent on sales to the few
leading cable operators worldwide. Two customers, Adelphia and
Comcast, (18% and 12%, respectively), accounted for 10% or more
of total revenues, for the twelve months ended December 31,
2004. Adelphia is not expected to be a customer in 2005 due to
our decision to cease investment in our CMTS product line and
this may have a material adverse effect on our business or
results of operations in 2005. Three customers, Adelphia, Cross
Beam Networks and Comcast, (22%, 16% and 13%, respectively),
accounted for 10% or more of total revenues, for the twelve
months ended December 31, 2003. As is common in our
industry, we typically do not enter into contracts with our
customers in which they commit to purchase products from us.
Typically, our sales are made on a purchase order or system
contract basis, and none of our customers has entered into a
long-term agreement requiring it to purchase our products.
Moreover, we do not typically require our customers to purchase
a minimum quantity of our products, and our customers can
generally cancel or significantly reduce their orders on short
notice without significant penalties. The loss of any of our
customers can have a material adverse effect on our results of
operations. Further, any reduction in orders from a given
customer can likewise have a material adverse affect on our
results of operations.
Significant sales of our DVS products are made to a small number
of resellers, who often incorporate our DVS products and
applications in systems that are sold to an end-user customer,
which is typically a cable operator, satellite provider or
broadcast operator. If one or more of these resellers develop
their own products or elect to purchase similar products from
another vendor, such an action may have a significant impact on
our revenue and results of operations.
Also, we may not succeed in attracting new customers as many of
our potential customers have pre-existing relationships with our
current or potential competitors and the continued consolidation
of the cable industry reduces the number of potential customers.
To attract new customers, we may be faced with intense price
competition, which may affect our gross margins.
We may also lose existing customers or experience declining
business from our existing customers because of our decision to
cease investment in our CMTS product line. For example,
Adelphia, one of our largest CMTS customers, indicated that it
will no longer purchase CMTS products from us and may no longer
purchase HAS or DVS products from us. The loss of Adelphia and
the loss of any additional CMTS customers may be material and
could materially adversely affect our business and results of
operations, especially if we are unable to offset such losses
with increased revenue from our DVS and HAS products.
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Recent changes in senior management and the reductions in
workforce associated with our restructuring efforts could
disrupt the operation of our business, distract our management
from focusing on revenue- generating efforts, result in the
erosion of employee morale, and impair our ability to respond
rapidly to growth opportunities in the future |
We have experienced a number of recent changes in senior
management and other key personnel. Our Chief Executive Officer,
President and Chief Technology Officer, Chief Operating Officer,
Chief Financial Officer and General Counsel all resigned within
the latter half of 2004. Our new Chief Executive Officer was
appointed in September 2004 and our new Chief Financial Officer
was appointed in late November 2004. We also have recently
experienced increased turnover in our video engineering group
and finance organization. The recruitment and retention of a new
senior management staff and turnover in key personnel has
created and could continue to create a number of transitional
challenges for us. These transitional issues have caused, and
may cause, disruptions to our business. We cannot be assured
that a smooth transition of our senior management staff has
occurred or that we have taken the necessary steps to affect an
orderly continuation of our operations during the transitional
period. Further, the process of locating personnel with the
combination
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of skills and attributes required to carry out our goals and
integrating such personnel once they are recruited is often
lengthy. We cannot be assured that the integration of our new
senior management staff will occur in a timely manner, or that
such integration will not present additional transitional
challenges for us or adversely affect the operation of our
business.
Moreover, we have implemented a number of restructuring plans
since 2001, including the most recent restructuring activities
in 2004 which have resulted in personnel reduction of 40%. The
employee reductions and changes in connection with our
restructuring activities, as well as future changes in senior
management and key personnel, could result in an erosion of
morale, and affect the focus and productivity of our remaining
employees, including those directly responsible for revenue
generation and the management and administration of our
finances, which in turn may affect our revenue in the future or
cause other administrative deficiencies. Additionally, employees
directly affected by the reductions may seek future employment
with our business partners, customers or competitors. Although
all employees are required to sign a proprietary information
agreement with us at the time of hire, there can be no
assurances that the confidential nature of our proprietary
information will be maintained in the course of such future
employment. Additionally, we may face wrongful termination,
discrimination, or other claims from employees affected by the
reduction related to their employment and termination. We could
incur substantial costs in defending ourselves or our employees
against such claims, regardless of the merits of such actions.
Furthermore, such matters could divert the attention of our
employees, including management, away from our operations, harm
productivity, harm our reputation and increase our expenses. We
cannot assure you that our restructuring efforts will be
successful, and we may need to take additional restructuring
efforts, including additional personnel reduction, in the future.
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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 our ability to
attract and retain qualified senior management, engineering,
sales and marketing personnel. The competition for some of these
personnel is intense, particularly for engineers with MPEG
experience. The loss of any of these individuals or our
inability to recruit such individuals may significantly disrupt
and be harmful to our business. In addition, if we are unable to
hire qualified personnel as needed in a timely manner, we may be
unable to adequately manage and grow our business.
Highly skilled employees with the education and training that we
require, especially employees with significant experience and
expertise in video, data networking and radio frequency design,
are in high demand. We may incur additional expenses to attract
and retain key personnel. We cannot be assured that the
additional expenses we may incur will enable us to attract and
retain 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 can
terminate his or her relationship with us at any time. Our
employees generally are not bound by non-competition agreements.
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There are many risks associated with our participation in
industry standards |
In connection with the development of the DOCSIS 2.0
specification by CableLabs, a cable industry consortium that
establishes cable technology standards and administers
compliance testing, we entered into an agreement with CableLabs
whereby we licensed to CableLabs on a royalty-free basis any of
our intellectual property rights, including rights to our
proprietary S-CDMA technology, to the extent that such rights
may be asserted against a party desiring to design, manufacture
or sell DOCSIS based products, including DOCSIS 2.0 based
products. This license agreement grants to CableLabs the right
to sublicense our intellectual property, including our
intellectual property rights in our S-CDMA patents, to
manufacturers that compete with us in the marketplace for DOCSIS
based products. As a result of this license to CableLabs, our
competitors that produce DOCSIS-based products have access to
our technology without having to pay us any royalties or other
compensation for the use of our technology. As a result of our
contribution of technology to the DOCSIS intellectual property
pool, we may have foregone significant revenue from the
potential licensing of our proprietary technology, and we may be
unable to recoup the investment in the research and development
of intellectual property contributed to the DOCSIS technology
pool.
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Additionally, the agreement that we signed with CableLabs to
participate in the DOCSIS intellectual property pool may make it
difficult for us to enforce our intellectual property rights
against other companies. Certain cable equipment vendors
manufacture and sell DOCSIS based and DOCSIS certified and
qualified products without sublicensing from CableLabs the
technology in the CableLabs intellectual property pool. Due to
the interests of cable operators in having as many equipment
vendors as possible, we may feel constrained by competitive
pressures from pursuing the enforcement of our intellectual
property rights against our competitors that have not entered
into sublicenses with CableLabs. Moreover, if we seek to enforce
our intellectual property rights against other equipment
manufacturers that access technology from the CableLabs
intellectual property pool, our license to the technology in the
pool may be jeopardized. Certain contributors of technology to
the CableLabs intellectual property pool are our competitors and
may elect to revoke our license to their technology if we
attempt to enforce our intellectual property rights against them.
We may have lost any competitive advantage that our proprietary
S-CDMA technology may have provided us in the marketplace by
licensing it to CableLabs, and we may face increased competition
because our competitors have the ability to incorporate our
technology into their products. We believe that this increased
competition could come from existing competitors or from new
competitors who enter the market and that such competition is
likely to result in lower product ASPs, which could harm our
revenues and gross margins. Additionally, because our
competitors will be able to incorporate our technology into
their products, our current customers may choose alternate
suppliers or choose to purchase DOCSIS-compliant products from
multiple suppliers. We may be unable to effectively compete with
the other vendors if we cannot produce DOCSIS compliant cable
products more quickly or at lower cost than our competitors.
DOCSIS specifications have not yet been accepted in Asia,
although an increasing number of Asian cable operators are
requiring product to be DOCSIS qualified or certified. A related
specification for cable products, called the Euro-DOCSIS
specification, has been formalized by TComLabs, a cable
technology consortium of European cable operators, and European
and some Asian cable operators have embraced it. We have
contributed certain of our technologies, including our
proprietary S-CDMA technology, to the Euro-DOCSIS specification.
We may develop and sell products that comply with the
Euro-DOCSIS specification, and we may be unsuccessful in these
efforts. Even if we are successful in our efforts, we may face
some of the same risks associated with our contribution of
intellectual property to the CableLabs DOCSIS intellectual
property pool.
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We need to certify and qualify our new and existing
products to meet industry specifications in order to remain
competitive |
Major cable operators worldwide have endorsed the DOCSIS,
Euro-DOCSIS and PacketCable specifications and rarely purchase
data and voice equipment that is not certified or qualified as
compliant with these specifications. Although there is currently
no specification for DVS products, if such a specification is
adopted, then we will not only need to certify our video
products in addition to the current requirement that we certify
our HAS products. Traditionally, cable operators have chosen to
purchase only products meeting industry specifications because
the specifications enable interoperability among products from
multiple vendors, which leads to increased competition among
equipment manufacturers and consequently lowers product ASPs.
Consequently, our future success depends on our ability to
compete effectively in this marketplace by developing, marketing
and selling products that are certified and qualified to
industry standards in a timely fashion and in a cost effective
manner.
The DOCSIS and PacketCable specifications are promulgated by
CableLabs. Currently these specifications have been widely
adopted by cable operators in North America and by some cable
operators in Asia, Latin America and Europe. The Euro-DOCSIS
specifications have been developed by TComLabs specifically to
meet the requirements of European operators, and have found some
acceptance in China as well. There is no guarantee that our
products will continue to be DOCSIS, EuroDOCSIS or PacketCable
certified or qualified, or will be certified for any new
standards that may emerge. If we are unable to certify or
qualify our products as compliant with DOCSIS, EuroDOCSIS or
PacketCable or other applicable standards in a timely manner, we
may be unable to sell our products and may lose some or all of
any advantage we might otherwise have had, and our future
operating results may be adversely affected.
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Although we sell certified and qualified data and voice
products, there have been and may continue to be instances where
our existing customers and potential new customers elect to
purchase products from one or more of our competitors rather
than from us. In response to this situation, we have reduced our
prices and continue to experience customer demand to further
reduce our prices in order to promote sales of our current
products. This has had and may continue to have an adverse
impact on our revenues, operating results and gross margin.
Developing products to meet these various industry
specifications has several risks. The first is the cost and
effort to engineer standards-based products and to then prepare
them for compliance testing. Not only do we have to certify or
qualify new products, but any of our currently certified or
qualified products must be re-certified or re-qualified should
they be changed in any way. Second, there is no guarantee that
these products will be certified or qualified as meeting these
specifications in a timely fashion, if ever. Because most cable
operators purchase only those products that have been certified
or qualified as meeting these specifications, it is highly
unlikely that we will be able to sell our products until they
achieve certification or qualification, which can be a lengthy
process. As a result, we may incur significant research and
development expenses to develop new products that may not
receive certification or qualification and we cannot recoup the
costs of these research and development expenses by marketing
uncertified or unqualified products. Moreover, a consequence of
cable operators only purchasing products certified or
qualified as meeting industry specifications is the increased
competition between equipment vendors, which has resulted in a
steady and ongoing decline in equipment prices as vendors
compete for cable operators business. Third, there is no
guarantee that we will be able to support all future cable
industry specifications, which will likely have an adverse
impact on our future revenues.
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Our video products and applications must achieve
widespread market acceptance to advance the growth of our
digital video solutions business |
Our success will depend upon the widespread acceptance of our
video products and applications by broadband providers.
Traditionally, we have had success selling our CherryPicker and
DM products to cable operators and satellite providers; however,
there is no guarantee that this success will continue as the
products and applications evolve and as new competitors enter
the market. In 2004, we introduced our BP5100, which is our
product geared towards television broadcasters. Currently, we
have had one large deployment of BP5100 and have had limited
sales of the BP5100 through resale channels. We are currently
developing technology for the deployment of video for the
telecom carriers; however, there is no guarantee that we will
continue to pursue the development, that our product will work
or that our product will find widespread acceptance among the
telecom carriers.
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The emerging market trend to standardize the digital video
technology may challenge our ability to continue to grow our
digital video business |
Comcast, Time-Warner and Cox, the three largest cable operators
in the U.S., started their NGNA initiative in 2003 to develop a
common approach to transform their cable systems into
all-digital networks. This initiative could potentially impact
video technology, including our video technology and products.
Working as a group the operators can work more effectively with
equipment vendors in defining the products and product
capabilities required for the migration. In 2004 the
participating operators commissioned CableLabs to manage the
NGNA initiative and to develop a set of standards to which
equipment vendors can build their products. The NGNA initiative
is so far following the model successfully proven with the
earlier DOCSIS initiative, which enabled the development of
interoperable cable modems, CMTSs and other associated equipment
that allowed U.S. operators to rollout broadband cable
modem service much faster, more broadly and with greater success
than telecom carriers could offer their competing DSL service.
As it has with data services, CableLabs may request or even
require companies to contribute their video technologies to a
DOCSIS-like technology pool on a royalty-free basis. If we
contribute any of our video technology to a DOCSIS-like
technology pool, our video technology is subject to the same
risks as those associated with the standards-based technology
for our data services, which are discussed above. Subject to the
success of the initiative, cable operators would want to
purchase only video products that have been
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certified or qualified by CableLabs, in which case we will not
be able to sell our video products until they achieve
certification or qualification, which, based on our experience
with our data services, can be a lengthy process. As a result,
we may incur significant research and development expenses to
develop new video products that may not receive certification or
qualification and we may not be able to recoup the costs of
these research and development expenses by marketing uncertified
or unqualified products. Moreover, there is no guarantee that we
will be able to support all future cable industry specifications
relating to video products, which would likely have an adverse
impact on our future revenues. Furthermore, a consequence of
cable operators purchasing only certified or qualified products,
based on our experience with the data services, is the increased
competition between equipment vendors, which would result in a
steady and ongoing decline in equipment prices as vendors
compete for cable operators business. Consequently, our
future success may depend on our ability to compete effectively
in the video marketplace by developing, marketing and selling
products that are certified and qualified to industry standards
in a timely fashion and in a cost effective manner.
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We depend on broadband providers capital spending
for a substantial portion of our revenue and any decrease or
delay in capital spending would negatively impact our operating
results and financial condition |
Historically, almost all of our sales had been derived from
sales to broadband providers and, more specifically, cable
operators, and we expect these sales to constitute a significant
portion of net sales for the foreseeable future. Demand for our
products will depend on the magnitude and timing of capital
spending by broadband providers. These capital spending patterns
are dependent on a variety of factors including:
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the availability of financing; |
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annual budget cycles, as well as the typical reduction in
upgrade projects during the winter months; |
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the status of federal, local and foreign government regulation
and deregulation of the telecommunications industry; |
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overall demand for broadband services and the acceptance of new
data, video and voice services; |
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evolving industry standards and network architectures; |
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competitive pressures (including the availability of alternative
data transmission and access technologies); |
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discretionary consumer spending patterns; and |
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general economic conditions. |
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Average selling prices of broadband equipment may continue
to decline, decreasing our gross margins |
The broadband equipment market has been characterized by erosion
of product ASPs, particularly for HAS devices. This erosion may
continue. The ASPs for our products are likely to continue to
decline due to competitive pricing pressures, promotional
programs and customers possessing strong negotiating positions
which require price reductions as a condition of purchase. In
addition, we believe that the widespread adoption of industry
specifications, such as the DOCSIS and EuroDOCSIS
specifications, is further eroding ASPs as cable modems and
other similar HAS products become commodity products. If a
specification is adopted for video technology, our DVS products
may experience the same ASP erosion. Decreasing ASPs could
result in decreased revenues even if the number of units sold
increases. Decreasing ASPs may also require us to sell our
products at much lower gross margin than in the past, and in
fact, we may sell products at a loss. The primary reason that
our gross profits have generally declined in recent years is the
decline in product ASPs. As a result, we may experience
substantial period-to-period fluctuations in future revenue,
gross margin and operating results due to ASP erosion.
Therefore, we must continue to develop and introduce on a timely
basis and a cost-effective manner new products or
next-generation products with enhanced functionalities that can
be sold at higher gross margins. If we fail to do so our
revenues and gross margins may decline further.
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We must achieve cost reductions or increase revenues to
attain profitability |
In prior years, we experienced revenue declines, which were, in
large part, due to declining product ASPs due to our transition
from a proprietary platform to the DOCSIS standards platform.
Most recently, we have experienced a decrease in revenue derived
from our DOCSIS CMTS sales. This has resulted in increased
losses and made it difficult for us to attain profitability. In
order to achieve profitability, we must significantly increase
our revenues, reduce the cost of our products, and maintain or
reduce our operating expenses.
Although we have implemented expense reduction and restructuring
plans in the past, including the latest restructurings in the
fourth quarter of 2004, that have focused on cost reductions and
operating efficiencies, we still operate at a loss. A large
portion of our expenses, including rent, and operating lease
expenditures, is fixed and difficult to reduce or change.
Accordingly, if our revenue does not meet our expectations, we
may not be able to adjust our expenses quickly enough to
compensate for the shortfall in revenue. In that event, our
business, financial condition and results of operations could be
materially and adversely affected.
As product ASPs decline, we need to reduce the cost of our
products through design and engineering changes. We may not be
successful in redesigning our products, and, even if we are
successful, our efforts may be delayed or our redesigned
products may contain significant errors and product defects. In
addition, any redesign may not result in sufficient cost
reductions to allow us to reduce significantly the prices of our
products or improve our gross margins. Reductions in our product
costs may require us to use lower-priced components that are
highly integrated 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, if at all, and we could incur
significant expenses without related revenues if we cannot use
the products or services offered by such agreements. We have
incurred significant vendor cancellation charges related to
volume purchase and manufacturing agreements in the past and may
incur such charges in the future.
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We may not be able to raise additional funds to continue
operating our business |
Our main source of liquidity continues to be our unrestricted
cash on hand. As a result of our history of operating losses, we
expect to continue to use our unrestricted cash to fund
operating losses in the future. Our cash, cash equivalents and
short-term investments decreased to $97.7 million at
December 31, 2004, from $138.6 million at
December 31, 2003. If our operating losses are more severe
than expected or continue longer than expected, we may find it
necessary to seek other sources of financing to support our
capital needs and provide available funds for working capital.
Furthermore, as of December 31, 2004, we had
$65.1 million of notes outstanding that mature in August
2007 and may need to seek additional financing to repay the
notes at maturity.
Given the current condition of the capital markets, there are
few sources of financing available to us. Commercial bank
financing may not be available to us on acceptable terms.
Accordingly, any plan to raise additional capital, if available
to us, would likely involve an equity-based or equity-linked
financing, such as the issuance of convertible debt, common
stock or preferred stock, which would be dilutive to our
stockholders. If we are unable to procure additional working
capital, as necessary, we may be unable to continue operations.
On October 7, 2003, we filed a registration statement on
Form S-3 with the SEC. This shelf registration statement,
which was declared effective by the SEC on November 4,
2003, will allow us to issue various types of securities,
including common stock, preferred stock, debt securities and
warrants to purchase common stock, from time to time up to an
aggregate of $125.0 million, subject to market conditions
and our capital needs.
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We may dispose of or discontinue existing product lines,
which may adversely impact our future results |
On an ongoing basis, we evaluate our various product offerings
in order to determine whether any should be discontinued or, to
the extent possible, divested. Moreover, the worldwide downturn
in the telecommunications industry led us to reassess our
business strategy, which in turn caused us to discontinue
investment in
43
certain product lines. We have ceased investment in the telecom
and satellite businesses and largely sold or discontinued the
various businesses we acquired in 1999 and 2000. In October
2004, we also announced our determination to cease investment in
the CMTS product line and halt development of future CMTS
hardware. In February 2005, we agreed to sell to ATI
Technologies Inc. certain of our cable modem semiconductor
assets.
We cannot be assured that we have correctly forecasted, or will
correctly forecast in the future, the right product lines to
dispose or discontinue or that our decision to dispose of or
discontinue various investments and product lines is prudent if
market conditions change. In addition, we cannot be assured that
the discontinuance of various product lines will reduce our
operating expenses or will not cause us to incur material
charges associated with such decision. Furthermore, the
discontinuance of existing product lines entails various risks,
including the risks that we will not be able to find a buyer for
a product line or the purchase price obtained will not be equal
to the book value of the assets for the product line. Other
risks include managing the expectations of, and maintaining good
relations with, our customers who previously purchased disposed
or discontinued product lines, which could prevent us from
selling other products to them in the future. We may also incur
other liabilities and costs associated with our disposal or
discontinuance of product lines.
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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 products, particularly in the initial deployment and
implementation stages. Spikes in demand of our support services
may cause us to be unable to serve our customers. 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 especially during peak periods. 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 relationships with our customers and could
prevent us from selling product to existing customers or gaining
new customers.
Furthermore, we may experience transitional issues relating to
customer support in connection with our decision to dispose of
or discontinue various investments and product lines. We may
incur liability associated with customers dissatisfaction
with the level of customer support maintained for discontinued
product lines. For example, in January 2005, Adelphia sued us in
Colorado state court, alleging, among other things, breach of
contract and misrepresentation in connection with our sale of
CMTS (Cable Modem Termination System) products to Adelphia and
our announcement to cease future investment in the CMTS market.
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We may have financial exposure to litigation |
We and/or our directors and officers are defendants in a number
of lawsuits, including securities litigation lawsuits and the
lawsuit with Adelphia discussed above (See
Item 3 Legal Proceedings for more information
regarding our litigation). As a result, we may have financial
exposure to litigation as a defendant and because we are
obligated to indemnify our officers and members of our board of
directors for certain actions taken by our officers and
directors on our behalf.
In order to limit financial exposure arising from litigation
and/or our obligation to indemnify our officers and directors,
we have historically purchased directors and
officers insurance (D&O Insurance). However, the
availability of D&O Insurance may become more difficult and
more costly for companies to attain. In recent years, we have
experienced a significant increase in the cost of our D&O
Insurance. There can be no assurance that D&O Insurance will
be available to us in the future or, if D&O Insurance is
available, it may be prohibitively expensive. Additionally, some
insurance underwriters who offered D&O Insurance in the past
have been placed into liquidation or may be, at some future
point, placed into liquidation.
If there is no insurance coverage for the litigation or, even if
there is insurance coverage, if a carrier is subsequently
liquidated or placed into liquidation, we will be responsible
for the attorney fees and costs resulting from the litigation.
The incurrence of significant fees and expenses in connection
with the litigation could have a material adverse effect on our
results of operations.
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The sales cycle for certain of our products is lengthy,
which makes forecasting of our customer orders and revenues
difficult |
The sales cycle for certain of our products is lengthy, often
lasting nine months to more than a year. Our customers generally
conduct significant technical evaluations, including customer
trials, of our products as well as competing products prior to
making a purchasing decision. In addition, purchasing decisions
may also be delayed because of a customers internal budget
approval processes. Because of the lengthy sales cycle and the
size of customer orders, if orders forecasted for a specific
customer for a particular period do not occur in that period,
our revenues and operating results for that particular quarter
could suffer. Moreover, a portion of our expenses related to an
anticipated order is fixed and difficult to reduce or change,
which may further impact our revenues and operating results for
a particular period.
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We need to develop additional distribution channels to
market and sell our products |
The vast majority of our data and voice product sales have
traditionally been to large cable operators. Our DVS products
have been traditionally sold to large cable operators and
satellite operators with recent, limited sales to television
broadcasters. We have not had access to smaller broadband
providers. Although we intend to establish strategic
relationships with leading distributors worldwide to new
customers, 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 their
customers. Some of our competitors have established
long-standing relationships with these cable operators that may
limit our and our distributors ability to sell our
products to those customers. Even if we were to sell our
products to those customers, it would likely not be based on
long-term commitments, and those customers would be able to
terminate their relationships with us at any time without
significant penalties.
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We may fail to accurately forecast customer demand for our
products |
The nature of the broadband industry makes it difficult for us
to accurately forecast demand for our products. Our inability to
forecast accurately the actual demand for our products may
result in too much or too little supply of products or an
over/under capacity of manufacturing or testing resources at any
given point in time. The existence of any one or more of these
situations could have a negative impact on our business,
operating results or financial condition. We have incurred
significant vendor cancellation charges related to volume
purchase and manufacturing agreements in the past and may incur
such charges in the future. We had purchase obligations of
approximately $30.0 million as of December 31, 2004,
primarily to purchase minimum quantities of materials and
components used to manufacture our products. We may be obligated
to fulfill these purchase obligations even if demand for our
products is lower than we anticipate.
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We may not be able to manage expenses and inventory risks
associated with meeting the demand of our customers |
From time to time, we receive indications from our customers as
to their future plans and requirements to ensure that we will be
prepared to meet their demand for our products. If actual orders
differ materially from these indications, our ability to manage
inventory and expenses may be affected. In addition, if we fail
to meet customers supply expectations, we may lose
business from such customers. If we enter into purchase
commitments to acquire materials, or expend resources to
manufacture products and such products are not purchased by our
customers, our business and operating results could suffer.
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We are dependent on key third-party suppliers and any
failure by them to deliver components could limit our ability to
satisfy customer demand |
We manufacture all of our products using components or
subassemblies procured from third-party suppliers, including
semiconductors. Some of these components are available from a
sole source and others are available from limited sources. A
majority of our sales are from products containing one or more
components that are available only from sole source suppliers.
For example, our video equipment is single sourced from a
manufacturer in San Jose, California. Our modems are
sourced from a manufacturer in China. Additionally,
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some of our components are custom parts that are produced to our
specifications, and it may be difficult to move the
manufacturing of such components from one vendor to another
vendor.
Any interruption in the operations of our vendors of sole source
or custom product parts could adversely affect our ability to
meet our scheduled product deliveries to customers. If we are
unable to obtain a sufficient supply of components, including
semiconductors, 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 and expose us to potential damages that may arise
from our inability to supply our customers with products.
Further, a significant increase in the price of one or more of
these components, such as our semiconductor components, could
harm our gross margin or operating results. Additionally, we
attempt to limit this risk by maintaining safety stocks of these
components, subassemblies and modules. As a result of this
investment in inventories, we have in the past and in the future
may be subject to risk of excess and obsolete inventories, which
could harm our business. In this regard, our gross margins and
operating results could be adversely affected by excess and
obsolete inventory.
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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.
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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 the
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 manufacturing, assembling or testing 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 lead times. 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.
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We are dependent upon international sales and there are
many risks associated with international operations |
We expect sales to customers outside of the United States to
continue to represent a significant percentage of our revenues
for the foreseeable future. For the year ended December 31,
2004, 2003 and 2002 approximately 45%, 44% and 68%,
respectively, of our net revenues were from customers outside of
the U.S. International sales are subject to a number of
risks, including the following:
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changes in foreign government regulations and communications
standards; |
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import and export license requirements, tariffs and taxes; |
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trade barriers; |
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difficulty in protecting intellectual property; |
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difficulty in collecting accounts receivable; |
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currency fluctuations; |
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the burden of complying with a wide variety of foreign laws,
treaties and technical standards; |
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difficulty in staffing and managing foreign operations; and |
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political and economic instability. |
If our customers are affected by currency devaluations or
general economic downturns their ability to purchase our
products could be reduced significantly. Payment cycles for
international customers typically are longer than those for
customers in North America.
Our international operations are subject to certain risks common
to foreign operations in general, such as governmental
regulations and import restrictions. In addition, there are
social, political, labor and economic conditions in specific
countries or regions as well as difficulties in staffing and
managing foreign operations, and potential adverse foreign tax
consequences, among other factors that could also have an impact
on our business and results of operations outside of the United
States.
Furthermore, foreign countries may decide to prohibit, terminate
or delay the construction of new broadband infrastructures for a
variety of reasons. These reasons include environmental issues,
economic downturns and availability of favorable pricing for
other communications services or the availability and cost of
related equipment. Any such action by foreign countries would
reduce the market for our products.
Like other companies operating or selling internationally, we
are subject to the Foreign Corrupt Practices Act (FCPA) and
other laws which prohibit improper payments or offers of
payments to foreign governments and their officials and
political parties by U.S. and other business entities for the
purpose of obtaining or retaining business. We make sales in
countries known to experience corruption. Our sales activities
in such countries create the risk of an unauthorized payments or
offers of payments by one of our employees, consultants, sales
agents or distributors which could be in violation of various
laws including the FCPA, even though such parties are not always
subject to our control. We have attempted to implement
safeguards to prevent losses from such practices and to
discourage such practices by our employees, consultants, sales
agents and distributors. However, our safeguards may prove to be
less than effective and our employees, consultants, sales agents
or distributors may engage in conduct for which we might be held
responsible. Violations of the FCPA may result in severe
criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business,
financial condition and results of operations.
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Exchange rate fluctuations could cause a decline in our
financial condition and results of operations |
While we generally invoice our foreign sales in
U.S. dollars, we invoice some of our sales in Europe in
Euros and other sales in the United Kingdom, Belgium, Canada,
Japan, Hong Kong, Korea and China in local currencies. Since we
have also elected to take payment from our customers in local
currencies and may elect to take payment in other foreign
currencies in the future, we are exposed to losses as the result
of foreign currency fluctuations. We currently do not engage in
foreign currency hedging transactions. We may in the future
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.
Furthermore, foreign countries may decide to prohibit, terminate
or delay the construction of new broadband infrastructures for a
variety of reasons. These reasons include environmental issues,
economic downturns and availability of favorable pricing for
other communications services or the availability and cost of
related equipment. Any such action by foreign countries would
reduce the market for our products.
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The deployment process for our equipment may be lengthy
and may delay the receipt of new orders and cause fluctuations
in our revenues |
The timing of deployment of our equipment can be subject to a
number of other risks, including the availability of skilled
engineering and technical personnel, the availability of other
equipment such as fiber optic cable, and the need for local
zoning and licensing approvals. We believe that changes in our
customers
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deployment plans have delayed, and may in the future delay the
receipt of new orders. Since the majority of our sales have been
to relatively few customers, a delay in equipment deployment
with any one customer has in the past had, and could in the
future, have a material adverse effect on our sales for a
particular quarter.
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Our industry is highly competitive with many larger and
more established competitors |
The market for our products is extremely competitive and is
characterized by rapid technological change. Our direct
competitors include Ambit Microsystems Corporation, Cisco
Systems, BigBand Networks, Motorola, Scientific-Atlanta and
Toshiba. Additionally, we face competition from early stage
companies with access to significant financial backing that
improve existing technologies or develop new technologies. The
principal competitive factors in our market include the
following:
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product performance, features and reliability; |
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price; |
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size and stability of operations; |
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breadth of product line; |
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sales and distribution capabilities; |
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technical support and service; |
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relationships with providers of service providers; and |
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compliance with industry standards. |
Some of these factors are outside of our control. Conditions in
the 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 products that are less costly, provide superior
performance or achieve greater market acceptance than our
products.
Many of our current and potential competitors have greater
financial, technical, marketing, distribution, customer support
and other resources, as well as better name recognition and
access to customers than we do. The widespread adoption of
DOCSIS and other industry standards has and is likely to
continue to cause increased price competition. We believe that
the adoption of these standards have resulted in and are likely
to continue to result in lower ASPs for our products. Any
increased price competition or reduction in sales of our
products, particularly our higher margin head-end products, has
resulted and will continue to result in decreased revenue and
downward pressure on our gross margin. These competitive
pressures have and are likely to continue to have an adverse
impact on our business.
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Our business is subject to the risks of warranty returns,
product liability and product defects |
Products like ours are very complex and can frequently contain
undetected errors or failures, especially when first introduced
or when new versions are released. Despite testing, errors may
occur. Product errors could affect the performance or
interoperability of our products, delay the development or
release of new products or new versions of products, adversely
affect our reputation and our customers willingness to buy
products from us and adversely affect market acceptance or
perception of our products. Any such errors or delays in
releasing new products or new versions of products or
allegations of unsatisfactory performance could cause us to lose
revenue or market share, increase our service costs, cause us to
incur substantial costs in redesigning the products, subject us
to liability for damages and divert our resources from other
tasks, any one of which could materially and adversely affect
our business, results of operations and financial condition.
Although we have limitation of liability provisions in our
standard terms and conditions of sale, they 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. The sale and support of our products also entails the
risk of product liability claims. 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
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ultimately are unsuccessful could result in our expenditure of
funds in litigation and divert managements time and other
resources.
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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. Even though we seek
to establish and protect proprietary rights in our products,
there are risks. We cannot be assured that any patent,
trademark, copyright or other intellectual property rights owned
by us will not be invalidated, circumvented or challenged, that
such intellectual property rights will provide competitive
advantages to us or that any of our pending or future patent
applications will be issued with the scope of the claims sought
by us, if at all. We cannot be assured that others will not
develop technologies that are similar or superior to our
technology, duplicate our technology or design around the
patents that we own. In addition, effective patent, copyright
and trade secret protection may be unavailable or limited in
certain foreign countries in which we do business or may do
business in the future.
Our pending patent applications may not be granted. Even if they
are granted, the claims covered by any patent 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 a license
from us.
We believe that the future success of our business will depend
on our ability to translate the technological expertise and
innovation of our employees into new and enhanced products. We
have entered into confidentiality and invention assignment
agreements with our employees, and we enter into non-disclosure
agreements with many of our suppliers, distributors and
appropriate customers so as to limit access to and disclosure of
our proprietary information. These contractual arrangements, as
well as statutory protections, may not prove sufficient to
prevent misappropriation of our trade secrets or technology or
deter independent third-party development of similar
technologies. In addition, the laws of some foreign countries
may not protect our intellectual property rights to the same
extent as do the laws of the United States. We may, in the
future, take legal action to enforce our patents and other
intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs
and diversion of resources and could negatively affect our
business, operating results, financial position and liquidity.
CableLabs DOCSIS 2.0 specification includes two advanced
physical layer technologies, S-CDMA and A-TDMA. In connection
with the development of the DOCSIS 2.0 specification by
CableLabs, we entered into an agreement with CableLabs, on a
royalty-free basis, whereby we licensed to CableLabs many of our
intellectual property rights to the extent that such rights may
be asserted against a party desiring to design, manufacture or
sell DOCSIS-based products, including DOCSIS 2.0-based products.
This license agreement grants to CableLabs the right to
sublicense our intellectual property, including our intellectual
property rights in our S-CDMA patents, to manufacturers that
compete with us in the marketplace for DOCSIS based products.
We pursue the registration of our trademarks in the United
States and have applications pending to register several of our
trademarks throughout the world. 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. Effective trademark, copyright, trade secret and patent
protection may not be available in every country in which our
products may be manufactured, marketed or sold.
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Third party claims of infringement or other claims against
us could adversely affect our ability to market our products,
require us to redesign our products or seek licenses from third
parties, and seriously harm our operating results and disrupt
our business |
As is typical in the industry in which we operate, we have been
and may from time to time be notified of claims that we may be
infringing intellectual property rights owned by third parties.
We also have in the past agreed to, and may from time to time in
the future agree to, indemnify a customer of our technology or
49
products for claims against the customer by a third party based
on claims that our technology or products infringe patents of
that third party. We further believe that companies may be
increasingly subject to infringement claims as distressed
companies and individuals attempt to generate cash by enforcing
their patent portfolio against a wide range of products. These
types of claims, meritorious or not, can result in costly and
time-consuming litigation; divert managements attention
and other resources; require us to enter into royalty
arrangements; subject us to damages or injunctions restricting
the sale of our products, require us to indemnify our customers
for the use of the allegedly infringing products; require us to
refund payment of allegedly infringing products to our customers
or to forgo future payments; require us to redesign certain of
our products; or damage our reputation. Our failure to obtain a
license for key intellectual property rights from a third party
for technology used by us could cause us to incur substantial
liabilities and to suspend the manufacturing of products
utilizing the technology. Alternatively, we could be required to
expend significant resources to develop non-infringing
technology with no assurances that we would be successful in
such endeavors. The occurrence of any of the above events could
materially and adversely affect our business, results of
operations and financial condition.
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Our indebtedness could adversely affect our financial
condition; we may incur substantially more debt |
As of December 31, 2004, we had approximately
$67.2 million of long-term obligations of which
$65.1 million is long-term debt associated with our Notes.
This level of indebtedness may adversely affect our stockholders
by:
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making it more difficult for us to satisfy our obligations with
respect to our indebtedness; |
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increasing our vulnerability to general adverse economic and
industry conditions; |
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limiting our ability to obtain additional financing; |
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requiring 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 our cash flow to fund our growth strategy, working capital,
capital expenditures and other general corporate purposes; |
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limiting our flexibility in planning for, or reacting to,
changes in our business and the industry; and |
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placing 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.
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We need to develop and introduce new and enhanced products
in a timely manner to remain competitive |
The markets in which we operate are characterized by rapidly
changing technologies, evolving industry standards, frequent new
product introductions and relatively short product life. The
pursuit of necessary technological advances and the development
of new products require substantial time and expense. For
example, we made ten acquisitions during the period between 1999
and 2000. Due to various economic conditions, none of the
products from our acquired businesses have achieved the level of
market acceptance that was forecasted at the time of their
acquisitions. Additionally, certain product groups have not
achieved the level of technological development needed to be
marketable or to expand the market. As a result, we recorded an
aggregate of approximately $576.8 million related to
impairment charges and write-down of in-process research and
development related to the acquired technologies, both of which
negatively impacted our operating results in 2001 and 2002.
To compete successfully in the markets in which we operate, we
must design, develop, manufacture and sell new or enhanced
products that provide increasingly higher levels of performance
and reliability. However, we may not be able to successfully
develop or introduce these products, if our products are not:
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cost effective; |
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brought to market in a timely manner; |
50
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in accordance with evolving industry standards and
architecture; or |
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fail to achieve market acceptance. |
There is no assurance that the technologies we are currently
developing or intend to develop will achieve feasibility or that
even if we are successful, the developed product will be
accepted by the market. We may not be able to recover the costs
of existing and future product developments and our failure to
do so may materially and adversely impact our business,
financial condition and results of operations.
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We are exposed to the credit risk of our customers and to
credit exposures in weakened markets, which could result in
material losses |
Most of our sales are on an open credit basis, with payment
terms of 30 to 60 days typically in the United States, and
because of local customs or conditions, longer in some markets
outside the United States. Beyond our open credit arrangements,
we have also experienced a request for customer financing and
facilitation of leasing arrangements, which we have not provided
to date and do not expect to provide in the future. We expect
demand for enhanced open credit terms, for example, longer
payment terms, customer financing and leasing arrangements to
continue and believe that such arrangements are a competitive
factor in obtaining business. Our decision not to provide these
types of financing arrangements may adversely affect our ability
to sell products, and therefore, our revenue, operations and
business.
Because of the current condition in the global economy, our
exposure to credit risks relating to sales on an open-credit
basis has increased. Although we monitor and attempt to mitigate
the associated risk, there can be no assurance that our efforts
will be effective in reducing credit risk. Additionally, there
have been significant insolvencies and bankruptcies among our
customers, which have and may continue to cause us to incur
economic and financial losses. There can be no assurance that
additional losses would not be incurred and that such losses
would not be material. Although these losses have generally not
been material to date, future losses, if incurred, could harm
our business and have a material adverse effect on our operating
results and financial condition.
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We have and we may seek to expand our business through
acquisitions; acquisitions could disrupt our business operations
and harm our operating results |
In order to expand our business, we may make strategic
acquisitions of other companies or certain assets. We plan to
continue to evaluate opportunities for strategic acquisitions
from time to time, and may make an acquisition at some future
point. However, the current volatility in the stock market and
the current price of our common stock may adversely affect our
ability to make such acquisitions. Any acquisition that we make
involves substantial risks, including the following:
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difficulties in integrating the operations, technologies,
products and personnel of an acquired company; |
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diversion of managements attention from normal daily
operations of the business; |
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potential difficulties in completing projects associated with
in-process research and development; |
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difficulties in entering markets in which we have no or limited
direct prior experience and where competitors in such markets
have stronger market positions; |
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initial dependence on unfamiliar supply chains or relatively
small supply partners; |
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insufficient revenues to offset increased expenses associated
with acquisitions; and |
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the potential loss of key employees of the acquired companies. |
Acquisitions may also cause us to:
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issue common stock that would dilute our current
stockholders percentage ownership; |
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assume liabilities; |
51
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record goodwill and non-amortizable intangible assets that will
be subject to impairment testing and potential periodic
impairment charges; |
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incur amortization expenses related to certain intangible assets; |
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incur large and immediate write-offs; or |
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become subject to litigation. |
For example, we made ten acquisitions during the period between
1999 and 2000. Due to various economic conditions, none of the
products from our acquired businesses have achieved the level of
market acceptance that was forecasted at the time of their
acquisitions. As a result, we recorded an aggregate of
approximately $576.8 million related to impairment charges
and write-down of in-process research and development related to
the acquired technologies, both of which negatively impacted our
operating results in 2001 and 2002.
Mergers and acquisitions of high-technology companies are
inherently risky, and no assurance can be given that our future
acquisitions will be successful and will not materially
adversely affect our business, operating results or financial
condition. Failure to manage and successfully integrate
acquisitions we make could harm our business and operating
results in a material way. Even when an acquired company has
already developed and marketed products, there can be no
assurance that product enhancements will be made in a timely
fashion or that all pre-acquisition due diligence will have
identified all possible issues that might arise with respect to
such products.
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Our products are subject to safety approvals and
certifications |
In the United States, 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.
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We are vulnerable to earthquakes, disruptions to our power
supply, labor issues and other unexpected events |
Our corporate headquarters, as well as the majority of our
research and development activities and some manufacturing
operations are located in California, an area known for seismic
activity. In addition, the operations of some of our key
suppliers and manufacturers are also located in this area and in
other areas known for seismic activity, such as Taiwan. An
earthquake, or other significant natural disaster, could result
in an interruption in our business or the operations of one or
more of our key suppliers. Our California operations may also be
subject to disruptions in power supply, such as those that
occurred in 2001. Our business may also be impacted by labor
issues related to our operations and/or those of our suppliers,
service providers, or customers. Such an interruption could harm
our operating results. We may not carry sufficient business
interruption insurance to compensate for any losses that we may
sustain as a result of any natural disasters or other unexpected
events.
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Various export licensing requirements could materially and
adversely affect our business or require us to significantly
modify our current business practices |
Various government export regulations may apply to the
encryption or other features of our products. We may have to
make certain filings with the government in order to obtain
permission to export certain of our products. In the past, we
may have inadvertently failed to file certain export
applications and notices, and we may have to make certain
filings and request permission to continue exportation of any
affected products without interruption while these applications
are pending. If we do have to make such filings, we cannot be
assured that we will obtain permission to continue exporting the
affected products or that we will obtain any required export
approvals now or in the future. If we do not receive the
required export approvals, we may be
52
unable to ship those products to certain customers located
outside of the United States. In addition, we may be subject to
fines or other penalties due to the failure to file certain
export applications and notices.
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Compliance with changing laws and regulations relating to
corporate governance and public disclosure has resulted, and
will continue to result, in the incurrence of additional
expenses associated with being a public company |
New and changing laws and regulations, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ
National Market Rules, impose stricter corporate governance
requirements, greater disclosure obligations, and greater focus
on disclosure and internal controls. These new laws and
regulations have had the effect of increasing the complexity and
cost of our companys corporate governance compliance,
diverting the time and attention of our management from
revenue-generating activities to compliance activities, and
increasing the risk of personal liability for our board members
and executive officers involved in our companys corporate
governance process. Our efforts to comply with evolving laws and
regulations have resulted, and will continue to result, in
increased general and administrative expenses, and increased
professional and independent auditor fees. In addition, it has
become more difficult and expensive for us to obtain director
and officer liability insurance.
In order to meet the new corporate governance and financial
disclosure obligations, we have been taking, and will continue
to take, steps to improve our controls and procedures, including
disclosure and internal controls, and related corporate
governance policies and procedures to address compliance issues
and correct any deficiencies that we may discover. For example,
pursuant to the requirements of Section 404 of
Sarbanes-Oxley, we undertook a comprehensive and costly
evaluation of our internal controls. Based on this evaluation
and as set forth in the Section 404 management report
included in this annual report, our management determined that
our internal controls over financial reporting were ineffective.
Our management further determined that our disclosure controls
and procedures were ineffective. In response to these
deficiencies, our management has commenced the necessary
processes and procedures to remediate the deficiencies in our
disclosure and internal control by establishing, implementing
and testing additional controls. Our efforts to correct the
deficiencies in our disclosure and internal controls have
required, and will continue to require, the commitment of
significant financial and managerial resources. In addition, we
anticipate the costs associated with the testing and evaluation
of our internal controls will be significant and material in
fiscal year 2005 and may continue to be material in future
fiscal years as these controls are maintained and continually
evaluated and tested.
Furthermore, changes in our operations and the growth of our
business may require us to modify and expand our disclosure
controls and procedures, internal controls and related corporate
governance policies. In addition, the new and changed laws and
regulations are subject to varying interpretations in many cases
due to their lack of specificity, and as a result, their
application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. If our efforts to
comply with new or changed laws and regulations differ from the
conduct intended by regulatory or governing bodies due to
ambiguities or varying interpretations of the law, we could be
subject to regulatory sanctions, our reputation may be harmed
and our stock price may be adversely affected.
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Our stock price has been and is likely to continue to be
highly volatile |
The trading price of our common stock has been and is likely to
continue to be highly volatile. Our stock price could be subject
to extreme fluctuations in response to a variety of factors,
including the following:
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actual or anticipated variations in quarterly operating results; |
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announcements of technological innovations; |
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new products or services offered by us or our competitors; |
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changes in financial estimates by securities analysts; |
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conditions or trends in the broadband services industry; |
53
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changes in the economic performance and/or market valuations of
Internet, online service or broadband service industries; |
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our announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments; |
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adoption of industry standards and the inclusion or
compatibility of our technology with such standards; |
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adverse or unfavorable publicity regarding us or our products; |
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additions or departures of key personnel; |
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sales of common stock; and |
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other events or factors that may be beyond our control. |
In addition, the stock markets in general, and the Nasdaq
National Market and the stock price of broadband services and
technology companies in particular, have experienced extreme
price and volume volatility. This volatility and decline has
affected many companies irrespective of or disproportionately to
the operating performance of these companies. Additionally,
industry factors may materially adversely affect the market
price of our common stock, regardless of our actual operating
performance.
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We have adopted a stockholder rights plan, which, together
with provisions in our charter documents and Delaware law, may
delay or prevent an acquisition of us, which could decrease the
value of our stock |
We adopted a stockholder rights plan pursuant to which we
distributed one right for each outstanding share of common stock
held by stockholders of record as of February 20, 2001.
Because the rights may substantially dilute the stock ownership
of a person or group attempting a take-over of us, even if such
a change in control is beneficial to our stockholders, without
the approval of our board of directors, the plan could make it
more difficult for a third party to acquire us, or a significant
percentage of our outstanding capital stock, without first
negotiating with our board of directors. Additionally,
provisions of our Certificate of Incorporation and our Bylaws
could make it more difficult for a third party to acquire
control of us in a transaction not approved by our Board of
Directors, and we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which
could also have the effect of delaying or preventing our
acquisition by a third party.
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Newly adopted accounting regulations that require
companies to expense stock options will result in a decrease in
our earnings and our stock price may decline. |
The Financial Accounting Standards Board recently adopted the
previously proposed regulations that will eliminate the ability
to account for share-based compensation transactions using the
intrinsic method that we currently use and generally would
require that such transactions be accounted for using a
fair-value-based method and recognized as an expense in our
consolidated statement of operations. We will be required to
expense stock options effective in periods after July
1, 2005. Currently, we generally only disclose such
expenses on a pro forma basis in the notes to our consolidated
financial statements in accordance with accounting principles
generally accepted in the United States. The adoption of this
new accounting regulation will have a significant impact on our
results of operations and our stock price could decline
accordingly.
Item 7a. Quantitative
and Qualitative Disclosures About Market Risk
Interest Rate Risk Our exposure to market risk for
changes in interest rates relates primarily to our investment
portfolio. The primary objective of our investment activities is
to preserve principal while maximizing yields without
significantly increasing risk. This is accomplished by investing
in widely diversified short-term investments, consisting
primarily of investment grade securities, substantially all of
which mature within the next twenty-four months. A hypothetical
50 basis point increase in interest rates would result in
an approximate $275,000 decline (less than 1%) in the fair value
of our available-for-sale securities.
54
Foreign Currency Risk A substantial majority of our
revenue, expense and capital purchasing activity are transacted
in U.S. dollars. However, we do enter into transactions
from Belgium, United Kingdom, Hong Kong and Canada. A
hypothetical adverse change of 10% in exchange rates would
result in a decline in income before taxes of approximately
$356,000. All of the potential changes noted above are based on
sensitivity analyses performed on our financial positions at
December 31, 2004. Actual results may differ materially.
55
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Item 8. |
Financial Statements and Supplementary Data |
TERAYON COMMUNICATION SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page | |
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Reports of Ernst & Young LLP, Independent Registered
Public Accounting Firm
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57 |
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Consolidated Balance Sheets
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60 |
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Consolidated Statements of Operations
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61 |
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Consolidated Statements of Stockholders Equity
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62-63 |
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Consolidated Statements of Cash Flows
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64 |
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Notes to Consolidated Financial Statements
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65 |
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56
Report Of Ernst & Young LLP, Independent
Registered
Public Accounting Firm
The Board of Directors and Stockholders
Terayon Communication Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Terayon Communication Systems, Inc. as of December 31, 2004
and 2003, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedule listed in the
index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Terayon Communication
Systems, Inc. at December 31, 2004 and 2003, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Terayon Communication Systems, Inc.s
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2005 expressed an
unqualified opinion on managements assessment and an
adverse opinion on the effectiveness of internal control over
financial reporting.
Palo Alto, California
March 14, 2005
57
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
The Board of Directors and Shareholders of
Terayon Communications Systems, Inc.
We have audited managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting in Item 9a, that Terayon Communication Systems,
Inc (Terayon) did not maintain effective internal
control over financial reporting as of December 31, 2004
because of the effect of the material weaknesses described in
managements assessment, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Terayons management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment:
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Management identified a material weakness due to insufficient
controls related to the identification, capture, and timely
communication of financially significant information between
certain parts of the organization and the finance department to
enable the finance department to account for transactions in a
complete and timely manner. As a result of this material
weakness, management recorded an adjustment in the quarter ended
September 30, 2004 to record termination benefits paid to a
former executive. |
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Management also identified a material weakness for insufficient
controls related to the preparation and review of the annual
consolidated financial statements and accompanying footnote
disclosures. The insufficient controls include a lack of
sufficient personnel with technical accounting expertise in the
finance department and inadequate review and approval procedures
to prepare external financial statements in accordance with
generally accepted accounting principles (GAAP). As a result of
this |
58
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material weakness, management made substantial revisions to its
2004 annual consolidated financial statements and footnote
disclosures before they were issued. |
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2004 consolidated financial statements, and this report
does not affect our report dated March 14, 2005 on those
financial statements.
In our opinion, managements assessment that Terayon
Communication Systems, Inc. did not maintain effective internal
control over financial reporting as of December 31, 2004 is
fairly stated, in all material respects, based on the COSO
control criteria. Also, in our opinion, because of the effect of
the material weaknesses described above on the achievement of
the objectives of the control criteria, Terayon Communication
Systems, Inc. has not maintained effective internal control over
financial reporting as of December 31, 2004, based on the
COSO control criteria.
Palo Alto, California
March 14, 2005
59
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
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December 31, | |
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| |
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2004 | |
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2003 | |
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| |
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(In thousands, | |
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except share data) | |
ASSETS |
Current assets:
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|
Cash and cash equivalents
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|
$ |
43,218 |
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$ |
30,188 |
|
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Short-term investment
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|
54,517 |
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|
|
108,452 |
|
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Accounts receivable, less allowance for doubtful accounts of
$1,289 in 2004 and $3,591 in 2003
|
|
|
16,554 |
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|
|
29,199 |
|
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Accounts receivable from related parties
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|
|
3,106 |
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|
|
600 |
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Other current receivables
|
|
|
1,044 |
|
|
|
3,662 |
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Inventory, net
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|
|
17,144 |
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|
|
16,364 |
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Other current assets
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|
|
2,042 |
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|
|
2,883 |
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Total current assets
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137,625 |
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|
|
191,348 |
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Property and equipment, net
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5,760 |
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|
11,871 |
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Restricted cash
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|
|
8,827 |
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|
|
9,212 |
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Other assets, net
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|
|
1,522 |
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|
|
2,809 |
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Total assets
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$ |
153,734 |
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|
$ |
215,240 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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|
|
|
|
Accounts payable
|
|
$ |
7,845 |
|
|
$ |
26,049 |
|
|
Accrued payroll and related expenses
|
|
|
4,181 |
|
|
|
6,537 |
|
|
Deferred revenues
|
|
|
2,579 |
|
|
|
3,423 |
|
|
Accrued warranty expenses
|
|
|
3,870 |
|
|
|
5,509 |
|
|
Accrued restructuring and executive severance
|
|
|
3,902 |
|
|
|
2,647 |
|
|
Accrued vendor cancellation charges
|
|
|
521 |
|
|
|
2,869 |
|
|
Accrued other liabilities
|
|
|
4,317 |
|
|
|
5,284 |
|
|
Interest payable
|
|
|
1,356 |
|
|
|
1,358 |
|
|
Current portion of capital lease obligations
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,571 |
|
|
|
53,800 |
|
Long-term obligations
|
|
|
2,077 |
|
|
|
3,118 |
|
Accrued restructuring and executive severance
|
|
|
1,664 |
|
|
|
1,853 |
|
Convertible subordinated notes
|
|
|
65,081 |
|
|
|
65,081 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
Authorized shares 5,000,000
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding shares none in 2004 and 2003
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
Authorized shares 200,000,000
|
|
|
|
|
|
|
|
|
|
|
Issued 76,454,161 in 2004 and 75,031,097 in 2003
|
|
|
|
|
|
|
|
|
|
|
Outstanding 76,298,152 in 2004 and 74,875,088 in 2003
|
|
|
76 |
|
|
|
75 |
|
|
Additional paid in capital
|
|
|
1,083,711 |
|
|
|
1,082,036 |
|
|
Accumulated deficit
|
|
|
(1,024,091 |
) |
|
|
(987,560 |
) |
|
Deferred compensation
|
|
|
|
|
|
|
(22 |
) |
|
Treasury stock, at cost; 156,009 shares in 2004 and 2003
|
|
|
(773 |
) |
|
|
(773 |
) |
|
Accumulated other comprehensive loss
|
|
|
(2,582 |
) |
|
|
(2,368 |
) |
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
56,341 |
|
|
|
91,388 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
153,734 |
|
|
$ |
215,240 |
|
|
|
|
|
|
|
|
See accompanying notes.
60
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$ |
140,622 |
|
|
$ |
128,791 |
|
|
$ |
120,306 |
|
|
Related party product revenues
|
|
|
9,916 |
|
|
|
4,694 |
|
|
|
9,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
150,538 |
|
|
|
133,485 |
|
|
|
129,403 |
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
103,150 |
|
|
|
99,261 |
|
|
|
92,497 |
|
|
Cost of related party product revenue
|
|
|
3,770 |
|
|
|
1,773 |
|
|
|
8,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
106,920 |
|
|
|
101,034 |
|
|
|
100,949 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
43,618 |
|
|
|
32,451 |
|
|
|
28,454 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
33,959 |
|
|
|
42,839 |
|
|
|
58,696 |
|
|
Sales and marketing
|
|
|
24,145 |
|
|
|
26,781 |
|
|
|
35,704 |
|
|
General and administrative
|
|
|
11,216 |
|
|
|
12,127 |
|
|
|
14,715 |
|
|
Restructuring charges (net), executive severance and asset
write-offs
|
|
|
11,159 |
|
|
|
2,803 |
|
|
|
8,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80,479 |
|
|
|
84,550 |
|
|
|
118,037 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(36,861 |
) |
|
|
(52,099 |
) |
|
|
(89,583 |
) |
Interest income
|
|
|
1,982 |
|
|
|
2,917 |
|
|
|
6,838 |
|
Interest expense
|
|
|
(3,294 |
) |
|
|
(3,279 |
) |
|
|
(6,174 |
) |
Other income (expense)
|
|
|
1,566 |
|
|
|
2,424 |
|
|
|
(4,145 |
) |
Gain on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
49,089 |
|
|
|
|
|
|
|
|
|
|
|
Loss before tax (expense) benefit
|
|
|
(36,607 |
) |
|
|
(50,037 |
) |
|
|
(43,975 |
) |
Income tax (expense) benefit
|
|
|
76 |
|
|
|
(316 |
) |
|
|
(238 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(36,531 |
) |
|
$ |
(50,353 |
) |
|
$ |
(44,213 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(0.48 |
) |
|
$ |
(0.68 |
) |
|
$ |
(0.61 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
75,861 |
|
|
|
74,212 |
|
|
|
72,803 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
61
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Comprehensive | |
|
Treasury Stock | |
|
Total | |
|
|
| |
|
Paid-in | |
|
Accumulated | |
|
Deferred | |
|
Income | |
|
| |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Compensation | |
|
(Loss) | |
|
Shares | |
|
Amount | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share amounts) | |
Balance at December 31, 2001
|
|
|
71,943,930 |
|
|
$ |
73 |
|
|
$ |
1,074,203 |
|
|
$ |
(892,994 |
) |
|
$ |
(458 |
) |
|
$ |
248 |
|
|
|
127,839 |
|
|
$ |
(768 |
) |
|
$ |
180,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options for cash to purchase common stock
|
|
|
422,073 |
|
|
|
|
|
|
|
1,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,721 |
|
Repurchase or return of common stock
|
|
|
(1,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,170 |
|
|
|
(5 |
) |
|
|
(5 |
) |
Return of escrow shares from Telegate acquisition
|
|
|
(25,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of options to non- employees
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472 |
|
Issuance of restricted common stock from stock option plan for
services provided
|
|
|
205,001 |
|
|
|
|
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290 |
|
Acceleration of vesting of employee stock options and stock
protection payment
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Issuance of common stock for Employee Stock Purchase Plan
|
|
|
539,186 |
|
|
|
|
|
|
|
1,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,864 |
|
Issuance of warrant to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to unrealized loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(519 |
) |
|
|
|
|
|
|
|
|
|
|
(519 |
) |
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,799 |
) |
|
|
|
|
|
|
|
|
|
|
(2,799 |
) |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
73,084,045 |
|
|
|
73 |
|
|
|
1,078,144 |
|
|
|
(937,207 |
) |
|
|
(25 |
) |
|
|
(3,070 |
) |
|
|
156,009 |
|
|
|
(773 |
) |
|
|
137,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options for cash to purchase common stock
|
|
|
579,233 |
|
|
|
1 |
|
|
|
2,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,534 |
|
Re-valuation of options to non-employees
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
Issuance of restricted common stock from stock option plan for
services provided
|
|
|
9,600 |
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 |
|
Issuance of common stock for Employee Stock Purchase Plan
|
|
|
1,202,210 |
|
|
|
1 |
|
|
|
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,195 |
|
Issuance of warrant to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to unrealized loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(470 |
) |
|
|
|
|
|
|
|
|
|
|
(470 |
) |
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,172 |
|
|
|
|
|
|
|
|
|
|
|
1,172 |
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
74,875,088 |
|
|
|
75 |
|
|
|
1,082,036 |
|
|
|
(987,560 |
) |
|
|
(22 |
) |
|
|
(2,368 |
) |
|
|
156,009 |
|
|
|
(773 |
) |
|
|
91,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options for cash to purchase common stock
|
|
|
225,645 |
|
|
|
|
|
|
|
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490 |
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Cancellation of unvested stock options
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for Employee Stock Purchase Plan
|
|
|
1,197,419 |
|
|
|
1 |
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,191 |
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Comprehensive | |
|
Treasury Stock | |
|
Total | |
|
|
| |
|
Paid-in | |
|
Accumulated | |
|
Deferred |
|
Income | |
|
| |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
Compensation |
|
(Loss) | |
|
Shares | |
|
Amount | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share amounts) | |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to unrealized loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
(521 |
) |
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,745 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
76,298,152 |
|
|
$ |
76 |
|
|
$ |
1,083,711 |
|
|
$ |
(1,024,091 |
) |
|
$ |
|
|
|
$ |
(2,582 |
) |
|
|
156,009 |
|
|
$ |
(773 |
) |
|
$ |
56,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
63
TERAYON COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(36,531 |
) |
|
$ |
(50,353 |
) |
|
$ |
(44,213 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of Net Servicos account receivable
|
|
|
|
|
|
|
|
|
|
|
1,118 |
|
|
Depreciation and amortization
|
|
|
6,416 |
|
|
|
9,369 |
|
|
|
11,572 |
|
|
Write-off and amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
3,972 |
|
|
Amortization of deferred compensation
|
|
|
17 |
|
|
|
53 |
|
|
|
476 |
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(49,089 |
) |
|
Inventory provision
|
|
|
11,980 |
|
|
|
4,086 |
|
|
|
6,109 |
|
|
Impairment of investment
|
|
|
|
|
|
|
|
|
|
|
4,500 |
|
|
Write-off of fixed assets
|
|
|
2,393 |
|
|
|
497 |
|
|
|
2,987 |
|
|
Compensation expense for issuance of common stock
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
Value of common and preferred stock warrants issued
|
|
|
|
|
|
|
45 |
|
|
|
26 |
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
12,645 |
|
|
|
(12,844 |
) |
|
|
26,211 |
|
|
Accounts receivable from related parties
|
|
|
(2,506 |
) |
|
|
242 |
|
|
|
3,164 |
|
|
Inventory
|
|
|
(12,760 |
) |
|
|
(12,193 |
) |
|
|
4,065 |
|
|
Other assets
|
|
|
5,131 |
|
|
|
7,281 |
|
|
|
443 |
|
|
Accounts payable
|
|
|
(18,204 |
) |
|
|
2,129 |
|
|
|
(18,901 |
) |
|
Accrued payroll and related expenses
|
|
|
(2,356 |
) |
|
|
310 |
|
|
|
(3,214 |
) |
|
Deferred revenues
|
|
|
(844 |
) |
|
|
2,926 |
|
|
|
(3,672 |
) |
|
Accrued warranty expenses
|
|
|
(1,639 |
) |
|
|
(3,098 |
) |
|
|
239 |
|
|
Accrued restructuring charges
|
|
|
1,066 |
|
|
|
(2,254 |
) |
|
|
(1,443 |
) |
|
Accrued vendor cancellation charges
|
|
|
(2,348 |
) |
|
|
(12,335 |
) |
|
|
(3,426 |
) |
|
Other accrued liabilities
|
|
|
(2,008 |
) |
|
|
(2,331 |
) |
|
|
(6,725 |
) |
|
Interest payable
|
|
|
(2 |
) |
|
|
3 |
|
|
|
(1,918 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(39,550 |
) |
|
|
(68,397 |
) |
|
|
(67,719 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(54,517 |
) |
|
|
(243,652 |
) |
|
|
(288,186 |
) |
Proceeds from sales and maturities of short-term investments
|
|
|
107,931 |
|
|
|
224,154 |
|
|
|
434,346 |
|
Purchases of property and equipment
|
|
|
(2,698 |
) |
|
|
(3,831 |
) |
|
|
(7,186 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
50,716 |
|
|
|
(23,329 |
) |
|
|
138,974 |
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital leases
|
|
|
(124 |
) |
|
|
(66 |
) |
|
|
(127 |
) |
Payments on repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
Repurchase of convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
(57,627 |
) |
Proceeds from issuance of common stock
|
|
|
1,681 |
|
|
|
3,729 |
|
|
|
3,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,557 |
|
|
|
3,663 |
|
|
|
(53,887 |
) |
Effect of foreign currency exchange rate changes
|
|
|
307 |
|
|
|
1,172 |
|
|
|
(563 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(13,030 |
) |
|
|
(86,891 |
) |
|
|
16,805 |
|
Cash and cash equivalents at beginning of year
|
|
|
30,188 |
|
|
|
117,079 |
|
|
|
100,274 |
|
Cash and cash equivalents at end of year
|
|
$ |
43,218 |
|
|
$ |
30,188 |
|
|
$ |
117,079 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
138 |
|
|
$ |
194 |
|
|
$ |
714 |
|
Cash paid for interest
|
|
$ |
3,268 |
|
|
$ |
3,262 |
|
|
$ |
8,387 |
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation relating to common stock issued to
non-employees
|
|
$ |
|
|
|
$ |
53 |
|
|
$ |
38 |
|
See accompanying notes.
64
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Terayon Communication Systems, Inc. (Company) was incorporated
under the laws of the State of California on January 20,
1993. In June 1998, the Company reincorporated in the State of
Delaware.
The Company develops, markets and sells equipment to broadband
service providers who use the Companys products to deliver
broadband voice, digital video solutions (DVS) and data
services to residential and business subscribers.
|
|
2. |
Summary of Significant Accounting Policies |
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
The preparation of the consolidated financial statements in
conformity with United States generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Estimates are based on
historical experience, input from sources outside of the
Company, and other relevant facts and circumstances. Actual
results could differ from those estimates. Areas that are
particularly significant include the Companys revenue
recognition policy, the valuation of its accounts receivable and
inventory, the assessment of recoverability and the measurement
of impairment of fixed assets, and the recognition of
restructuring liabilities.
|
|
|
Foreign Currency Translation |
The Company records the effect of foreign currency translation
in accordance with Statement of Financial Account Standards
(SFAS) No. 52, Foreign Currency
Translation. For operations outside the United States that
prepare financial statements in currencies other than the
U.S. dollar, results of operations and cash flows are
translated at average exchange rates during the period, and
assets and liabilities are translated at end-of-period exchange
rates. Translation adjustments are included as a separate
component of accumulated other comprehensive loss in
stockholders equity. For the three years ended
December 31, 2004, translation gains and losses were not
significant. Realized foreign currency transaction gains and
losses are included in results of operations as incurred, and
have not been significant to the Companys operating
results in any year presented.
|
|
|
Concentrations of Credit Risk, Customers, Suppliers, and
Products |
The Company performs ongoing credit evaluations of its customers
and generally requires no collateral. Credit losses have
historically been within managements expectations. The
Company maintains an allowance for potentially uncollectible
accounts receivable based on an assessment of collectibility.
The Company assesses collectibility based on a number of
factors, including past history, the number of days an amount is
past due (based on invoice due date), changes in credit ratings
of customers, current events and circumstances regarding the
business of the Companys clients customers and other
factors that the Company believes are relevant. At
December 31, 2004 and 2003, the allowance for potentially
uncollectible accounts was $1.3 million and
$3.6 million, respectively. In 2004, we experienced better
than expected collections of $2.1 million offset by
write-offs of $201,000. A relatively small number of customers
account for a significant
65
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
percentage of the Companys revenues and accounts
receivable. The Company expects the sale of its products to a
limited number of customers and resellers to continue to account
for a high percentage of revenues.
The Company relies on single source suppliers of materials and
labor for the significant majority of its product inventory.
Should the Companys current suppliers not produce and
deliver inventory for the Company to sell on a timely basis,
operating results may be adversely impacted.
The Company places its cash and cash equivalents in several
financial institutions and limits the amount of credit exposure
through diversification and by investing in only high-grade
government and commercial issuers.
The Company invests its excess cash in debt instruments of
governmental agencies, and corporations with credit ratings of
AA/ AA- or better or A1/P1 or better, respectively. The Company
has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. The
Company has not experienced any significant losses on its cash
equivalents or short-term investments.
The Company recognizes revenue in accordance with SEC Staff
Accounting Bulletin (SAB) No. 104 Revenue
Recognition (SAB 104). SAB 104
requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services were
rendered; (3) the selling price is fixed or determinable;
and (4) collectibility is reasonably assured.
Contracts and customer purchase orders are used to determine the
existence of an arrangement. Delivery occurs when product is
delivered to a common carrier. Certain of our products are
delivered on an FOB destination basis. The Company defers
revenue associated with these transactions until the delivery
has occurred to the customers premises. The Company
assesses whether the fee is fixed or determinable based on the
payment terms associated with the transaction and whether the
sales price is subject to adjustment. The Company assesses
collectibility based primarily on the creditworthiness of the
customer as determined by credit checks and analysis, as well as
the customers payment history.
Should there be changes to managements judgments, revenue
recognized for any reporting period could be adversely affected.
The Companys service revenue, which is sold separately
from product lines represents approximately 2.4% and 1.3% of
revenue for the years ended December 31, 2004 and 2003,
respectively. It is generated from service arrangements for
product support, which is recognized ratably over the term of
the arrangement, typically one year. Product support includes
internet access to technical content, software upgrades, as well
as internet and telephone access to technical support personnel.
|
|
|
Research and Development Expenses |
Research and development expenses are charged to expense as
incurred.
|
|
|
Shipping and Handling Costs |
Costs related to shipping and handling are included in cost of
goods sold for all periods presented.
The Company accounts for advertising costs as expense in the
period in which they are incurred. Advertising expense for the
years ended December 31, 2004, 2003 and 2002 were
$0.1 million, $0.1 million, and $0.4 million,
respectively.
66
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2001, the Company entered into co-marketing
arrangements with Shaw Communications, Inc. (Shaw) and Rogers
Communications, Inc. (Rogers). The Company paid
$7.5 million to Shaw and $0.9 million to Rogers, and
recorded these amounts as other current assets. In July 2002,
the Company began amortizing these prepaid assets and charging
them against revenues in accordance with the Financial
Accounting Standards Board (FASB) Emerging Issues Task
Force (EITF) No. 01-09, Accounting for
Consideration given by a Vendor to a Customer or Reseller in
Connection with the Purchase or Promotion of the Vendors
Products. Amounts charged against revenues in 2003 and
2002 totaled approximately $5.6 million and
$2.8 million, respectively, and none in 2004. The Company
charged the amortization of these assets against revenues
through the six quarters ended in December 31, 2003, the
term of the related arrangement, at the rate of
$1.4 million per quarter. See Note 14.
Basic and diluted net loss per share was computed using the
weighted average number of common shares outstanding. Options,
warrants, restricted stock, and convertible debt were not
included in the computation of diluted net loss per share
because the effect would be anti-dilutive.
Shares used in the calculation of basic and diluted net loss per
share are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss
|
|
$ |
(36,531 |
) |
|
$ |
(50,353 |
) |
|
$ |
(44,213 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
75,861 |
|
|
|
74,212 |
|
|
|
72,803 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$ |
(0.48 |
) |
|
$ |
(0.68 |
) |
|
$ |
(0.61 |
) |
|
|
|
|
|
|
|
|
|
|
Options to purchase 16,802,838, 17,463,959 and
14,635,025 shares of common stock were outstanding at
December 31, 2004, 2003 and 2002, respectively, and
warrants to purchase 200,000 and 2,325,593 shares of
common stock were outstanding at December 31, 2003 and
2002, respectively, and none in 2004 but were not included in
the computation of diluted net loss per share, since the effect
is anti-dilutive.
|
|
|
Cash, Cash Equivalents and Short-Term Investments |
The Company invests its excess cash in money market accounts and
debt instruments and considers all highly liquid debt
instruments purchased with an original maturity of three months
or less to be cash equivalents. Investments with an original
maturity at the time of purchase of over three months are
classified as short-term investments regardless of maturity date
as all investments are classified as available-for-sale and can
be readily liquidated to meet current operational needs.
The Company determines impairment related to its debt and equity
investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and SAB 59, Accounting for
Noncurrent Marketable Equity Securities, which provide
guidance on determining when an investment is
other-than-temporarily impaired. Applying this guidance requires
judgment. In making this judgment, the Company evaluates, among
other factors, the duration and extent to which the fair value
of an investment is less than its cost, the financial health of
and business outlook for the investee, including factors such as
industry and sector performance, changes in technology, and
operational and financing cash flow, available financial
information, and the Companys intent and ability to hold
the investment. The Company also relies upon guidance from
EITF 03-01 The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments in
determining possible impairment as it relates to its debt
investments. In 2004, the Company recorded approximately
$0.5 million in unrealized losses on investments in Other
67
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive Loss on the Consolidated Balance Sheet. The
unrealized losses relating to investments in federal agency
securities were caused by interest rate increases. The Company
purchased these securities at par, and the contractual cash
flows of these investments are guaranteed by an agency of the
U.S. government. Accordingly, it is expected that the
securities would not be settled at a price less than the
amortized cost of the Companys investment. Because the
decline in market value is attributable to changes in interest
rates and not credit quality and because the Company has the
ability and intent to hold these investments until a recovery of
fair value, which may be at maturity, the Company does not
consider these investments to be other-than-temporarily impaired
at December 31, 2004. Further the Company has a history of
holding these types on investments to maturity and assesses this
issue quarterly.
The Companys short-term investments, which consist
primarily of commercial paper, U.S. government and
U.S. government agency obligations and fixed income
corporate securities are classified as available-for-sale and
are carried at fair market value. Realized gains and losses and
declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income.
The cost of securities sold is based on the specific
identification method. The Company had no material investments
in short-term equity securities at December 31, 2004 or
2003.
|
|
|
Other Current Receivables |
As of December 31, 2004 and 2003, other current receivables
are primarily composed of interest, taxes, and non-trade
receivables, and included approximately $0.2 million and
$1.8 million, respectively, due from contract manufacturers
for raw materials purchased from the Company.
Inventory is stated at the lower of cost (first-in, first-out)
or market. The components of inventory are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Finished goods
|
|
$ |
13,763 |
|
|
$ |
14,264 |
|
Work-in process
|
|
|
1,501 |
|
|
|
660 |
|
Raw materials
|
|
|
1,880 |
|
|
|
1,440 |
|
|
|
|
|
|
|
|
|
|
$ |
17,144 |
|
|
$ |
16,364 |
|
|
|
|
|
|
|
|
The Company records losses on commitments to purchase inventory
in accordance with Statement 10 of Chapter 4 of
Accounting Release Bulletin No. 43. The Companys
policy for valuation of inventory and commitments to purchase
inventory, including the determination of obsolete or excess
inventory, requires it to perform a detailed assessment of
inventory at each balance sheet date, which includes a review
of, among other factors, an estimate of future demand for
products within specific time horizons, generally six months or
less as well as product lifecycle and product development plans.
Given the rapid change in the technology and communications
equipment industries as well as significant, unpredictable
changes in capital spending by the Companys customers, the
Company believes that assessing the value of inventory using
generally a six month time horizon is appropriate.
The estimates of future demand that the Company uses in the
valuation of inventory are the basis for the revenue forecast.
Based on this analysis, the Company reduces the cost of
inventory that it specifically identifies and considers obsolete
or excessive to fulfill future sales estimates. Excess inventory
is generally defined as inventory in excess of projected usage,
and is determined using the Companys best estimate of
future demand at the time, based upon information then
available. See Note 4.
68
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost of goods sold for the years ended December 31, 2004
and 2003 included reversals of $3.3 million ($0.04 per
share) and $10.0 million ($0.13 per share),
respectively, of special charges originally recorded in 2001 and
2000 for vendor cancellation charges and inventory considered to
be excess and obsolete. The Company changed its previous
estimates and was able to reverse the provisions in 2004 and
2003, as it was able to sell inventory originally considered to
be excess and obsolete. In addition, the Company was able to
negotiate downward certain vendor cancellation claims to terms
more favorable to the Company.
During 2004, 2003 and 2002, the Company recorded inventory
charges of $12.0 million, $4.1 million and
$6.1 million, respectively, to write down some of its
inventory due to excess and obsolescence and to reduce the
inventory to the lower of cost or market value in 2002 as
average selling prices fell below the cost of these products and
to record charges for excess and obsolete inventory.
Property and equipment are carried at cost less accumulated
depreciation and amortization. Property and equipment are
depreciated for financial reporting purposes using the
straight-line method over the estimated useful lives, generally
three to seven years. Leasehold improvements are amortized using
the straight-line method over the shorter of the useful lives of
the assets or the terms of the leases. The recoverability of the
carrying amount of property and equipment is assessed based on
estimated future undiscounted cash flows, and if an impairment
exists, the charge to operations is measured as the excess of
the carrying amount over the fair value of the assets. Based
upon this method of assessing recoverability, for the years
ended December 31, 2004, 2003 and 2002, the Company
recorded $2.4 million, $0.5 million and
$1.3 million, respectively in asset impairments primarily
related to restructuring activities.
Property and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Software and computers
|
|
$ |
21,415 |
|
|
$ |
23,273 |
|
Furniture and equipment
|
|
|
21,623 |
|
|
|
23,816 |
|
Leasehold improvements
|
|
|
5,021 |
|
|
|
4,935 |
|
Automobiles
|
|
|
16 |
|
|
|
16 |
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
48,075 |
|
|
|
52,040 |
|
Accumulated depreciation and Amortization
|
|
|
(42,315 |
) |
|
|
(40,169 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
5,760 |
|
|
$ |
11,871 |
|
|
|
|
|
|
|
|
Depreciation expense was $5.9 million and $8.9 million
for the twelve months ended December 31, 2004 and 2003,
respectively. Amortization expense for the twelve months ended
December 31, 2004 and 2003 were both $0.5 million.
Restricted cash at both December 31, 2004 and 2003
primarily related to approximately $7.5 million to secure
an aircraft lease as well as $1.3 million and
$1.7 million, respectively, to secure real estate leases.
|
|
|
Goodwill and Other Intangible Assets |
Goodwill is the excess of the purchase price over the fair value
of identifiable net assets acquired in business combinations
accounted for as purchases. During 2002, the Company recorded
impairment charges for goodwill, assembled workforce, and other
intangible assets (see Note 6). At December 31, 2004
and 2003, all goodwill had either been amortized or written-off
the Companys books.
69
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill and other long-lived assets were reviewed for
impairment whenever events such as product discontinuance, plant
closures, product dispositions or other changes in circumstances
indicated that the carrying amount may not have be recoverable.
When such events occurred, the Company compared the carrying
amount of the assets to undiscounted expected future cash flows.
If this comparison indicated that there was an impairment, the
amount of the impairment was typically calculated using
discounted expected future cash flows. The discount rate applied
to these cash flows was based on the Companys weighted
average cost of capital, which represented the blended costs of
debt and equity.
The Company provides a standard warranty for most of its
products, ranging from one to five years from the date of
purchase. The Company provides for the estimated cost of product
warranties at the time revenue is recognized. The Companys
warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting
a product failure. Expense estimates are based on historical
experience and expectation of future conditions. See
Note 15.
The Company accounts for its employee stock plans in accordance
with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), and includes the disclosure-only provisions as
required under SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). The Company
provides additional pro forma disclosures as required under
SFAS 123 and SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure.
For purposes of pro forma disclosures, the estimated fair value
of the options granted and ESPP shares to be issued is amortized
to expense over their respective vesting periods. Had
compensation cost for the Companys stock-based
compensation plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the
fair value method of SFAS 123, the Companys net loss
and net loss per share would have been increased to the pro
forma amounts indicated below (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss
|
|
$ |
(36,531 |
) |
|
$ |
(50,353 |
) |
|
$ |
(44,213 |
) |
Add: Stock-based compensation under APB 25
|
|
|
22 |
|
|
|
123 |
|
|
|
476 |
|
Deduct: Stock option compensation expense determined under fair
value-based method
|
|
|
(13,741 |
) |
|
|
(22,210 |
) |
|
|
(33,718 |
) |
Employee stock purchase plan compensation expense determined
under fair value-based method
|
|
|
(928 |
) |
|
|
(1,712 |
) |
|
|
(1,990 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(51,178 |
) |
|
$ |
(74,152 |
) |
|
$ |
(79,445 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$ |
(0.67 |
) |
|
$ |
(1.00 |
) |
|
$ |
(1.09 |
) |
|
|
|
|
|
|
|
|
|
|
Equity instruments granted to non-employees are accounted for
under the fair value method, in accordance with SFAS 123
and EITF No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, using the
Black-Scholes option pricing model and are recorded in the
equity section of the Companys consolidated balance sheet
as deferred compensation. These instruments are subject to
periodic revaluations over their vesting terms. The expense is
recognized as the instruments vest.
70
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss presented in the
accompanying consolidated balance sheets and consolidated
statements of stockholders equity consists of net
unrealized gain (loss) on short-term investments and accumulated
net foreign currency translation losses.
The following are the components of accumulated other
comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Cumulative translation adjustments
|
|
$ |
(2,093 |
) |
|
$ |
(2,400 |
) |
Unrealized gain/(loss) on available-for-sale investments
|
|
|
(489 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
$ |
(2,582 |
) |
|
$ |
(2,368 |
) |
|
|
|
|
|
|
|
Certain amounts of revenues reported by geographical areas in
previous years have been reclassified to conform to the 2004
presentation. Such reclassifications had no effect on previously
reported results of operations, total assets or accumulated
deficit.
|
|
|
Impact of Recently Issued Accounting Standards |
On December 16, 2004, FASB issued SFAS 123(R) which is
a revision of SFAS Statement No. 123, Accounting for
Stock-Based Compensation. SFAS 123(R) supersedes
APB 25, Accounting for Stock Issued to Employees, and
amends SFAS Statement No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the
approach described in Statement 123. However,
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS 123(R) must be
adopted no later than July 1, 2005. Early adoption will be
permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R) on
July 1, 2005. A component of SFAS 123(R) includes one
of the following options: (a) modified-prospective method,
(b) the modified-retrospective method, restating all prior
periods or (c) the modified-retrospective method, restating
only the prior interim periods of 2005. A determination as to
which of the three options the Company will adopt will be made
at a later date.
As permitted by SFAS 123, the Company currently accounts
for share-based payments to employees using APB 25s
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123(R)s fair value method will have
a significant impact on the Companys result of operations,
although it will have no impact on our overall financial
position. The impact of adoption of SFAS 123(R) cannot be
predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we
adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as
described in the disclosure of pro forma net income and earnings
per share in Note 2 to our consolidated financial
statements. SFAS 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the Company cannot
estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock
options), the Company has not recognized any operating cash
flows for such excess tax deductions in any of the periods
presented.
71
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3. |
Fair Value of Financial Instruments |
The amounts reported as cash and cash equivalents approximate
fair value due to their short-term maturities. The fair value
for the Companys investments in marketable debt and equity
securities is estimated based on quoted market prices.
The fair value of short-term and long-term capital lease and
debt obligations is estimated based on current interest rates
available to the Company for debt instruments with similar
terms, degrees of risk and remaining maturities. The carrying
values of these obligations, as of each period presented
approximate their respective fair values.
The following estimated fair value amounts have been determined
using available market information. However, considerable
judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
|
Gross |
|
Gross | |
|
Estimated | |
|
|
Amortized | |
|
Unrealized |
|
Unrealized | |
|
Fair | |
Short-term investments |
|
Cost | |
|
Gains |
|
Losses | |
|
Value | |
|
|
| |
|
|
|
| |
|
| |
|
|
(In thousands) | |
Investments maturing in less than 1 year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency obligations
|
|
$ |
8,000 |
|
|
$ |
|
|
|
$ |
(72 |
) |
|
$ |
7,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,000 |
|
|
|
|
|
|
|
(72 |
) |
|
|
7,928 |
|
Investments maturing in 1-2 years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency obligations
|
|
|
47,006 |
|
|
|
|
|
|
|
(417 |
) |
|
|
46,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
47,006 |
|
|
|
|
|
|
|
(417 |
) |
|
|
46,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
55,006 |
|
|
$ |
|
|
|
$ |
(489 |
) |
|
$ |
54,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 | |
|
|
| |
|
|
|
|
Gross | |
|
Gross | |
|
Estimated | |
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
Short-term investments |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Investments maturing in less than 1 year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$ |
38,940 |
|
|
$ |
|
|
|
$ |
(12 |
) |
|
$ |
38,928 |
|
Fixed income corporate securities
|
|
|
2,223 |
|
|
|
1 |
|
|
|
|
|
|
|
2,224 |
|
Government agency obligations
|
|
|
7,918 |
|
|
|
1 |
|
|
|
|
|
|
|
7,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
49,081 |
|
|
|
2 |
|
|
|
(12 |
) |
|
|
49,071 |
|
Investments maturing in 1-2 years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income corporate securities
|
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
1,333 |
|
Government agency obligations
|
|
|
58,006 |
|
|
|
68 |
|
|
|
(26 |
) |
|
|
58,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
59,339 |
|
|
$ |
68 |
|
|
$ |
(26 |
) |
|
$ |
59,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
108,420 |
|
|
$ |
70 |
|
|
$ |
(38 |
) |
|
$ |
108,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no realized gains or losses on short term investments
in either the year ended December 31, 2004 or 2003,
respectively.
72
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases its facilities and certain equipment under
operating leases. The operating lease for the Companys
corporate headquarters expires in 2009. The operating lease for
the Companys Israel headquarters expires in 2005. The
Companys other operating leases expire at various times
through 2006. Rent expense was approximately $6.3 million,
$7.1 million, and $7.9 million, for the years ended
December 31, 2004, 2003, and 2002, respectively. The
Company subleases a portion of its facilities to third parties.
In connection with the restructuring plans announced
January 27, 2004, the Company is seeking to sublease
approximately 56,400 square feet of its Santa Clara,
California facility. See Note 6. The Companys
sublease rental income was approximately $1.7 million,
$1.1 million, and $0.4 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
The Company leases certain equipment under non-cancelable lease
agreements that are accounted for as capital leases. Equipment
under capital lease arrangements included in property and
equipment totaled $0.0 and $0.3 million at
December 31, 2004 and 2003, respectively. Related
accumulated amortization was $0.0 and $0.3 million at
December 31, 2004 and 2003, respectively. Amortization
expense related to assets under capital leases is included in
depreciation expense. The capital leases are secured by the
related equipment and the Company is required to maintain
liability and property damage insurance.
In 2002, the Company entered into an operating lease arrangement
to lease a corporate aircraft. This lease arrangement was
secured by a $9.0 million letter of credit at
December 31, 2002. The letter of credit was reduced to
$7.5 million in February 2003. The $7.5 million letter
of credit was converted to a cash deposit in 2004. In August
2004 the Company entered into a 28 month aircraft sublease
terminating on December 31, 2006. The lease commitment for
the aircraft is included in the table below.
Future minimum lease payments under non-cancelable operating
leases as of December 31, 2004 are as follows (in
thousands):
|
|
|
|
|
|
|
Operating | |
|
|
Leases | |
|
|
| |
2005
|
|
$ |
7,452 |
|
2006
|
|
|
4,900 |
|
2007
|
|
|
3,177 |
|
2008
|
|
|
3,087 |
|
2009
|
|
|
2,579 |
|
Thereafter
|
|
|
188 |
|
|
|
|
|
Total minimum payments
|
|
$ |
21,383 |
|
|
|
|
|
As of December 31, 2004 there are approximately
$2.4 million of future minimum sublease payments to be
received under non-cancelable subleases not reflected in the
table above.
|
|
|
Purchase Obligations and Special Charges |
The Company has purchase obligations to certain of its suppliers
that support the Companys ability to manufacture its
products. The obligations consist of open purchase orders placed
with vendors for goods and services of the vendors
products at a specified price. As of December 31, 2004,
$30.0 million of purchase obligations were outstanding. As
a result of declines in its forecasts, the Company has canceled
certain purchase orders with its contract manufacturers that had
existing inventory on hand, or on order in anticipation of the
Companys earlier forecasts. Consequently, the Company
accrued for vendor cancellation charges in amounts that
represented managements estimate of the Companys
exposure to vendors for its
73
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
inventory commitments. At December 31, 2004, accrued vendor
cancellation charges were $0.5 million and the remaining
$29.5 million is attributable to open purchase orders that
are expected to be utilized in the normal course of business and
are expected to become payable at various times throughout 2005.
On February 26, 2003, the Company entered into an agreement
with Solectron Corporation (Solectron) to settle all outstanding
obligations under three manufacturing agreements between the
Company and Solectron. Under the terms of the settlement
agreement, the Company paid Solectron approximately
$3.9 million, and each party released any and all claims
that it may have had against the other party. Additionally, the
Company received selected inventory from Solectron. The Company
previously accrued $6.0 million toward the settlement of
the Solectron matter as a vendor cancellation charge in the
fourth quarter of 2000 and the second quarter of 2001. In 2003,
in connection with the Solectron settlement, the Company
reversed $2.1 million of the accrued vendor cancellation
charges included in cost of goods sold.
On September 29, 2003, the Company entered into an
agreement with Flextronics (Israel) Ltd., an Israeli company
(Flextronics), to purchase inventory from Flextronics and settle
all outstanding claims between the Company and Flextronics.
Under the terms of the settlement agreement, the Company paid
Flextronics approximately $1.5 million to be applied toward
the purchase of future inventory from Flextronics, if any.
Additionally, each party released any and all claims that it may
have had against the other party. The Company previously accrued
$2.0 million toward the settlement of the Flextronics
matter as a vendor cancellation charge in the second quarter of
2001. In 2003, in connection with the Flextronics settlement,
the Company reversed $0.5 million of the accrued vendor
cancellation charges included in cost of goods sold.
As of December 31, 2004, the Company had $0.5 million
in unused outstanding letters of credit primarily required to
support operating leases, which expire at various dates through
2009.
The Company has various royalty arrangements, which require it
to pay nominal amounts to various suppliers for usage of
licensed property. Royalties are generally calculated on a
per-unit basis, and to a lesser extent, as a percentage of
sales. The Companys total accrued obligations for
royalties at December 31, 2004 and 2003 were
$0.4 million and $1.3 million, respectively.
The Company has purchased, through its acquisition of Radwiz
Ltd. (Radwiz), certain technology that utilized funding provided
by the Israeli Chief Scientist of the Ministry of Industry and
Trade. The Company has committed to pay royalties to the
Government of Israel on proceeds from sales of products based on
this technology at rates of 3%-5% per sale. The Company
does not expect sales of products using this technology to be
material in 2005.
In June 2004, the Company entered into an employment agreement
with an executive officer. The executive officer resigned
effective as of October 1, 2004. The Company recorded a
severance provision of $1.4 million related to termination
costs for this officer in the third quarter of 2004. Most of the
severance costs related to this officer were paid in the fourth
quarter of 2004 with nominal amounts for employee benefits
payable into the fourth quarter of 2005.
In June 2004, the Company entered into separation agreements
with two other executive officers. One officer resigned in the
second quarter of 2004 and the other officer resigned from the
Company during the third quarter of 2004. The Company recorded a
severance provision of $1.7 million related to termination
costs for these officers in the second quarter of 2004. Most of
the severance costs were paid in the third quarter of 2004 with
nominal amounts for employee benefits payable through the third
quarter of 2005.
74
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In August 2004, the Company entered into an employment agreement
with another executive officer. The executive officer resigned
effective as of December 31, 2004. The Company recorded a
severance provision of $403,000 related to termination costs for
this officer in the fourth quarter of 2004. Most of the
severance costs related to this officer were paid in the first
quarter of 2005 with nominal amounts for employee benefits
payable into the fourth quarter of 2005.
This table summarizes the executive severance balance as of
December 31, 2004 (in thousands):
|
|
|
|
|
|
|
Executive | |
|
|
Severance | |
|
|
| |
Balance at December 31, 2003
|
|
$ |
|
|
Charges
|
|
|
3,451 |
|
Cash payments
|
|
|
(3,020 |
) |
|
|
|
|
Balance at December 31, 2004
|
|
$ |
431 |
|
|
|
|
|
The 2004 charge for executive severance of $3.5 million is
included within restructuring charges (net), executive severance
and asset write-off in the Consolidated Statement of Operations.
The $0.4 million in executive severance is accrued on the
Consolidated Balance Sheet within accrued restructuring and
executive severance at December 31, 2004.
One of the Companys subsidiaries is subject to Israeli law
and labor agreements, under which it is required to make
severance payments to dismissed employees and employees leaving
its employment in certain other circumstances. The
subsidiaries severance pay liability to its employees,
which is calculated on the basis of the salary of each employee
for the last month of the reported year multiplied by the years
of such employees employment is included in the
Companys consolidated balance sheets on the accrual basis,
and is partially funded by a purchase of insurance policies in
the subsidiaries name. At December 31, 2004 and 2003,
$1.3 million and $1.9 million, respectively, for
accrued severance pay was included in long-term obligations. In
accordance with EITF No. 88-1, Determination of
Vested Benefit Obligation for a Defined Benefit Pension
Plan, the Company included $0.7 million and
$1.3 million relating to the amounts funded by the purchase
of insurance policies for the Israeli severance liability in its
consolidated balance sheets as other assets at December 31,
2004 and 2003, respectively.
6. Restructuring Charges, net
and Asset Write-offs
The Company accrues for termination costs in accordance with
SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities, (SFAS 146) and
SFAS No. 112 Employers Accounting for
Post Employment Benefits. Liabilities are initially
measured at their fair value on the date in which they are
incurred based on plans approved by the Companys Board of
Directors. Accrued employee termination costs principally
consist of three components: 1) a lump-sum severance
payment based upon years of service (e.g. two weeks per year of
service); 2) COBRA insurance based on years of service and
rounded up to the month; and 3) an estimate of costs for
outplacement services immediately provided to the affected
employees. Substantially all employees were terminated on the
date of notification, so there was no additional service period
required to be included in the determination of accrued
termination costs. Where such services were required for a
period over 60 days, the Company ratably amortized
termination cost over the required service period.
During the first quarter of 2004, the Company initiated a Board
of Directors approved restructuring plan to bring operating
expenses in line with revenue levels. The Company incurred
restructuring charges in the amount of $3.3 million of
which $1.0 million related to employee termination costs,
$0.9 million related to
75
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
termination costs for an aircraft lease, and $1.4 million
related to costs for excess leased facilities. The Company
incurred restructuring charges in the amount of
$1.1 million in the second quarter of 2004 related to
additional costs for excess leased facilities, which were
contemplated in the first quarter restructuring plan. In the
fourth quarter to further conform the Companys expenses to
its revenue and to cease investment in the cable modem
termination systems (CMTS) product line the Companys
Board of Directors approved a third restructuring plan with a
charge in the amount of $1.3 million related to employee
terminations.
In the second, third and fourth quarters of 2004, the Company
re-evaluated the first and second quarter 2004 restructuring
charges for the employee severance, excess facilities and the
aircraft lease termination. Based on market conditions, new
assumptions provided by its real-estate broker, and the terms of
aircraft sublease agreement, which the Company entered into in
the third quarter of 2004, the Company increased the
restructuring charge for the aircraft lease by a total of
$1.0 million, the facilities accrual was increased
$0.3 million and employee severance accrual was decreased
by $0.2 million, for the year ended December 31, 2004.
As of December 31, 2004, $3.3 million remained
accrued. The employment of 168 employees had been terminated,
and we had paid $1.5 million in termination costs,
$1.2 million of costs related to the aircraft lease, and
$0.9 million of costs related to excess leased facilities.
The balance of the employee termination charges were paid in the
first quarter of 2005.
The Company anticipates the remaining restructuring accrual
related to the aircraft lease to be substantially utilized for
servicing operating lease payments, through January 2007, and
the remaining restructuring accrual related to excess leased
facilities to be utilized for servicing operating lease payments
or negotiating a buyout of operating lease commitments through
October 2009.
The reserve for the aircraft lease approximates the difference
between the Companys current costs for the aircraft lease
and the estimated income derived from subleasing.
The amount of net charges accrued under the 2004 restructuring
plans assumes that the Company will successfully sublease excess
leased facilities. The reserve for the excess leased facilities
includes the estimated income derived from subleasing, which is
based on information from the Companys real-estate
brokers, who estimated it based on assumptions relevant to the
real estate market conditions as of the date of the
Companys implementation of the restructuring plan and the
time it would likely take to sublease the excess leased
facilities. Even though it is the Companys intent to
sublease its interests in the excess facility at the earliest
possible time, the Company cannot determine with certainty a
fixed date by which such events will occur, if at all. In light
of this uncertainty, the Company will continue to periodically
re-evaluate and adjust the accrual, as necessary.
This table summarizes the accrued restructuring balances related
to the 2004 restructurings as of December 31, 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft | |
|
Excess | |
|
|
|
|
Involuntary | |
|
Lease | |
|
Leased | |
|
|
|
|
Terminations | |
|
Termination | |
|
Facilities | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2003
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Charges
|
|
|
2,297 |
|
|
|
934 |
|
|
|
2,523 |
|
|
|
5,754 |
|
Cash payments
|
|
|
(1,467 |
) |
|
|
(1,194 |
) |
|
|
(850 |
) |
|
|
(3,511 |
) |
Changes in estimates
|
|
|
(238 |
) |
|
|
952 |
|
|
|
325 |
|
|
|
1,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
592 |
|
|
$ |
692 |
|
|
$ |
1,998 |
|
|
$ |
3,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the first quarter of 2003, the Companys Board of
Directors approved a restructuring plan to conform the
Companys expenses to its revenue levels and to better
position the Company for future growth and eventual
profitability. The Company incurred restructuring charges in the
amount of $2.7 million related to employee termination
costs as part of the 2003 restructuring. As of December 31,
2003, 81 employees were terminated throughout the Company, and
the Company paid $2.7 million in termination costs. In the
second quarter of 2003, the Company reversed $86,000 of
previously accrued termination costs due to a change in
estimate. At December 31, 2004, no restructuring charges
remained accrued.
During 2002, a restructuring plan (2002 Plan) was approved by
the Board of Directors and the Company incurred restructuring
charges in the amount of $3.6 million of which $15,000
remained accrued at December 31, 2004, for excess leased
facilities in Israel. The 2002 Plan increased the reserve for
excess leased facilities due to the exiting of additional space
within the same facility in Israel as in the 2001 Plan. As part
of the 2002 Plan 153 employees were terminated throughout the
Company. During 2004, improving real estate market conditions in
Israel gave rise to the Companys improved tenant sublease
assumptions, thereby creating a change in estimate of $100,000.
Additionally, a reclassification between the 2002 Plan and 2001
Plan correcting the application of cash payments to the
appropriate reserve, decreased the reserve for the 2002 Plan by
$1.1 million. The Company currently anticipates the
remaining restructuring accrual relating to excess leased
facilities, will be utilized for servicing operating lease
payments through 2005.
This table summarizes the accrued restructuring balances related
to the 2002 restructurings as of December 31, 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess | |
|
|
|
|
|
|
Leased | |
|
|
|
|
|
|
Facilities | |
|
|
|
|
|
|
and | |
|
|
|
|
Involuntary | |
|
Cancelled | |
|
|
|
|
Terminations | |
|
Contracts | |
|
Total | |
|
|
| |
|
| |
|
| |
Charges
|
|
$ |
2,319 |
|
|
$ |
1,322 |
|
|
$ |
3,641 |
|
Cash payments
|
|
|
(2,131 |
) |
|
|
|
|
|
|
(2,131 |
) |
Reclassifications
|
|
|
(100 |
) |
|
|
100 |
|
|
|
|
|
Balance at December 31, 2002
|
|
|
88 |
|
|
|
1,422 |
|
|
|
1,510 |
|
Cash payments
|
|
|
(88 |
) |
|
|
(219 |
) |
|
|
(307 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
|
1,203 |
|
|
|
1,203 |
|
Cash payments
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
|
|
|
|
|
|
|
(1,088 |
) |
|
|
(1,088 |
) |
Change in estimate
|
|
|
|
|
|
|
(100 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
|
|
|
$ |
15 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
During 2001, the Board of Directors approved a restructuring
plan (2001 Plan) and the Company incurred restructuring charges
in the amount of $12.7 million of which $1.8 million
remained accrued at December 31, 2004, for excess leased
facilities in Israel. Terminations covering 293 technical,
production and administrative employees occurred as part of the
2001 Plan. During 2004, improving real estate market conditions
in Israel gave rise to the Companys improved tenant
sublease assumptions thereby creating a change in estimate of
$1.4 million. Additionally, a reclassification between the
2002 Plan and 2001 Plans
77
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
correcting the application of cash payments to the appropriate
reserve, increased the reserve for the 2001 Plan by
$1.1 million. The Company currently anticipates the
remaining restructuring accrual relating to excess leased
facilities, will be utilized for servicing operating lease
payments through 2005.
This table summarizes the accrued restructuring balances related
to the 2001 restructurings as of December 31, 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess | |
|
|
|
|
|
|
Leased | |
|
|
|
|
|
|
Facilities | |
|
|
|
|
|
|
and | |
|
|
|
|
Involuntary | |
|
Cancelled | |
|
|
|
|
Terminations | |
|
Contracts | |
|
Total | |
|
|
| |
|
| |
|
| |
Charges
|
|
$ |
3,168 |
|
|
$ |
9,501 |
|
|
$ |
12,669 |
|
Cash payments
|
|
|
(1,891 |
) |
|
|
(2,580 |
) |
|
|
(4,471 |
) |
Balance at December 31, 2001
|
|
|
1,277 |
|
|
|
6,921 |
|
|
|
8,198 |
|
Cash payments
|
|
|
(100 |
) |
|
|
(2,855 |
) |
|
|
(2,955 |
) |
Reclassifications
|
|
|
(1,177 |
) |
|
|
1,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
|
|
|
|
5,243 |
|
|
|
5,243 |
|
Cash payments
|
|
|
|
|
|
|
(1,685 |
) |
|
|
(1,685 |
) |
Change in estimate
|
|
|
|
|
|
|
(261 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
|
3,297 |
|
|
|
3,297 |
|
Cash payments
|
|
|
|
|
|
|
(1,170 |
) |
|
|
(1,170 |
) |
Reclassifications
|
|
|
|
|
|
|
1,088 |
|
|
|
1,088 |
|
Change in estimate
|
|
|
|
|
|
|
(1,377 |
) |
|
|
(1,377 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
|
|
|
$ |
1,838 |
|
|
$ |
1,838 |
|
|
|
|
|
|
|
|
|
|
|
As a result of CMTS product line restructuring activities in
2004, the Company recognized a fixed asset impairment charge of
$2.4 million. The impairment charge reflects a write-down
of the assets carrying value to a fair value based on a
third party valuation in 2004.
Primarily as a result of restructuring activities in 2003, the
Company wrote off $0.4 million of fixed assets in 2003,
which were determined to have no remaining useful life. As a
result of restructuring activities in 2002 certain property and
equipment were determined to have no remaining useful life.
During 2002, $1.3 million of fixed assets were written-off.
The impaired fixed assets in each period represented the net
book value of idle manufacturing equipment, leasehold, and
office equipment.
The Company adopted SFAS No. 142 on January 1,
2002. The Company reclassified $1.3 million of assembled
workforce, net of accumulated amortization, with an indefinite
life, to goodwill at the date of adoption. The Company tests
goodwill for impairment using the two-step process prescribed in
SFAS No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of the
impairment, if any. Due to a difficult economic environment and
heightened price competition in the modem and telecom businesses
during the three months ended June 30, 2002, the Company
experienced a significant drop in its market capitalization, and
therefore proceeded to perform an interim test to measure
goodwill and intangible assets for impairment at June 30,
2002. Based on the forecast, the estimated undiscounted future
cash flows from the use of the goodwill would have been less
than its carrying amount. The Company determined that the
outcome of this test reflected that the fair value of the
goodwill was zero. This resulted in a non-cash charge of
$4.0 million to write off the remaining goodwill of which
$3.0 million in
78
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2002 was related to the Cable segment and $1.0 million was
related to the former Telecom segment. Subsequent to this
write-off, the Company had no intangible assets, that were
deemed to have indefinite useful lives.
|
|
7. |
Impairment of Long-Term Investment |
The Companys long-lived assets previously included
long-term equity investments. During 2002, the Company
determined that one long term equity investment in a
privately-held company was impaired. The investees
forecasts were not met and market conditions significantly
deteriorated and accordingly, the Company recorded an impairment
charge of $4.5 million. The net book value of the
Companys long term equity investments was zero as of
December 31, 2004 and 2003.
|
|
8. |
Convertible Subordinated Notes |
In July 2000, the Company issued $500 million of
5% Convertible Subordinated Notes (Notes) due in August
2007 resulting in net proceeds to the Company of approximately
$484.4 million. The Notes are the Companys general
unsecured obligation and are subordinated in right of payment to
all existing and future senior indebtedness and to all of the
liabilities of the Companys subsidiaries. The Notes are
convertible into shares of the Companys common stock at a
conversion price of $84.01 per share at any time on or
after October 24, 2000 through maturity, unless
previously redeemed or repurchased. The Company could have
redeemed 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 the Companys stock exceeded 150% of the
conversion price, or $126.01 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. The Company would also make an additional payment of
$193.55 per $1,000 principal amount of the Notes, less the
amount of any interest actually paid on the Notes before the
date of redemption. The Company may redeem the Notes at any time
on or after August 7, 2003 at specified prices plus accrued
and unpaid interest. Interest is payable semi-annually. Debt
issuance costs related to the Notes were approximately
$15.6 million and are amortized over seven years. At
December 31, 2004 and 2003, accumulated amortization of
debt issuance costs totaled $15.3 million and
$14.5 million, respectively.
In 2002, the Company repurchased approximately
$109.1 million of the Notes for $57.6 million in cash,
resulting in a gain of approximately $49.1 million, net of
related unamortized issuance costs of $2.4 million. In
2001, the Company repurchased approximately $325.9 million
of the Notes. The Company did not repurchase any Notes during
2004 or 2003.
In April 2002, the Company adopted SFAS No. 145 and
determined that the extinguishment of its debt did not meet the
criteria of an extraordinary item as set forth in
SFAS No. 145. Accordingly, in 2002, the Company began
reporting the gain from retirement of the Notes in operating
results.
Approximately $65.1 million of the Notes were outstanding
at December 31, 2004 and 2003.
Beginning in April 2000, several plaintiffs filed class action
lawsuits in federal court against the Company and certain of the
Companys officers and directors. Later that year, the
cases were consolidated in the United States District Court,
Northern District of California as In re Terayon Communication
Systems, Inc. Securities Litigation. The Court then appointed
lead plaintiffs who filed an amended complaint. In 2001, the
Court granted in part and denied in part defendants motion
to dismiss, and plaintiffs filed a new complaint. In 2002, the
Court denied defendants motion to dismiss that complaint,
which, like the earlier complaints, alleges that the defendants
violated the federal securities laws by issuing materially false
and misleading
79
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements and failing to disclose material information
regarding the Companys technology. On February 24,
2003, the Court certified a plaintiff class consisting of those
who purchased or otherwise acquired the Companys
securities between November 15, 1999 and
April 11, 2000.
On September 8, 2003, the Court heard defendants
motion to disqualify two of the lead plaintiffs and to modify
the definition of the plaintiff class. On September 10,
2003, the Court issued an order vacating the hearing date for
the parties summary judgment motions, and, on
September 22, 2003, the Court issued another order staying
all discovery until further notice and vacating the trial date,
which had been November 4, 2003.
On February 23, 2004, the Court issued an order
disqualifying two of the lead plaintiffs. The order also states
that plaintiffs counsel must provide certain information
to the Court about counsels relationship with the
disqualified lead plaintiffs, and it provides that defendants
may serve certain additional discovery. On March 24, 2004,
plaintiffs submitted certain documents to the Court in response
to its order, and, on April 16, 2004, the Company responded
to this submission. The Company has also have initiated
discovery pursuant to the Courts February 23, 2004
order.
On October 16, 2000, a lawsuit was filed against the
Company and the individual defendants (Zaki Rakib, Selim Rakib
and Raymond Fritz) in the California Superior Court,
San Luis Obispo County. This lawsuit is titled
Bertram v. Terayon Communications Systems, Inc. The factual
allegations in the Bertram complaint were similar to those in
the federal class action, but the Bertram complaint sought
remedies under state law. Defendants removed the Bertram case to
the United States District Court, Central District of
California, which dismissed the complaint and transferred the
case to the United States District Court, Northern District of
California. That Court eventually issued an order dismissing the
case. Plaintiffs have appealed this order, and their appeal was
heard on April 16, 2004. On June 9, 2004, the United
States Court of Appeals for the Ninth Circuit affirmed the order
dismissing the Bertram case.
The Court of Appeals opinion affirming dismissal of the
Bertram case does not end the class action. The Company believes
that the allegations in the class action are without merit, and
we intend to contest this matter vigorously. This matter,
however, could prove costly and time consuming to defend, and
there can be no assurances about the eventual outcome.
In 2002, two shareholders filed derivative cases purportedly on
behalf of the Company against certain of its current and former
directors, officers, and investors. (The defendants differed
somewhat in the two cases.) Since the cases were filed, the
investor defendants have been dismissed without prejudice, and
the lawsuits have been consolidated as Campbell v. Rakib in
the California Superior Court, Santa Clara County. The
Company is a nominal defendant in these lawsuits, which allege
claims relating to essentially the same purportedly misleading
statements that are at issue in the pending securities class
action. In the securities class action, the Company disputes
making any misleading statements. The derivative complaints also
allege claims relating to stock sales by certain of the director
and officer defendants.
The Company believes that there are many defects in the Campbell
and OBrien derivative complaints.
On January 19, 2003, Omniband Group Limited, a Russian
company (Omniband) filed a request for arbitration with the
Zurich Chamber of Commerce, claiming damages in an amount of
$2,094,970 allegedly caused by the breach of an agreement by the
Company, Terayon Communication Systems Ltd., a wholly-owned
subsidiary of the Company, and Radwiz Ltd (Radwiz), a former
wholly-owned subsidiary of the Company, to sell to Omniband
certain equipment pursuant to an agreement between Omniband and
Radwiz. On December 18, 2003, the panel of arbiters with
the Zurich Chamber of Commerce allowed the arbitration
proceeding to continue against Radwiz but dismissed the
proceedings against the Company and Terayon Ltd. Omniband
appealed the Zurich Chamber of Commerces decision to
dismiss the proceedings against the Company and Terayon Ltd.,
and the decision was affirmed on October 15, 2004. On
January 13, 2005, the
80
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Zurich Chamber of Commerce dismissed the case with prejudice
after Omniband failed to respond and pay the arbitration fees.
In January 2005, Adelphia Corporation sued the Company in the
District Court of the City and County of Denver, Colorado.
Adelphias complaint alleges, among other things, breach of
contract and misrepresentation in connection with the
Companys sale of CMTS products to Adelphia and the
Companys announcement to cease future investment in the
CMTS market. Adelphia seeks unspecified monetary damages and
declaratory relief. The Company filed a motion to dismiss the
complaint on February 24, 2005. As the Company believes
that Adelphias allegations are without merit, it intends
to contest this matter vigorously. This matter, however, could
prove costly and time consuming to defend, and there can be no
assurances about the eventual outcome.
From time to time, the Company receives letters claiming that
the Companys technology and products may infringe on
intellectual property rights of third parties. The Company also
has in the past agreed to, and may from time to time in the
future agree to, indemnify a customer of its technology or
products for claims against the customer by a third party based
on claims that the Companys technology or products
infringe intellectual property rights of that third party. These
types of claims, meritorious or not, can result in costly and
time-consuming litigation; divert managements attention
and other resources; require the Company to enter into royalty
arrangements; subject the Company to damages or injunctions
restricting the sale of its products, require the Company to
indemnify its customers for the use of the allegedly infringing
products; require the Company to refund payment of allegedly
infringing products to its customers or to forgo future
payments; require the Company to redesign certain of its
products; or damage the Companys reputation, any one of
which could materially and adversely affect the Companys
business, results of operations and financial condition.
The Company has received letters claiming that its technology
infringes the intellectual property rights of others. The
Company has consulted with its patent counsel and is in the
process of reviewing the allegations made by such third parties.
If these allegations were submitted to a court, the court could
find that the Companys products infringe third party
intellectual property rights. If the Company is found to have
infringed third party rights, the Company could be subject to
substantial damages and/or an injunction preventing the Company
from conducting its business. In addition, other third parties
may assert infringement claims against the Company in the
future. A claim of infringement, whether meritorious or not,
could be time-consuming, result in costly litigation, divert the
Companys managements resources cause product
shipment delays or require the Company to enter into royalty or
licensing arrangements. These royalty or licensing arrangements
may not be available on terms acceptable to the Company, if at
all.
Furthermore, the Company has in the past agreed to, and may from
time to time in the future agree to, indemnify a customer of its
technology or products for claims against the customer by a
third party based on claims that its technology or products
infringe intellectual property rights of that third party. These
types of claims, meritorious or not, can result in costly and
time-consuming litigation; divert managements attention
and other resources; require the Company to enter into royalty
arrangements; subject the Company to damages or injunctions
restricting the sale of its products; require the Company to
indemnify its customers for the use of the allegedly infringing
products; require the Company to refund payment of allegedly
infringing products to its customers or to forgo future
payments; require the Company to redesign certain of its
products; or damage its reputation, any one of which could
materially and adversely affect the Companys business,
results of operations and financial condition.
The Company is currently a party to various other legal
proceedings, in addition to those noted above, and may become
involved from time to time in other legal proceedings in the
future. While the Company currently believes that the ultimate
outcome of these other proceedings, individually and in the
aggregate, will not have a material adverse effect on its
financial position or overall results of operations, litigation
is subject to inherent uncertainties. Were an unfavorable ruling
to occur in any of the Companys legal proceedings, there
exists the
81
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
possibility of a material adverse impact on the Companys
results of operations for the period in which the ruling occurs.
The estimate of the potential impact on the Companys
financial position and overall results of operations for any of
the above legal proceedings could change in the future.
In conjunction with a 1998 preferred stock financing, the
Company issued Shaw a warrant (Anti-Dilution Warrant) to
purchase an indeterminate number of shares of common stock. The
Anti-Dilution Warrant was exercisable at the option of Shaw
during the period that Shaw owned equity in the Company and in
the event the Company issued new equity securities at below the
current market price defined in the Anti-Dilution Warrant. The
aggregate exercise price was $0.50. The Company issued certain
equity securities that, as of December 31, 2003 and 2002,
required the Company to issue an additional 37,283 and 17,293
warrants, respectively, to purchase shares of common stock
pursuant to the Anti-Dilution Warrant. The Company recorded
expenses of approximately $45,000 and $26,000 relating to the
issuance of warrants pursuant to the Anti-Dilution Warrant, in
2003 and 2002, respectively. The expense was calculated by
multiplying the annualized fair market value of the
Companys stock by the share dilution attributable to the
Anti-Dilution Warrant. In February 2003, Shaw transferred its
ownership to a third party and the Anti-Dilution Warrant expired
unexercised. As of December 31, 2003, the Anti-Dilution
Warrant had expired and was not exercised.
In February 2001, the Company issued a warrant to
purchase 200,000 shares of the Companys common
stock at a price of $5.4375 per share, the closing price of
the Companys common stock on the date the warrant was
issued, in connection with the December 2000 acquisition of
TrueChat, Inc. (TrueChat). Under terms of the warrant
100,000 shares are vested and exercisable immediately and
the remaining 100,000 shares vest and become exercisable at
the rate of 1/24th per month, beginning January 31,
2001. The fair value of the warrant of approximately
$0.7 million was calculated using the Black-Scholes method
and was recorded as additional consideration relating to the
purchase of TrueChat. As of December 31, 2003, the TrueChat
warrant was exercisable for an aggregate of 200,000 shares
of the Companys common stock. The TrueChat warrant expired
unexercised in February 2004.
In February 2001, the Companys Board of Directors approved
the adoption of a Stockholder Rights Plan under which all
stockholders of record as of February 20, 2001 received
rights to purchase shares of a new series of preferred stock.
The rights were distributed as a non-taxable dividend and will
expire in ten years from the record date. The rights will be
exercisable only if a person or group acquires 15% or more of
the Companys common stock or announces a tender offer for
15% or more of the Companys common stock. If a person or
group acquires 15% or more of the Companys common stock,
all rights holders except the buyer will be entitled to acquire
the Companys common stock at a discount. The Board may
terminate the Rights Plan at any time or redeem the rights prior
to the time a person or group acquires more than 15% of the
Companys common stock.
82
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common stock reserved for issuance is as follows:
|
|
|
|
|
|
|
December 31, | |
|
|
2004 | |
|
|
| |
Common stock options
|
|
|
28,719,914 |
|
Employee stock purchase plan
|
|
|
1,202,733 |
|
|
|
|
|
Total
|
|
|
29,922,647 |
|
|
|
|
|
|
|
|
Stock Option and Stock Purchase Plans |
In March 1995, the Board of Directors approved a stock option
plan (1995 Plan) that authorized shares for future issuance to
be granted as options to purchase shares of our common stock. As
of December 31, 2004 a total of 4,229,494 shares have
been authorized for issuance related to the 1995 Plan.
In March 1997, the Board of Directors approved an equity
incentive plan (1997 Plan) that authorized 1,600,000 shares
for future issuance to be granted as options to purchase shares
of our common stock. In June 1998, the Board of Directors
authorized the adoption of the amended 1997 Plan, increasing the
aggregate number of shares authorized for issuance under the
1997 Plan to 6,600,000 shares (5,000,000 additional
shares). The amendment also provided for an increase to the
authorized shares each year on January 1, starting with
January 1, 1999, if the number of shares reserved for
future issuance was less than 5% of our outstanding common
stock, then the authorized shares would be increased to a
balance equal to 5% of the common stock outstanding. There were
no increases to the 1997 Plan in 1998 or 1999. On
January 1, 2000, 2,384,528 shares were added to the
1997 Plan for a total of 8,984,528 shares.
The 1997 Plan was amended on June 13, 2000 to increase the
shares authorized for issuance by 3,770,000 additional shares
and to provide for an increase in the number of shares of common
stock beginning January 1, 2000 through January 1,
2007, by the lesser of 5% of the common stock outstanding on
such January 1 or 3,000,000 shares. In May 2003, the
Companys Board of Directors authorized the adoption of an
amendment to reduce the number of authorized shares in the 1997
Plan by 6,237,826 shares. As of December 31, 2004, a
total of 15,516,702 shares have been authorized for
issuance related to the 1997 Plan.
In June 1998, the Board of Directors authorized the adoption of
the 1998 Non-Employee Directors Stock Option Plan (1998
Plan), pursuant to which 400,000 shares of our common stock
have been reserved for future issuance to our non-employee
directors. In 2002, the Board of Directors amended the 1998 Plan
to increase the shares authorized for issuance by 400,000
additional shares. As of December 31, 2004, a total of
800,000 shares have been authorized for issuance related to
the 1998 Plan.
In September 1999, our Board of Directors authorized the
adoption of the 1999 Non-Officers Equity Incentive Plan (1999
Plan), pursuant to which 6,000,000 shares of our common
stock have been reserved for future issuance to our non-officer
employees Additionally, in May 2003, our Board of Directors
authorized the adoption of an amendment to reduce the number of
authorized shares in the 1999 Plan by 13,762,174 shares.
83
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2004, a total of 14,737,826 shares
have been authorized for issuance related to the 1999 Plan.
The 1995 and 1997 Plans provide for incentive stock options or
nonqualified stock options to be issued to employees, directors,
and consultants of the Company. Prices for incentive stock
options may not be less than the fair market value of the common
stock at the date of grant. Prices for nonqualified stock
options may not be less than 85% of the fair market value of the
common stock at the date of grant. Options are immediately
exercisable and vest over a period not to exceed five years from
the date of grant. Any unvested stock issued is subject to
repurchase by the Company at the original issuance price upon
termination of the option holders employment. Unexercised
options expire ten years after the date of grant.
The 1999 Plan provides for nonqualified stock options to be
issued to non-officer employees and consultants of the Company.
Prices for nonqualified stock options may not be less than 85%
of the fair market value of the common stock at the date of the
grant. Options generally vest and become exercisable over a
period not to exceed five years from the date of grant.
Unexercised options expire ten years after date of grant.
During the year ended December 31, 2002, the Company
recorded aggregate deferred compensation of approximately
$38,000 representing the difference between the grant price and
the deemed fair value of the Companys common stock options
granted during the period. During the years ended
December 31, 2004 and 2003, the Company did not record any
additional deferred compensation. The amortization of deferred
compensation is being charged to operations and is being
amortized over the vesting period of the options, which is
typically five years. In each subsequent reporting period
(through the vesting period) the remaining deferred compensation
will be re-measured. For the years ended December 31, 2004,
2003, and 2002, the amortization expense was approximately
$22,000, $53,000, and $0.5 million, respectively.
84
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of additional information with
respect to the 1995 Plan, the 1997 Plan, the 1998 Plan, the 1999
Plan, outstanding options assumed by the Company in conjunction
with its business acquisitions and option grants made outside
the plans (if any):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
Options | |
|
| |
|
|
Available for | |
|
Number of | |
|
Weighted-Average | |
|
|
Grant | |
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
Balance at December 31, 2001
|
|
|
20,397,666 |
|
|
|
20,007,686 |
|
|
$ |
9.75 |
|
|
Options authorized
|
|
|
3,400,000 |
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,734,400 |
) |
|
|
1,734,400 |
|
|
$ |
5.40 |
|
|
Options exercised
|
|
|
|
|
|
|
(257,521 |
) |
|
$ |
3.95 |
|
|
Options canceled
|
|
|
6,849,540 |
|
|
|
(6,849,540 |
) |
|
$ |
12.66 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
28,912,806 |
|
|
|
14,635,025 |
|
|
$ |
8.05 |
|
|
Options authorized
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
Options reduced
|
|
|
(20,000,000 |
) |
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(7,153,320 |
) |
|
|
7,153,320 |
|
|
$ |
3.05 |
|
|
Options exercised
|
|
|
|
|
|
|
(602,272 |
) |
|
$ |
4.20 |
|
|
Options canceled
|
|
|
3,722,114 |
|
|
|
(3,722,114 |
) |
|
$ |
7.58 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
8,481,600 |
|
|
|
17,463,959 |
|
|
$ |
6.20 |
|
|
Options authorized
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(4,738,944 |
) |
|
|
4,738,944 |
|
|
$ |
1.95 |
|
|
Options exercised
|
|
|
|
|
|
|
(225,645 |
) |
|
$ |
2.19 |
|
|
Options canceled
|
|
|
5,174,420 |
|
|
|
(5,174,420 |
) |
|
$ |
5.18 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
11,917,076 |
|
|
|
16,802,838 |
|
|
$ |
5.37 |
|
|
|
|
|
|
|
|
|
|
|
In addition, the following table summarizes information about
stock options that were outstanding and exercisable at
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
|
|
|
| |
|
Options Exercisable | |
|
|
|
|
Weighted | |
|
|
|
| |
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Shares | |
|
Contractual | |
|
Exercise | |
|
Exercisable | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Life | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.00 - $1.99
|
|
|
3,777,098 |
|
|
|
9.48 |
|
|
$ |
1.74 |
|
|
|
162,549 |
|
|
$ |
1.26 |
|
$2.46 - $4.26
|
|
|
3,562,965 |
|
|
|
8.40 |
|
|
|
2.44 |
|
|
|
1,963,959 |
|
|
|
2.45 |
|
$4.27 - $6.50
|
|
|
3,312,257 |
|
|
|
7.22 |
|
|
|
4.59 |
|
|
|
1,998,096 |
|
|
|
4.85 |
|
$6.51 - $8.39
|
|
|
5,348,910 |
|
|
|
6.12 |
|
|
|
6.80 |
|
|
|
5,220,337 |
|
|
|
6.80 |
|
$8.51 - $123.50
|
|
|
801,608 |
|
|
|
5.34 |
|
|
|
29.23 |
|
|
|
735,213 |
|
|
|
30.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,802,838 |
|
|
|
7.54 |
|
|
$ |
5.37 |
|
|
|
10,080,154 |
|
|
$ |
7.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, there were no shares of the
Companys common stock subject to repurchase by the Company.
Employee Stock Purchase Plan
In June 1998, the Board of Directors approved, and the Company
adopted, the 1998 Employee Stock Purchase Plan (ESPP), which is
designed to allow eligible employees of the Company to purchase
shares of
85
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common stock at semi-annual intervals through periodic payroll
deductions. In 2002, the ESPP was amended to add an additional
3,000,000 shares to the ESPP. An aggregate of
4,400,000 shares of common stock are reserved for the ESPP,
and 3,197,267 shares have been issued through
December 31, 2004. The ESPP is implemented in a series of
successive offering periods, each with a maximum duration of
24 months. Eligible employees can have up to 15% of their
base salary deducted that can be used to purchase shares of the
common stock on specific dates determined by the Board of
Directors (up to a maximum of $25,000 per year based upon
the fair market value of the shares at the beginning date of the
offering). The price of common stock purchased under the ESPP
will be equal to 85% of the lower of the fair market value of
the common stock on the commencement date of each offering
period or the specified purchase date. In November 2002 the
Companys Board of Directors suspended the ESPP after the
final offering period expired on July 31, 2004.
The Company has elected to follow APB Opinion No. 25 and
related interpretations in accounting for its employee stock
plans because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123 requires
the use of valuation models that were not developed for use in
valuing employee stock instruments. Under APB Opinion
No. 25, when the exercise price of the Companys
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net loss is required under
SFAS No. 123 and is calculated as if the Company had
accounted for its employee stock options and for its ESPP shares
to be issued under the fair value method of
SFAS No. 123. The fair value for employee stock
options granted and ESPP shares was estimated at the date of
grant based on the Black-Scholes model using the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Free |
|
|
|
Weighted |
|
|
|
|
Interest |
|
Volatility |
|
Average |
|
Dividend |
|
|
Rates |
|
Factor |
|
Expected Life |
|
Yield |
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plans
|
|
|
4.22 |
% |
|
|
1.50 |
|
|
|
5.0 yrs |
|
|
|
0.0 |
% |
|
Employee stock purchase plan
|
|
|
4.36 |
% |
|
|
1.50 |
|
|
|
0.5 yrs |
|
|
|
0.0 |
% |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plans
|
|
|
2.67 |
% |
|
|
0.87 |
|
|
|
5.0 yrs |
|
|
|
0.0 |
% |
|
Employee stock purchase plan
|
|
|
2.88 |
% |
|
|
1.54 |
|
|
|
0.5 yrs |
|
|
|
0.0 |
% |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plans
|
|
|
3.47 |
% |
|
|
0.79 |
|
|
|
5.0 yrs |
|
|
|
0.0 |
% |
|
Employee stock purchase plan
|
|
|
1.27 |
% |
|
|
1.54 |
|
|
|
0.5 yrs |
|
|
|
0.0 |
% |
As discussed above, the valuation models used under
SFAS No. 123 were developed for use in estimating the
fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, valuation models
require the input of highly subjective assumptions, including
the expected life of the option. Because the Companys
employee stock options have characteristics significantly
different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair
value estimate, in managements opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock instruments.
The options weighted average grant date fair value, which
is the value assigned to the options under
SFAS No. 123, was $1.28, $2.14, and $4.98, for options
granted during 2004, 2003 and 2002, respectively. The weighted
average grant date fair value of ESPP shares to be issued was
$0.99, $1.00 and $2.25 for the years ended December 31,
2004, 2003 and 2002, respectively.
86
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2004, 2003 and 2002, the
Company had an income tax (benefit) expense of $(76,000),
$316,000 and $238,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
State
|
|
|
40 |
|
|
|
|
|
|
|
20 |
|
|
Foreign
|
|
|
(116 |
) |
|
|
316 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(76 |
) |
|
|
316 |
|
|
|
238 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(76 |
) |
|
$ |
316 |
|
|
$ |
238 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax benefit attributable to net
loss applicable to common stockholders computed at the
U.S. federal statutory rates to income tax benefit
(expense)(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Tax benefit at U.S. statutory rate
|
|
$ |
(12,812 |
) |
|
$ |
(17,624 |
) |
|
$ |
(15,391 |
) |
Loss for which no tax benefit is currently recognizable
|
|
|
12,747 |
|
|
|
17,536 |
|
|
|
15,391 |
|
Other, net
|
|
|
(11 |
) |
|
|
404 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(76 |
) |
|
$ |
316 |
|
|
$ |
238 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes.
87
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
and liabilities as of December 31, 2003 and 2002 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$ |
145,066 |
|
|
$ |
149,862 |
|
|
Tax credit carry forwards
|
|
|
16,245 |
|
|
|
19,505 |
|
|
|
Reserves and accruals
|
|
|
10,132 |
|
|
|
9,949 |
|
|
|
Capitalized research and development
|
|
|
4,172 |
|
|
|
8,761 |
|
|
Intangible asset amortization
|
|
|
30,051 |
|
|
|
38,864 |
|
|
Other, net
|
|
|
14,891 |
|
|
|
12,130 |
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
220,557 |
|
|
|
239,071 |
|
|
|
Valuation allowance
|
|
|
(220,557 |
) |
|
|
(239,071 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent on future
earnings, if any, the timing and the amount of which are
uncertain. Accordingly, a valuation allowance has been
established to reflect these uncertainties as of
December 31, 2004 and 2003. The change in the valuation
allowance was a net decrease of $18.5 million and
$5.7 million and a net increase of approximately
$26.4 million for the years ended December 31, 2004,
2003 and 2002, respectively. Approximately $45.6 million of
the valuation allowance related to stock options benefits will
be credited to equity when realized.
As of December 31, 2004, the Company had federal,
California and foreign net operating loss carryforwards of
approximately $366.6 million, $184.3 million and
$49.8 million, respectively. The Company also had federal
and California tax credit carryforwards of approximately
$9.1 million and $16.7 million, respectively. The
federal and California net operating loss and credit
carryforwards will expire at various dates beginning in the
years 2005 through 2024, if not utilized. The foreign net
operating losses have an unlimited carryover period.
Utilization of net operating loss and tax credit carryforwards
may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating
loss and tax credit carry forwards before full utilization.
|
|
12. |
Defined Contribution Plan |
During 1995, the Company adopted a 401(k) Profit Sharing Plan
and Trust that allows eligible employees to make contributions
subject to certain limitations. The Company may make
discretionary contributions based on profitability as determined
by the Board of Directors. No amount was contributed by the
Company to the plan during the years ended December 31,
2004, 2003 and 2002.
Since late 2000, the worldwide telecom and satellite industries
have experienced severe downturns that have resulted in
significantly reduced purchases of new broadband equipment.
Because of this overall drop in demand, the Company has
refocused its efforts on the cable industry, and has
significantly reduced its investment in the telecom and
satellite businesses. Consequently, beginning in 2003, the
Companys previously reported Telecom segment no longer
meets the quantitative threshold for disclosure and the Company
now operates as one business segment.
88
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company operates solely in one business segment, the
development and marketing of CMTS, home access solutions (HAS),
DVS products and related services. The Companys foreign
operations consist of sales, marketing and support activities
through its foreign subsidiaries. The Companys Chief
Executive Officer has responsibility as the chief operating
decision maker (CODM) as defined by Statement of Financial
Accounting Standards Number 131, Disclosures about
Segments of an Enterprise and Related Information. The
CODM reviews financial information presented on a consolidated
basis, accompanied by disaggregated information about revenues
and certain direct expenses by geographic region for purposes of
making operating decisions and assessing financial performance.
The Companys assets are primarily located in its corporate
office in the United States and are not allocated to any
specific region, therefore the Company does not produce reports
for, or measure the performance of, its geographic regions based
on any asset-based metrics. As a result, geographic information
is presented only for revenues and long-lived assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
83,212 |
|
|
$ |
74,341 |
|
|
$ |
41,150 |
|
|
|
Americas, excluding United States
|
|
|
4,126 |
|
|
|
3,713 |
|
|
|
20,530 |
|
|
|
EMEA excluding Israel
|
|
|
29,348 |
|
|
|
17,635 |
|
|
|
11,381 |
|
|
|
Israel
|
|
|
6,681 |
|
|
|
7,038 |
|
|
|
8,283 |
|
|
|
Asia excluding Japan
|
|
|
17,999 |
|
|
|
9,575 |
|
|
|
36,214 |
|
|
|
Japan
|
|
|
9,172 |
|
|
|
21,183 |
|
|
|
11,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
150,538 |
|
|
$ |
133,485 |
|
|
$ |
129,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
4,423 |
|
|
$ |
9,555 |
|
|
Americas, excluding United States
|
|
|
402 |
|
|
|
810 |
|
|
EMEA excluding Israel
|
|
|
131 |
|
|
|
176 |
|
|
Israel
|
|
|
687 |
|
|
|
1,157 |
|
|
Asia
|
|
|
117 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
|
5,760 |
|
|
|
11,871 |
|
|
|
Total current assets
|
|
|
137,625 |
|
|
|
191,348 |
|
|
Other assets
|
|
|
10,349 |
|
|
|
12,021 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
153,734 |
|
|
$ |
215,240 |
|
|
|
|
|
|
|
|
Two customers, Adelphia and Comcast accounted for more than 10%
of total revenues for the year ended December 31, 2004; 18%
and 12%, respectively. Three customers, Adelphia, Cross Beam
Networks and Comcast accounted for more than 10% of total
revenues for the year ended December 31, 2003; 22%, 16% and
13%, respectively. Three customers, Comcast, Harmonic and
Sumitronics, accounted for 10% or more of total accounts
receivable for the year ended December 31, 2004; 18%, 16%
and 10%, respectively and two customers, Adelphia and Comcast,
accounted for 10% of more of total accounts receivable for the
year ended December 31, 2003; 24% and 20%, respectively.
89
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14. |
Related Party Transactions |
During the years ended December 31, 2004, 2003 and 2002,
the Company recognized revenue of $9.9 million,
$4.7 million and $9.1 million, respectively in
connection with product shipments made to related parties.
Related party revenues in 2004 were from Harmonic, Inc.
(Harmonic). Related party revenues in 2003 and 2002 included
revenues from Harmonic and Rogers Communications, Inc. (Rogers).
Lewis Solomon, a member the Companys board of directors,
is a member of the board of directors of Harmonic. All revenues
attributable to Harmonic were included in related party revenues
in 2004 and 2003. Alek Krstajic, another member of our board of
directors, was the Senior Vice President of Interactive
Services, Sales and Product Development for Rogers until January
2003. Effective in April 2003, Rogers was no longer a related
party to us. Consequently, revenues attributable to Rogers are
only classified as related party revenues in the first quarter
of 2003. Neither of these related parties are a supplier to the
Company.
Cost of related party product revenues in the Companys
consolidated statements of operations consists of direct and
indirect product costs. Accounts receivable from Rogers and
Harmonic totaled approximately $3.1 million and
$0.6 million at December 31, 2004 and 2003,
respectively.
In December 2001, the Company entered into co-marketing
arrangements with Shaw Communications, Inc. (Shaw) and Rogers.
The Company paid $7.5 million to Shaw and $0.9 million
to Rogers, and recorded these amounts as other current assets.
In July 2002, the Company began amortizing these prepaid assets
and charging them against related party revenues in accordance
with EITF 01-09, Accounting for Consideration given
by a Vendor to a Customer or Reseller in Connection with the
Purchase or Promotion of the Vendors Products. The
Company charged $1.4 million per quarter of the
amortization of these assets against total revenues through
December 31, 2003. Amounts charged against total revenues
in the year ended December 31, 2002 and December 31,
2003, totaled approximately $2.8 million and
$5.6 million, respectively. Of the co-marketing
amortization charged to total revenues, $0.15 million and
$0.3 million were charged to related party revenues in the
year ended 2003 and 2002, respectively. No further amounts of
these co-marketing arrangements are included in other current
assets at December 31, 2003 and no further amortization
occurred in 2004.
In October 2002, the Company incurred a marketing expense of
$150,000 for Team Honor, an organization that supports a
professional sailing team. One of the Companys Board
members, Alek Krstajic is the founder and President of Team
Honor.
The Company provides for estimated product warranty expenses
when it sells the related products. Because warranty estimates
are forecasts that are based on the best available
information mostly historical claims
experience claims costs may differ from amounts
provided. An analysis of changes in the liability for product
warranties is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance | |
|
Additions | |
|
|
|
Balance | |
|
|
at | |
|
Charged to | |
|
|
|
at End | |
|
|
Beginning | |
|
Costs and | |
|
|
|
of | |
|
|
of Period | |
|
Expenses | |
|
Settlements | |
|
Period | |
|
|
| |
|
| |
|
| |
|
| |
Year ended December 31, 2002
Accrued warranty expenses
|
|
$ |
8,368 |
|
|
|
2,730 |
|
|
|
(2,491 |
) |
|
$ |
8,607 |
|
Year ended December 31, 2003
Accrued warranty expenses
|
|
$ |
8,607 |
|
|
|
2,287 |
|
|
|
(5,385 |
) |
|
$ |
5,509 |
|
Year ended December 31, 2004
Accrued warranty expenses
|
|
$ |
5,509 |
|
|
|
1,450 |
|
|
|
(3,089 |
) |
|
$ |
3,870 |
|
90
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Guarantees, Including Indirect Guarantees of Indebtedness
of Others |
In addition to product warranties, the Company, from time to
time, in the normal course of business, indemnifies other
parties with whom it enters into contractual relationships,
including customers, lessors, and parties to other transactions
with the Company, with respect to certain matters. These
obligations primarily relate to certain agreements with the
Companys officers, directors and employees, under which
the Company may be required to indemnify such persons for
liabilities arising out of their employment relationship The
Company has agreed to hold the other party harmless against
specified losses, such as those arising from a breach of
representations or covenants, third party claims that the
Companys products when used for their intended purpose(s)
infringe the intellectual property rights of such third party or
other claims made against certain parties. It is not possible to
determine the maximum potential amount of liability under these
indemnification obligations due to the limited history of prior
indemnification claims and the unique facts and circumstances
that are likely to be involved in each particular claim.
Historically, payments made by the Company under these
obligations were not material and no liabilities have been
recorded for these obligations on the balance sheets as of
December 31, 2004 or 2003.
|
|
16. |
Sale of Certain Assets |
In July 2003, the Company entered into an agreement with
Verilink Corporation (Verilink) to sell certain assets to
Verilink for up to a maximum of $0.9 million. The Company
received $0.45 million in July 2003 and an additional
$0.13 million by year end December 31, 2003. During
2004, the Company received an additional $0.11 million
toward the asset sale. The assets were originally acquired
through the Companys acquisition of Access Network
Electronics (ANE) in February 2000. Additionally, Verilink
agreed to purchase at least $2.1 million of related
inventory from the Company on or before December 31, 2004.
As of December 31, 2004 and 2003, Verilink had purchased
$0.56 million and $0.73 million, respectively, of this
inventory.
As part of this agreement, Verilink agreed to assume all
warranty obligations related to ANE products sold prior to, on,
or after July 2003. The Company agreed to reimburse Verilink for
up to $2.4 million of certain warranty obligations for ANE
products sold prior to July 2003. Further, Verilink assumed the
obligation for one of the Companys operating leases,
previously accrued as restructuring, resulting in a recovery of
restructuring charges of $0.3 million in 2003.
On April 2, 2004, the Company sold all of its ownership in
Radwiz, Ltd., Ultracom Communications Holdings Ltd. and Combox
Ltd. to a third party for a cash payment of $0.15 million.
In connection with this disposition, the acquirer received
obsolete inventories with no book value, $0.2 million of
selected net assets, and assumed $1.35 million of net
liabilities related to these subsidiaries. The Company recorded
a net gain of $1.5 million, which is included as a
component of other income (expense) in the accompanying
condensed consolidated statement of operations.
On February 8, 2005, the Company announced the signing of
an agreement with ATI Technologies, Inc (ATI) relating to
the sale of certain Company cable modem semiconductor assets.
The agreement calls for ATI to acquire the Companys cable
modem silicon intellectual property and related software, assume
a lease and hire approximately twenty-five employees from the
Companys design team. Under the terms of the agreement,
ATI will pay the Company $6.95 million upon the closing,
with a balance of $7.05 million subject to the Company
achieving milestones for certain conditions, services and
deliverables spanning a period of 15 months. On
March 9, 2005 ATI and the Company signed closing documents
for this agreement. Upon closing the Company received
$8.6 million in cash which was comprised of the
$6.95 million for the initial payment and
$1.65 million of the $1.9 million for having met the
first milestone. The difference between the $1.9 million
milestone and the payment of $1.65 million was money
retained by ATI to pay for Company
91
TERAYON COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
funded retention bonuses for employees that accepted employment
with ATI. The balance of $5.2 million will be subject to
the Company achieving the remaining milestones over the
subsequent 15 months. The maximum liability for the Company
is set at $11.5 million or the total amount of the purchase
price paid by ATI plus $1.5 million which would be offset
from the purchase price. Total purchase price payable to the
Company upon achieving all terms and conditions is
$14.0 million. Also set forth in this agreement are
representations and warranties made by the Company that may
cause it to incur liabilities and penalties arising out of the
Companys failure to meet certain conditions and milestones.
|
|
18. |
Unaudited Quarterly Financial Data |
Summarized quarterly financial data for 2004 and 2003 is as
follows (in thousands, except per share data):