e10vk
UNITED STATES 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, 2005
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OR
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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 .
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COMMISSION FILE NUMBER:
0000-24647
TERAYON COMMUNICATION SYSTEMS,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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77-0328533
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(State or Other Jurisdiction
of
Incorporation or Organization
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(IRS Employer
Identification No.)
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2450 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051
(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
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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 if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o No þ
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 a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one).
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant was approximately
$186,172,000 on June 30, 2006. For purposes of this
calculation only, the registrant has excluded stock beneficially
owned by directors and officers and owners of more than ten
percent of its common stock. 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,
77,637,177 shares outstanding as of November 30, 2006.
DOCUMENTS
INCORPORATED BY REFERENCE
None
INDEX
TERAYON
COMMUNICATION SYSTEMS, INC.
INTRODUCTORY
NOTE
The Companys Annual Report on
Form 10-K
(Form 10-K)
for the year ended December 31, 2005, includes restated and
audited consolidated financial statements for the years ended
December 31, 2004 and 2003, restated financial statements
for the year ended December 31, 2002, and adjusted
financial statements for the year ended December 31, 2001.
This
Form 10-K
also includes information for the quarterly periods ended
September 30, 2005 and December 31, 2005 and the
restated quarterly information for the first two quarters of
2005 and for the four quarters of 2004. This information is
disclosed in Note 3, Restatement of Consolidated
Financial Statements, and Note 18, 2005
Unaudited Condensed Consolidated Quarterly Information, to
Consolidated Financial Statements.
2
Background
of the Restatement
On November 7, 2005, the Company announced that it
initiated a review of its revenue recognition policies after
determining that certain revenues recognized in the second half
of the year ended December 31, 2004 from a customer may
have been recorded in incorrect periods. The review included the
Companys revenue recognition policies and practices for
current and past periods and its internal control over financial
reporting. Additionally, the Audit Committee of the Board of
Directors (Audit Committee) conducted an independent inquiry
into the circumstances related to the accounting treatment of
certain of the transactions at issue and retained independent
legal counsel to assist with the inquiry.
On March 1, 2006, the Company announced that the Audit
Committee had completed its independent inquiry and that the
Company would restate its consolidated financial statements for
the year ended December 31, 2004 and for the four quarters
of 2004 and the first two quarters of 2005. The principal
findings of the Audit Committee review were: there was no intent
by Company personnel to recognize revenue in contravention of
what Company personnel understood to be the applicable rules at
the time; that Company personnel did not consider or
sufficiently focus on relevant accounting rules; and there was
no intent by Company personnel to mislead the Companys
auditors or engage in other wrongful conduct. Additionally, the
Audit Committee and management reviewed the Companys
revenue recognition practices and policies as they related to
the delivery of certain products and services (including the
development and customization of software) to Thomson Broadcast
(Thomson) under a series of contractual arrangements (Thomson
Contract). The Company had recognized revenue under this series
of contractual arrangements under two separate revenue
arrangements in accordance with Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition (SAB 101), as
amended by SAB No. 104 (SAB 104). However, based
on the guidance under American Institute of Certified Public
Accountants Statement of Position (SOP)
97-2,
Software Revenue Recognition
(SOP 97-2),
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
(SOP 81-1),
SAB 104 and Financial Accounting Standards Board (FASB),
Emerging Issues Task Force (EITF)
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (EITF
00-21),
management determined that this series of contractual
arrangements should have been treated as a single contract, and
therefore a single revenue arrangement for accounting purposes.
Factors that contributed to the determination of a single
revenue arrangement included the documentation of the series of
contractual arrangements under a single memorandum of
understanding (MOU) and the ongoing nature of discussions
between parties to define product specifications and
deliverables that extended beyond the initial agreed upon
contracted deliverables. Additionally, the Company determined it
could not reasonably estimate progress towards completion of the
project, and therefore, in accordance with
SOP 81-1,
used the completed contract method. As a result, revenue
previously recognized in the third and fourth quarters of 2004
and in the first two quarters of 2005 under this series of
contractual arrangements was deferred and ultimately recognized
as revenue in the quarter ended December 31, 2005 upon
completion of the Thomson Contract and final acceptance received
from Thomson for all deliverables under the Thomson Contract.
Direct contract expenses, primarily research and development,
associated with the completion of the project previously
recognized in each quarter of 2004 and in the first two quarters
of 2005 were also deferred and ultimately recognized in the
quarter ended December 31, 2005 in accordance with the
completed contract methodology under
SOP 81-1.
On March 1, 2006, the Company announced a further review of
the Companys revenue recognition policies relating to the
recognition of products and related software sold in conjunction
with post-contract support (PCS) under
SOP 97-2,
SAB 104, EITF
00-21 and
FASB Technical
Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts. As a result, management
determined that the Company did not account properly for the
sale of digital video products under
SOP 97-2
and did not establish vendor specific objective evidence (VSOE)
of fair value for its PCS revenue element related to these
sales. Accordingly, revenue for digital video products sold in
conjunction with PCS and previously recognized as separate
elements in each quarter of 2003 and 2004, and also in the first
and second quarters of 2005, was deferred and recognized ratably
over the contract service period.
On November 8, 2006, the Company announced that the Audit
Committee, upon the recommendation of management, had concluded
that the Companys consolidated financial statements for
the years ended December 31, 2003, 2002 and 2000 and for
the quarters of 2003, 2002 and 2000 should no longer be relied
upon. The restatement of financial statements for 2003 would
correct errors primarily relating to revenue
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recognition, cost of goods sold and estimates of reserves. The
restatement of financial statements for 2000 and 2002 would
correct errors primarily relating to the need to separately
value and account for embedded derivatives associated with the
Companys 5% convertible subordinated notes issued in
July 2000, and other estimates. While no determination was made
that the financial statements for 2001 could not be relied upon,
adjustments would be made to 2001 that would be reflected in the
financial statements to be included in its periodic reports to
be filed with the Securities and Exchange Commission
(Commission) and reported as adjusted.
The Companys previous auditors resigned effective as of
September 21, 2005 and on that date, the Audit Committee
engaged Stonefield Josephson, Inc. (Stonefield) as the
Companys new independent registered public accounting
firm. On May 26, 2006, the Company announced that it had
engaged Stonefield, its current independent auditor, to also
re-audit the Companys consolidated financial statements
for the year ended December 31, 2004 and, if necessary, to
re-audit the Companys consolidated financial statements
for the year ended December 31, 2003. On November 8,
2006, the Company announced that it had engaged Stonefield to
re-audit the Companys consolidated financial statements
for the year ended December 31, 2003.
In June 2006, the Company, through outside counsel, retained FTI
Consulting, Inc. to provide an independent accounting
perspective in connection with the accounting issues under
review.
In connection with the Companys accounting review of the
Thomson Contract, the Commission initiated a formal
investigation. This matter was previously the subject of an
informal Commission inquiry. The Company has been cooperating
fully with the Commission and will continue to do so in order to
bring the investigation to a conclusion as promptly as possible.
Restatement
of Historical Financial Statements
The following is a description of the significant adjustments to
previously reported financial statements resulting from the
restatement process and additional matters addressed in the
course of the restatement. While this description does not
purport to explain each correcting entry, the Company believes
that it fairly describes the significant factors underlying the
adjustments and the overall impact of the restatement in all
material respects.
Revenue Recognition. The Company did
not properly account for revenue as described below. As part of
the restatement process, the Company applied the appropriate
revenue recognition methods to each element of all
multiple-element contracts, corrected other errors related to
revenue recognition and corrected errors to other accounts,
including cost of goods sold and deferred revenue resulting in
adjustments to these accounts in each period covered by the
restatement.
Video Product and Post Contract Support. The
Company did not properly recognize revenue in accordance with
generally accepted accounting principles (GAAP), specifically
SOP 97-2
for its digital video products. The Company previously
recognized revenue for its digital video products in accordance
with SAB 101, as amended by SAB 104 based upon meeting
the revenue recognition criteria in SAB 104. In order for
the Company to recognize revenue from individual elements within
a multiple element arrangement under
SOP 97-2,
the Company must establish vendor specific objective evidence
(VSOE) of fair value for each element. The Company determined
that it did not establish VSOE of fair value for the undelivered
element of PCS on the digital video products. Therefore, as part
of the restatement process the Company corrected this error and
recognized revenue of the hardware element sold in conjunction
with the undelivered PCS element ratably over the period of the
customer support contract. The cost of goods sold for the sale
for the hardware element and the PCS element was also recognized
ratably over the period of the customer support contract.
Accordingly, revenue and cost of goods sold previously
recognized based on meeting the revenue recognition criteria in
SAB 104 for the individual elements for digital video
products sold in conjunction with PCS in each quarter of 2003,
2004 and 2005 were deferred and recognized ratably over the
contract service period.
Thomson Contract. The Company recognized
revenue as it related to the delivery of certain products and
services (including the development and customization of
software) to Thomson under a series of contractual arrangements
in accordance with SAB 101, as amended by SAB 104.
However, based on
SOP 97-2
and
SOP 81-1,
this series of contractual arrangements under a single
memorandum of understanding (MOU) should have been treated as a
single contract, and therefore as a single revenue arrangement
for accounting
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purposes. Factors that contributed to the determination of a
single revenue arrangement included the documentation of the
series of contractual arrangements under a single MOU and the
ongoing nature of discussions between parties to define product
specifications and deliverables that extended beyond the initial
agreed upon contracted deliverables. In accordance with
SOP 81-1,
the Company determined it could not reasonably estimate progress
towards completion of the project and therefore used the
completed contract methodology. As a result, $7.8 million
of revenue previously recognized in the third and fourth
quarters of 2004 and $0.3 million of revenue previously
recognized in the first two quarters of 2005 were deferred and
ultimately recognized as revenue in the quarter ended
December 31, 2005 upon completion of the Thomson Contract
and final acceptance received from Thomson for all deliverables
under the Thomson Contract. Additionally, $1.2 million of
cost of goods sold previously recognized in 2004 and
$1.8 million related to direct development costs previously
recognized from the fourth quarter of 2003 through the second
quarter of 2005 were also deferred and ultimately recognized in
the quarter ended December 31, 2005.
Inventory Consignment. During the quarter
ended December 31, 2003, the Company entered into an
agreement to consign specific spare parts inventory to a certain
customer for the customers demonstration and evaluation
purposes. The consignment period was to terminate during the
quarter ended March 31, 2004, at which time the customer
would either purchase or return the spare parts inventory to the
Company. During the quarter ended March 31, 2004, the
Company notified the customer that the consignment period
terminated and in accordance with the agreement, the customer
should either return or purchase the spare parts inventory. The
Company did not receive a reply and subsequently invoiced the
customer $0.9 million for the spare parts inventory in the
quarter ended March 31, 2004. During the quarter ended
June 30, 2004, the customer agreed to purchase a portion of
the spare parts inventory and returned the remaining spare parts
inventory to the Company. Accordingly, for the quarter ended
June 30, 2004, the Company issued the customer a credit
memo for $0.9 million, which was the amount of the sale
that was invoiced in the quarter ended March 31, 2004 and
was the entire amount originally consigned to the customer.
During the course of the restatement, it was determined that at
March 31, 2004, accounts receivable was overstated by
$0.9 million, inventory was understated by
$0.5 million and both deferred revenue and deferred cost of
goods sold were overstated by $0.9 million and
$0.5 million, respectively. As a result, the consolidated
balance sheets for the quarters ending March 31, 2004 and
June 30, 2004 were appropriately revised to correct these
errors.
Other Revenue Adjustments. The Company also
made other adjustments in 2003, 2004 and 2005 to correct the
recognition of revenue for transactions where the Company did
not properly apply SAB 101, as amended by SAB 104. The
Company made other immaterial adjustments for certain
transactions related to revenue. See Note 3,
Restatement of Consolidated Financial Statements, to
Consolidated Financial Statements.
Allowance for Doubtful Accounts. During
the restatement process, the Company reassessed its accounting
regarding the allowance for doubtful accounts based on its
visibility of its collections and write-offs of the allowance
for doubtful accounts. Prior to 2004, the Companys policy
was to estimate the allowance for doubtful accounts and the
corresponding bad debt expense based on a fixed percentage of
revenue during a specific period. Beginning in 2004, the Company
adopted a specific reserve methodology for estimating the
allowance for doubtful accounts and corresponding bad debt
expense. During the restatement, the Company adjusted the
allowance for doubtful accounts and bad debt with a reduction of
$5.2 million, an increase of $1.9 million and an
increase of $0.6 million for the years ended
December 31, 2000, 2001 and 2002, respectively, to reflect
the specific reserve methodology and to correct errors resulting
from the Companys former policy. The Company made
adjustments to the allowance for doubtful accounts of
$0.1 million, $0.6 million, and $0.3 million for
the years ended December 31, 2003 and 2004 and for the
first two quarters of 2005, respectively.
In addition, during the restatement, the Company made other
adjustments to the allowance for doubtful accounts to offset the
accounts receivable and related reserve related to customers who
were granted extended payment terms, experiencing financial
difficulties or where collectibility was not reasonably assured.
Accordingly, the Company classifies these customers as those
with extended payment terms or with
collectibility issues. For these customers, the
Company historically deferred all revenue and recognized the
revenue when the fee was fixed or determinable or collectibility
reasonably assured or cash was received, assuming all other
criteria for revenue recognition were met. The Company adjusted
the allowance for doubtful accounts, eliminating the receivable
and
5
related reserve, for these customers by an increase of
$5.7 million, a decrease of $4.4 million and by an
immaterial amount for the years ended December 31, 2003 and
2004 and for the first two quarters of 2005, respectively.
In summary, the above restatements gave rise to an adjustment to
the allowance for doubtful accounts of an increase of
$5.8 million, a decrease of $3.8 million and an
increase of $0.3 million for the years ended
December 31, 2003 and 2004 and for the first two quarters
of 2005, respectively. The allowance for doubtful accounts
related to international customers was reduced by
$0.5 million based on the activity for the year ended
December 31, 2004.
Deferred Revenues and Deferred Cost of Goods
Sold. As part of the restatement process, the
Company determined that it did not properly account for deferred
revenue as it related to specific transactions to certain
customers where the transaction did not satisfy revenue
recognition criteria of SAB 104 related to customers with
acceptance terms, transactions with free-on-board (FOB)
destination shipping terms, customers where the arrangement fee
was not fixed or determinable or customers where collectibility
was not reasonably assured. While revenue was generally not
recognized for these customers, the Company improperly
recognized a deferred revenue liability and a deferred cost of
goods sold asset, thereby overstating assets and liabilities,
and during the restatement determined that deferred revenues and
deferred cost of goods sold should not be recognized for these
transactions. As a result, the Company adjusted deferred
revenues by $1.6 million, $1.0 million and
$0.9 million for the years ended 2003 and 2004 and the
first two quarters of 2005, respectively, and adjusted deferred
cost of goods sold by $0.9 million, $0.3 million and
$0.6 million for the years ended 2003 and 2004 and the
first two quarters of 2005, respectively.
Use of Estimates. The Company did not
correctly estimate, monitor and adjust balances related to
certain accruals and provisions as set forth below.
Access Network Electronics. In July 2003, the
Company sold certain assets related to its Miniplex products to
Verilink Corporation (Verilink). The assets were originally
acquired through the Companys acquisition of Access
Network Electronics (ANE) in April 2000. As part of the
agreement with Verilink, Verilink agreed to assume all warranty
obligations related to ANE products sold by the Company prior
to, on, or after July 2003. The Company agreed to reimburse
Verilink for up to $2.4 million of warranty obligations for
ANE products sold by the Company prior to July 2003 related to
certain power supply failures of the product and other general
warranty repairs (Warranty Obligation). The $2.4 million
Warranty Obligation negotiated with Verilink included up to
$1.0 million for each of two specific customers issues and
a general warranty obligation of $0.4 million that expired
in the quarter ended March 31, 2005. During the sale
process, the Company disclosed to Verilink that it had received
an official specific customer complaint related to the sale of
the Miniplex product from one of the two customers. In
accordance with SFAS No. 5, Accounting
for Contingencies, the Company established a reserve as a
result of this complaint. Under the agreement with Verilink, the
Company was able to quantify its exposure at $1.0 million
based upon the terms of the Warranty Obligation. No other
obligations were accrued by the Company related to the Miniplex
products because the Company had not received formal notice of
any complaints from other customers. Formerly, the Company
amortized the $1.0 million warranty accrual starting in the
quarter ended March 31, 2004 through the expiration of the
Warranty Obligation in the quarter ended March 31, 2005.
However, during the course of the restatement, the Company
determined that the warranty obligation accrual should not have
been reduced unless there were actual expenses incurred in
connection with the obligation or upon the expiration of the
Warranty Obligation in the quarter ended March 31, 2005.
Since the Company did not incur any expenses in connection with
this obligation and did not establish a basis for this
reduction, during the restatement, the Company corrected the
reduction of this accrual by $0.2 million in each of the
four quarters of 2004 and deferred the reduction of the warranty
accrual until the warranty period expired in the quarter ended
March 31, 2005. Accordingly, the $1.0 million
reduction of the warranty obligation in the quarter ended
March 31, 2005, reduced cost of goods sold by
$0.8 million for that period and increased cost of goods
sold by $0.2 million in each quarter of 2004.
Israel Restructuring Reserve. During 2001, the
Board of Directors approved a restructuring plan and the Company
incurred restructuring charges in the amount of
$12.7 million for excess leased facilities of which
$7.4 million related to Israel and $1.7 million
remained accrued at December 31, 2004. In 2002, the Company
did not include in its assessment the ability to generate and
collect sublease income in its Israel facility. As a
6
result, the Company increased its reserve by $1.2 million
due to lowered sublease assumptions. In the quarter ended
December 31, 2004, the Company analyzed the reserve and
reduced the reserve by $1.5 million to $1.7 million,
reducing operating expenses. During the restatement process, the
Company determined that $1.2 million of the
$1.5 million reserve reduction recognized in the quarter
ended December 31, 2004 properly related to the year ended
December 31, 2002. As a result, the Company reversed the
previously recorded $1.2 million increase in restructuring
reserve expense in 2002, thereby decreasing the net loss for the
quarter ended December 31, 2002. The Company also corrected
the entry that reduced the restructuring reserve in 2004 by
reversing the $1.2 million decrease in the reserve that
occurred in 2004.
License Fee. In 1999, the Company entered into
an intellectual property (IP) license agreement (License
Agreement) with a third party. Pursuant to the License
Agreement, the Company recorded a prepaid asset of
$2.0 million related to its licensing of the IP. The
License Agreement allowed the Company to incorporate the IP into
manufactured products for the cost of the license
fee which was $2.0 million. Additionally, the Agreement
also incorporated a clause for the Company to pay a royalty fee
of $1 per unit of component products sold to
third parties by the Company. During 1999, the Company began
designing semiconductor chips using this IP and paying the
license fee for the IP. In June 2000, the Company made its final
payment on the $2.0 million license, and the Company had a
$2.0 million prepaid asset. The Company amortized the
prepaid asset based on applying the royalty rate of $1 per
unit established in the License Agreement. However, the Company
incorrectly applied the $1 per unit rate to units
produced rather than units sold. As part of
correcting this error, the Company adjusted the amortization
rate of the prepaid asset to reflect actual units sold resulting
in a reduction in the per unit amortization rate. Adjustments to
cost of goods sold were a decrease of $0.8 million in 2003,
an increase of $0.5 million in 2004 and an increase of
$0.2 million during the first two quarters of 2005.
Goods Received Not Invoiced. The Company
maintains an account to accrue for obligations arising from
instances in which the Company has received goods but has not
yet received an invoice for the goods (RNI). During 2002 the
Company established the reserve after management determined that
the process being used to track RNI obligations was not properly
stating the liability. During the quarter ended March 31,
2004, the Company analyzed the RNI account and determined that
it was carrying an excess reserve of $0.8 million and began
amortizing the $0.8 million excess reserve at the rate of
$0.2 million per quarter thereby decreasing operating
expenses by that amount in each quarter of 2004. During the
restatement, the Company determined that the excess reserve
should have been reduced to zero as of December 31, 2002
and adjusted the financial statements accordingly. The impact of
this change is to decrease operating expenses by
$0.8 million in 2002 and increase operating expenses by
$0.8 million during 2004.
Other. In conjunction with the restatement,
the Company also made other adjustments and reclassifications to
its accounting for various other errors for the periods
presented, including: (1) correction of estimates of legal
expenses, property tax and excess and obsolete inventory
accruals; (2) reclassification to the proper accounting
period of: bonus accruals to employees, federal income taxes
payable, and operating expenses related to an operating lease;
(3) correction of accounting for impaired and disposed
assets; and (4) expenses related to an extended warranty
provided to a customer. See Note 3, Restatement of
Consolidated Financial Statements, to Consolidated
Financial Statements.
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 million. The Notes were 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. Under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133), the Notes are considered a hybrid instrument
since, and as described below, they contained multiple embedded
derivatives.
The Notes contained several embedded derivatives. First, the
Notes contain a contingent put (Contingent Put) where in the
event of any default by the Company, the Trustee or holders of
at least 25% of the principal amount of the Notes outstanding
may declare all unpaid principal and accrued interest to be due
and payable immediately. Second, the Notes contain an investor
conversion option (Investor Conversion Option) where the holder
of the Notes
7
may convert the debt security into Company common stock at any
time after 90 days from original issuance and prior to
August 1, 2007. The number of shares of common stock that
is issued upon conversion is determined by dividing the
principal amount of the security by the specified conversion
price in effect on the conversion date. The initial conversion
price was $84.01 which was subject to adjustment under certain
circumstances described in the Indenture. Third, the Notes
contain a liquidated damages provision (Liquidated Damages
Provision) that obligated the Company to pay liquidated damages
to investors of 50 basis points on the amount of
outstanding securities for the first 90 days and
100 basis points thereafter, in the event that the Company
did not file an initial shelf registration for the underlying
securities within 90 days of the closing date. In the event
that the Company filed its initial shelf registration within
90 days but failed to keep it effective for a two year
period from the closing date, the Company would pay
50 basis points on the amount of outstanding securities for
the first 90 days and 100 basis points thereafter. Fourth,
the Notes contain an issuers call option (Issuer Call
Option) that allowed the Company to redeem some or all of the
Notes at any time on or after October 24, 2000 and before
August 7, 2003 at a redemption price of $1,000 per
$1,000 principal amount of the Notes, plus accrued and unpaid
interest, if 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 the mailing of
the redemption notice. In addition, if the Company redeemed the
Notes, it was also required to make a cash payment of
$193.55 per $1,000 principal amount of the Notes less the
amount of any interest actually paid on the Notes prior to
redemption. The Company had the option to redeem the Notes at
any time on or after August 7, 2003 at specified prices
plus accrued and unpaid interest.
Under SFAS 133, an embedded derivative must be separated
from its host contract (i.e., the Notes) and accounted for as a
stand-alone derivative if the economic characteristics and risks
of the embedded derivative are not considered clearly and
closely related to those of the host. An embedded
derivative would not be considered clearly and closely related
to the host if there was a possible future interest rate
scenario (even though it may be remote) in which the embedded
derivative would at least double the initial rate of return on
the host contract and the effective rate would be twice the
current market rate as a contract that had similar terms as the
host and was issued by a debtor with similar credit quality.
Furthermore, per SFAS 133, the embedded derivative would
not be considered clearly and closely related to the host
contract if the hybrid instrument could be settled in such a way
the investor would not recover substantially all of its initial
investment.
During the restatement process, the Company determined under
SFAS 133 that both the Issuer Call Option and the
Liquidated Damages Provision represented an embedded derivative
that was not clearly and closely related to the host contract,
and therefore needed to be bifurcated from the Notes and valued
separately. As it related to the Liquidated Damages Provision
and based on a separate valuation that included Black-Scholes
valuation methodologies, the Company assessed a valuation of
$0.4 million. Based on the need to amortize the
$0.4 million over the
7-year life
of the Notes, the impact to the Companys financial results
related to the Liquidated Damages Provision was not material.
As it related to the Issuer Call Option and based on a separate
valuation that included Black-Scholes valuation methodologies,
the Company assessed a valuation of $11.9 million. As a
result, at the time the Notes were issued in July 2000, the
Company should have created an asset to record the value of the
Issuer Call Option for $11.9 million and created a bond
premium to the Notes for $11.9 million. In accordance with
SFAS 133, the asset value would then be marked to market at
the end of each accounting period and the bond premium would be
amortized against interest expense at the end of each accounting
period. Due to the decrease in the price of the Companys
common stock, the value of the Issuer Call Option became
effectively zero and the Company should have written off the
asset related to the Issuer Call Option in 2000. Additionally,
as part of the bond repurchase activity where the Company
repurchased $325.9 million and $109.1 million of face
value of the Notes (for a total of $435.0 million) that
occurred in 2001 and 2002, the Company should have recognized an
additional gain from the retirement of the bond premium
associated with the Issuer Call Option of $7.0 million in
2001 and $1.9 million in 2002. The Company determined that
the $7.0 million non-cash gain on the early retirement of
the premium to be immaterial to 2001 financial results.
In the quarter ended March 31, 2006, the Company paid off
the entire principal amount of the outstanding Notes, including
all accrued and unpaid interest and related fees, for a total of
$65.6 million. In addition, the
8
Company recognized $0.3 million into other income, net
representing the remaining unamortized bond premium associated
with the Issuer Call Option.
For further discussion of the restatement adjustments and the
net effects of all of the restatement adjustments on the
Companys balance sheet and statements of operations,
please refer to Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 3 to the Consolidated Financial
Statements.
Reliance on Prior Consolidated Financial
Statements. The Company has not amended its
previously filed Annual Reports on
Form 10-K
or Quarterly Reports on
Form 10-Q
for the periods affected by the restatement. The information
that has been previously filed or otherwise reported for these
periods is superseded by the information in this
Form 10-K.
As such, other than the Companys
Form 10-K
for the year ended December 31, 2005, the Company does not
anticipate amending its previously filed Annual Reports on
Form 10-K
or its Quarterly Reports on
Form 10-Q
for any prior periods.
9
PART I
Overview
We currently develop, market and sell digital video equipment to
networks operators and content aggregators who offer video
services. Our primary products include the Network
CherryPicker®
line of digital video processing systems and the CP 7600 line of
digital-to-analog
decoders. Our products are used for multiple digital video
applications, including the rate shaping of video content to
maximize the bandwidth for standard definition (SD) and high
definition (HD) programming, grooming customized channel
line-ups,
carrying local ads for local and national advertisers and
branding by inserting corporate logos into programming. Our
products are sold primarily to cable operators, television
broadcasters, telecom carriers and satellite providers in the
United States, Europe and Asia.
This Report on
Form 10-K
includes trademarks and registered trademarks of Terayon
Communication Systems, Inc. and its consolidated subsidiaries.
As used in this report, the terms Terayon, the
Company, we, us or
our refer to Terayon Communication Systems, Inc. and
its consolidated subsidiaries. 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.
We were incorporated in California and reincorporated in
Delaware in 1998. Our principal executive headquarters are
located at 2450 Walsh Avenue, Santa Clara, California 95051. Our
telephone number is
(408) 235-5500.
History
of the Company
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 that ultimately included
the acquisition of ten companies 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. Also at this time, we focused our business on
providing digital video products to cable operators and
satellite providers. Since 2000, we have terminated our
data-over-satellite
business and all of our acquired telecom-focused businesses and
incurred restructuring charges in connection with these actions.
In 2004, we refocused the Company to make digital video
solutions (DVS) the core of our business. In particular, we
began expanding our focus beyond cable operators to more
aggressively pursue opportunities for our digital video products
with television broadcasters, telecom carriers and satellite
television providers. As part of this strategic refocus, we
elected to continue selling our home access solutions (HAS)
product, 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 incurred severance,
restructuring and asset impairment charges and were subject to
litigation from Adelphia, one of the principal purchasers of our
CMTS product. In March 2005, we sold certain cable modem
semiconductor assets to ATI Technologies, Inc. and terminated
our internal semiconductor division.
In January 2006, we announced that the Company would focus
solely on digital video product lines, and as a result, we
discontinued our HAS product line. We determined that there were
no short or long-term synergies between our HAS product line and
digital video product lines which made the HAS products
increasingly irrelevant given our core business of digital
video. Though we continued to sell our remaining inventory of
HAS products and
10
CMTS products in 2006, the profit margins for our cable modems
and eMTAs have continued to decrease due to competitive pricing
pressures and the ongoing commoditization of the products.
Industry
Dynamics
We participate in the worldwide market for equipment sold
primarily to network operators, including cable operators,
television broadcasters, telecom carriers and satellite
providers. Our business is influenced by the following
significant trends in our industry:
Migration
of cable operators to all-digital networks
During the next several years, we believe that most North
American and many foreign cable operators will continue to
migrate their networks to all-digital operations in order to
deliver new services and substantially improve network
efficiency. Current efforts in this migration include digital
simulcasting, which is a transition step to an all-digital
network infrastructure. Digital simulcasting is being adopted by
all major U.S. cable operators, and we further expect it to
be adopted by second and third-tier cable operators in the U.S.
and by major operators worldwide.
Ability
to leverage network infrastructures to offer multiple products
and services
Within the last few years, several cable operators and telecom
carriers have begun offering a triple play bundle of
services that includes video, voice and high-speed data over a
single network. Their key objectives are to capture higher
average revenues per subscriber, secure market share and reduce
the churn of subscribers. The delivery of
triple play services has led to increased
competition between the cable operators and telecom carriers.
This competition has led network operators to upgrade their
infrastructure by purchasing equipment that allows them to
provide the triple play of services.
Delivering digital video services is a key area of growing
competition between cable operators and telecom carriers.
Verizon and AT&T, the two largest telecom carriers in the
U.S., are currently rolling out digital video services in select
cities nationwide. We believe that as telecom carriers expand
their digital video service rollouts, they will increasingly
require products that have technology like our Network
CherryPicker®
products to generate advertising revenues. Additionally, we are
currently working with Alcatel, Motorola, Inc. (Motorola), and
other leading telecom equipment vendors which have been selected
by several large telecom carriers to serve as systems
integrators responsible for the carriers deployment of
digital video services.
Network
operators and content aggregators must combat ad skipping
technologies
Consumers increasing use of digital video recorders (DVRs)
capable of skipping over commercial advertisements is a growing
threat to network operators and content aggregators, which face
the possibility of lower advertising revenues from advertisers
who pay in large part based on the number of viewers watching a
program. To overcome the reduction of advertising viewers
because of ad skipping DVRs, network operators and content
aggregators are increasingly seeking solutions based on 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
DVRs since they appear within the TV program itself. This
approach has already been proven by programmers such as SpikeTV
and MTV, and we believe that network operators and content
aggregators will increasingly rely on overlay techniques to
maintain or even increase their advertising revenues.
Continued
network investment to support new product requirements in
competitive and emerging markets
The cable, digital broadcast satellite and telecom 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. According to Kagan Research,
LLC, in 2005 U.S. cable operators spent $10.6 billion
on infrastructure, compared to $10.1 billion in 2004, an
increase of 5%. In addition, we believe that telecom carriers
(in particular Verizon and AT&T) will become an increasing
source of competition to traditional video service providers as
they continue to upgrade their networks to offer video services,
including high definition digital television (HDTV) services.
While
11
in the early stages, the development of a mobile video network
is underway, and we expect that digital program insertion video
application capabilities will play an important part in the
growth of this emerging market.
Consolidation
of the cable industry
In the late 1990s, U.S. cable operators began an
unprecedented wave of consolidation, with several of the larger
operators initiating aggressive growth strategies primarily
through the acquisition of small, medium and large cable
operators. Comcast Corporation (Comcast) the largest
U.S. operator today with more than 21 million
subscribers took the top spot in 2002 when it
acquired AT&T Broadband, which had become the nations
largest operator after acquiring TCI and MediaOne in 1999. In
August 2006, Adelphia Communications Corporation (Adelphia),
formerly the fifth largest operator with approximately
4.8 million subscribers, was purchased by Comcast and Time
Warner Cable (TWC). Currently, 58.2 million of the
estimated 65.6 million cable subscribers in the
U.S. are served by the top ten U.S. cable operators,
representing more than 89 percent of the market. With
fewer but much larger cable operators to
sell to, cable equipment vendors must continue adding new
products and services to win business.
This has led to a consolidation of cable equipment vendors
seeking to expand their product lines and to strengthen
relationships with key operators. For example, General
Instrument Corporation and Scientific-Atlanta, Inc.
(Scientific-Atlanta) were acquired by Motorola, Inc. and Cisco
Systems, Inc. (Cisco), respectively. Consolidation amongst
smaller vendors has also taken place, including the acquisition
of BroadBus by Motorola; Arroyo Video Solutions by Cisco; Entone
by Harmonic, Inc. (Harmonic); nCUBE by C-COR, and BigBand
Networks purchase of ADC Telecommunications CMTS
business.
Business
We currently develop, market and sell digital video equipment,
including our Network
CherryPicker®
digital video processing systems and our CP 7600 line of
digital-to-analog
decoders. Our products are sold to and used by cable, telecom,
broadcast and satellite operators for multiple digital video
applications, including the rate shaping of video content to
maximize the bandwidth for SD and HD programming, grooming
customized channel
line-ups,
carrying local ads for local and national advertisers, and
branding themselves by inserting their corporate logos into
their programming. We also continue to sell our remaining
inventory of CMTS and HAS products, including cable modems and
eMTAs, that we discontinued in January 2006.
The design of digital video processing equipment requires
expertise in Motion Picture Experts Group (MPEG) digital video
formats and Internet Protocol (IP). Our expertise in MPEG and
IP, coupled with our experience in designing, developing and
manufacturing complex equipment, has helped us secure a
leadership position in statistical remultiplexing (rate shaping)
which provides the cable and satellite operators with bandwidth
management capabilities for their SD and HD digital video
services. We believe we are well positioned to capitalize on the
growing demand for network operators to provide advanced
bandwidth intensive video services such as adding additional
HDTV channels.
Our DVS products are designed to enable localization
on-demand, or the delivery of on-demand, real-time video
constructed to meet the advertising needs of local and regional
markets. Further, we believe our digital video products enable
network operators and content aggregators to more
cost-effectively overlay advertisements directly into their
programming. This approach is more efficient compared to the
traditional approach which requires the advertisements and the
program to first be converted from digital to analog video, the
insertion of the overlaid advertisements, and the subsequent
re-encoding of the program and the advertisements back to
digital. Since our method works entirely in the digital domain,
there is no need for decoders to convert the digital video to
analog or for separate re-encoders to then convert the analog
video back to digital. To complement our cable and satellite
product offerings, we developed new software for the
DM 6400 model of our Network
CherryPicker®
line to support the new MPEG-4/AVC digital video format that
most telecom carriers have chosen for their video services.
12
Business
Strategy
Our goal is to be the leading provider of digital video products
that enable network operators and content aggregators to more
efficiently deliver digital video services to meet the needs of
local and regional markets, thereby reducing costs and
generating new revenues. To achieve this goal, we are pursuing
the following strategies:
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capitalize on the increasing demand for advanced digital video
services, including HDTV and video on demand, by leveraging our
strengths in bandwidth management, ad insertion, grooming
applications and products;
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continue to develop video applications with enhanced
capabilities that meet the localization on-demand and
personalized advertising needs of network operators, and to
address emerging markets, such as mobile video;
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increase the distribution opportunities for our digital video
products through reseller channels by developing new
relationships and expanding existing system integration
partnerships with partners such as Harmonic, Alcatel and
Motorola; and
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improve margins through focused product cost-reduction efforts
and by streamlining operational activities across our product
lines.
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The ongoing migration of network operators to all-digital
IP-based
networks represents a significant opportunity for companies like
us with products and technologies that enable these operators to
maximize their bandwidth and to manipulate their digital video
content completely within the digital domain, which maximizes
flexibility and reduces costs. We believe we are well positioned
to capitalize on this expanding market in large part because of
the success that our digital video products have had with the
major U.S. cable operators and satellite providers.
Products
Historically, we had multiple product lines that we sold to
cable operators, satellite providers and telecom carriers. Our
cable data product line consisted initially of a proprietary
system composed of a CMTS and cable modems. We later expanded
our cable data product line with standards-based offerings,
including CMTS, cable modems and eMTA products meeting the
DOCSIS and EuroDOCSIS specifications. We discontinued sales of
our CMTS products in 2004 and our modems and eMTAs in 2006. Our
cable data products were complemented by our Multigate
voice-over-cable
solution, which we inherited through our acquisition of Telegate
Ltd. We discontinued the Multigate product line in 2004. Our
telecom product line consisted of our IPTL digital subscriber
line access multiplexer, MainSail multi-service access platform
and MiniPlex digitally added main line products, all of which we
acquired through our acquisitions of Radwiz, MainSail Systems
and the Access Network Electronics division of Tyco
International. We discontinued these telecom products in 2003.
Our
Internet-over-satellite
product line consisted of the SatStream system we inherited via
our acquisition of ComBox. We discontinued our satellite product
in 2002.
We continue to sell our digital video product lines, which
currently consist of the Network
CherryPicker®
products and our CP 7600
digital-to-analog
decoder. Our Network
CherryPicker®
line of digital video processing systems give cable, telecom and
satellite operators 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. To date,
cable, satellite and telecommunications providers have deployed
more than 7,500 of our digital video systems.
Our
CherryPicker®
DM line is currently composed of 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. The newest version
of software for our DM 6400 is designed for telecom
carriers and specifically supports the new MPEG-4/AVC digital
video format that most telecom carriers have chosen for their
video services. According to Kagan Research, LLC, in 2005,
U.S. cable operators earned more than $4.6 billion
running local ads, a 12% increase over the $4.1 billion
billed in 2004. We believe this market will continue to grow and
that we are well
13
positioned in this space based on our current success in digital
ad insertion and the relationships we have with the major
advertising server companies, particularly SeaChange and C-Cor.
Our DM 3200 provides statistical remultiplexing
functionality, ad insertion and advance stream processing for
smaller capacity architectures.
Our
CherryPicker®
BP 5100 broadcast platform system has been developed
specifically for television broadcasters utilizing the same
proven statistical remultiplexing technology and components from
the DM line. The BP 5100 provides broadcasters with exceptional
flexibility in managing their digital video content, including
rate shaping their video content to maximize the bandwidth for
SD and HD programming, switching seamlessly between local and
national video feeds and branding themselves by overlaying their
corporate logos onto their programming.
Our CP 7600
digital-to-analog
video decoder is used by cable operators to implement a
digital simulcast architecture to improve the
bandwidth efficiency of their networks. All major
U.S. cable operators have adopted digital simulcasting and
both second and third-tier operators are in the process of
deploying the architecture. Prior to digital simulcasting,
operators had to send all of their programming in both digital
and analog formats to support both groups of subscribers. This
traditional approach consumes enormous amounts of bandwidth
within their networks. With simulcasting, operators now deliver
just one set of programming digitally and use the CP 7600 at the
edge of their networks (just before reaching
subscribers homes) to decode the programming to analog for
their analog subscribers, and to pass the digital programming on
to their digital subscribers untouched. This more
bandwidth-efficient approach is an evolutionary step towards an
architecture that is completely digital and
IP-based and
that will support the delivery of a new generation of services.
Our CP 7585 off-air demodulator allows cable and satellite
operators to convert SD or HD programming transmitted
over-the-air
by television broadcasters in 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. We discontinued the CP 7585 in April
2006 after selling off our inventory and determining the cost of
developing and building new models was not warranted.
We continue to develop video applications to enable advanced
capabilities for digital video programming, more localized
advertising and other digital video services. Upcoming digital
video products include a suite of overlay applications that
enable static and motion graphics to be superimposed on digital
video programs and advertising, and applications for statistical
re-multiplexing for MPEG-4 high definition sources.
Product
research and development
We maintain ongoing research and development activities for our
digital video product line. Our research and development efforts
are focused on developing new software applications and improved
hardware platforms designed to address customer requirements
across multiple industries and to obtain a competitive
technological leadership of our products. Another key goal is to
improve the gross margins of our existing products by reducing
their component and manufacturing costs.
Our research and development expense was $17.7 million for
the year ended December 31, 2005 compared with
$33.2 million and $42.6 million for the years ended
December 31, 2004 and 2003, respectively. We currently
anticipate that overall research and development spending in
2006 will decline compared to 2005, and will focus almost
entirely on developing new hardware platforms and software
applications for digital video solutions.
Developing new and innovative solutions is important for us to
remain competitive with larger companies that devote
considerably more resources to product development.
Customers
We market and sell our digital video products to multiple
vertical target markets consisting of the largest cable,
satellite and telecom operators in North America.
Some of our principal customers include the following:
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Comcast;
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Cox Communications Inc. (Cox);
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14
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TWC;
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EchoStar Communications Corporation; and
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Harmonic.
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We believe that a substantial majority of our revenues will
continue to be derived from sales to a relatively small number
of customers located in the United States for the foreseeable
future. For example, Harmonic, Thomson Broadcast and Comcast
accounted for approximately 12%, 11% and 10%, respectively, of
our total revenue for the year ended December 31, 2005. For
the year ended December 31, 2004, two customers, Adelphia
and Comcast accounted for approximately 20% and 13%,
respectively, of our total revenue. Three customers, Adelphia,
Cross Beam Networks and Comcast, accounted for approximately
21%, 16% and 13%, respectively, of our total revenues for the
year ended December 31, 2003. With the discontinuation of
our data products, our sales have become increasingly
concentrated in the United States and our presence outside the
United States has decreased. A small percentage of our total
digital video revenue has historically been derived from
customers located outside the United States. We expect that
trend will continue. The loss of any of our significant
customers 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. With our digital video
products, we believe that we are currently the market leader in
ad insertion, grooming and remultiplexing with our Network
CherryPicker®
line of digital video processing systems. However, several
companies have entered this market, including Cisco through its
acquisition of Scientific-Atlanta, Scopus Video Networks Ltd.,
BigBand Networks and RGB Networks, Inc. (RGB). We believe that
this increase in competition may lead to additional pricing
pressures and declining gross margins.
The principal competitive factors in our market include the
following:
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quality of product performance, features and reliability;
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customer technical support and service;
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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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relationships with network operators and content
aggregators; and
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meeting current or prospective industry or customer standards
applicable to our products.
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Many of our competitors and potential competitors are
substantially larger and have significant advantages over us,
including, without limitation:
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larger and more established selling and marketing capabilities;
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greater economies of scale;
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significantly greater financial, technical, engineering,
marketing, distribution, customer support and other resources;
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greater name recognition and a larger installed base of
customers; and
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well-established relationships with our existing and potential
customers.
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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.
Additionally, there may be pressure to develop new or
alternative industry standards and specifications for video
products and applications. The broader adoption
15
of any such standards and specifications would necessitate
greater spending on developing new products. The development and
market acceptance of new or alternative technologies could
decrease the demand for our products or render them obsolete,
and could impact the pricing and gross margin of our digital
video products. Our competitors, many of which have greater
resources than we do, may introduce products that are less
costly, provide superior performance or achieve greater market
acceptance than our products. These competitive pressures have
impacted and are likely to continue to adversely impact our
business.
Given these competitive and other market factors, we continually
look for opportunities to compete effectively and create value
for our stockholders. We may, at any time and from time to time,
be in the process of identifying or evaluating product
development initiatives, partnerships, strategic alliances or
transactions and other alternatives in order to maintain market
position and maximize shareholder value. Market and other
competitive factors may cause us to change our strategic
direction, and we may not realize the benefits of any such
initiatives, partnerships, alliances or transactions. We cannot
assure you that any such initiatives, partnerships, alliances or
transactions that we identify and pursue would actually result
in our competing effectively, maintaining market position or
increasing stockholder value. Our failure to realize any
expected benefits from such initiatives, partnerships, alliances
or transactions could negatively impact our financial position,
results of operations, cash flows and stock price.
Sales and
Marketing
We market and sell our products directly to network operators
and content aggregators through our direct sales forces in North
America and our limited sales forces in EMEA and Asia. We also
market and sell our products through distributors, system
integrators and resellers throughout the world and rely on this
network to sell the majority of our products sold outside the
United States.
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 network operators and content aggregators 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 limited events outside the United States.
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 comprehensive and lengthy,
and 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; Seoul, South Korea; and Tel Aviv, Israel. In the years
ended December 31, 2005, 2004 and 2003, approximately 42%,
47% and 45%, respectively, of our net revenues were derived from
customers outside of the United States. Japan and Israel were
the only international countries into which we made sales in
excess of 10% of net revenues in 2003. Sales to Japan were 2%,
7% and 16%, of net revenues while sales to Israel were 8%, 12%
and 12% of net revenues in the years ended December 31,
2005, 2004 and 2003, respectively. During 2005, we focused our
business on the sale of our digital video products, which have
historically had much higher sales in the United States, and
placed our sales emphasis on the U.S. market. However, we
focused sales of our data products, which have historically had
much higher sales outside the United States, on those markets
outside the United States, including Israel and Europe. In 2005,
we placed a lower emphasis on customers in certain locations
outside the United States, such as Asia Pacific, Canada and
South America. Additionally, we expect the portion of our
overall revenue generated from outside the United States to
continue to decrease in 2006 with the discontinuance of our HAS
products and our data business.
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 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.
16
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, difficulties in staffing and managing
foreign operations and potential adverse foreign tax
consequences, among other factors, that could also have an
adverse 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, Europe,
Israel 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
We typically ship product and invoice customers shortly upon
receipt of a purchase order as our customers typically request
the immediate delivery of product. Assuming product
availability, our practice is to ship our products promptly upon
the receipt of purchase orders from our customers. We only have
backlog if the product is not available to ship to the customer.
Therefore, we have limited backlog and believe that backlog
information is not material to an understanding of our business.
Manufacturing
Our finished goods are produced by subcontract manufacturers.
Our digital video products are single sourced from a
manufacturer in San Jose, California. Our HAS products,
which were discontinued in January 2006, were single sourced
from a manufacturer in China.
Our manufacturing operations employ semiconductors,
electromechanical components and assemblies as well as 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 we require, we sometimes experience a shortage in the
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 based on our
future sales failing to meet current sales forecasts or become
obsolete before utilization by those manufacturers. We have
recorded costs as a result of vendor cancellation charges.
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 associated 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.
We have entered into confidentiality and invention assignment
agreements with our employees and consultants, 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
17
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.
The development of standards or specifications is common in our
industry, as is the contribution of intellectual property to
associated intellectual property pools. These standards and
specifications allow for the development and availability of
intellectual property pools, such as the MPEG pool, the
standardization of delivery and techniques and the
interoperability of products. CableLabs, the research and
development consortium representing the cable operators,
developed the DOCSIS standard to allow for the interoperability
of products used by the cable operators. In connection with the
development of the DOCSIS 2.0 specification by CableLabs, 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. There may be pressure to develop new industry
standards and specifications for video products and
applications. Vendors like us may have to build products that
meet these standards in order to sell to network operators.
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.
Employees
As of December 31, 2005, we had 156 employees, of
which 128 were located in the United States, and 28 were located
outside the United States in Israel, Canada, Europe and Asia. We
had 46 employees in research and development, 63 in
marketing, sales and customer support, 19 in operations and 28
in general and administrative functions.
As of December 19, 2006, we had 114 employees, of which 99
were located in the United States, and 15 were located outside
the United States in Israel, Canada, Europe and Asia. We had 49
employees in research and development, 33 in marketing, sales
and customer support, 16 in operations and 16 in general and
administrative functions. In connection with our most recent
decision in January 2006 to discontinue HAS products, we
implemented a headcount reduction that resulted in a charge of
$0.6 million through December 31, 2006. None of our
employees are represented by collective bargaining agreements.
We believe that our relations with our employees are good.
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
18
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (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
Commission. We will also provide those reports in electronic or
paper form free of charge upon a request made to Mark A.
Richman, Chief Financial Officer, c/o Terayon Communication
Systems, Inc., 2450 Walsh Avenue, Santa Clara, CA 95051.
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 100 F. Street, N.E.,
Washington, D.C., 20549 or by calling
1-800-SEC-0330.
19
The following is a summary description of some of the many
risks we face in our business. You should carefully review 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. You should also consider the other
information described in this report.
Risks
Related to the Restatement
The restatement of our consolidated financial statements
has had a material adverse impact on us, including increased
costs, the delisting of our common stock from The NASDAQ Stock
Market, the increased possibility of legal or administrative
proceedings, and a default under our subordinated note
agreement.
As a result of the restatement process, we have become subject
to a number of additional risks and uncertainties, including the
following:
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We have incurred substantial unanticipated costs for accounting
and legal fees in the year ended December 31, 2005 and
continue to incur such costs in the year ended December 31,
2006 in connection with the restatement. Although the
restatement is complete, we expect to incur additional costs as
indicated below.
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We face an increased risk of being subject to legal or
administrative proceedings. In December 2005, the Commission
issued a formal order of investigation in connection with our
accounting review of certain customer transactions. This
investigation has diverted and will continue to divert more of
our managements time and attention and continue to cause
us to incur substantial costs. Such investigations can also lead
to fines or injunctions or orders with respect to future
activities, as well as further substantial costs and diversion
of managements time and attention.
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On June 23, 2006, a securities litigation lawsuit based on
the events concerning the restatement was filed against us and
certain of our current and former executive officers. In
connection with this litigation and any further litigation that
is pursued or other relief sought by persons asserting claims
for damages allegedly resulting from or based on this
restatement or events related thereto, we will incur defense
costs that may include the amount of our deductible and defense
costs exceeding our insurance coverage regardless of the
outcome. Additionally, we may incur costs if the insurers of our
directors and our liability insurers deny coverage for the costs
and expenses related to any litigation. Likewise, such events
may divert our managements time and attention away from
the operation of the business. If we do not prevail in any such
actions, we could be required to pay substantial damages or
settlement costs.
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We were de-listed from The NASDAQ Stock Market because we were
unable to file our periodic reports with the Commission on a
timely basis. This failure was attributable to our inability to
complete the restatement of our consolidated financial
statements for prior periods. As previously disclosed on our
Current Reports on
Form 8-K
filed on November 22, 2005 and January 20, 2006,
NASDAQ notified us of its intention to de-list our common stock
based on our failure to timely file our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005, and our failure
to solicit proxies and hold an annual shareholders meeting
during 2005. On March 31, 2006, The NASDAQ Listing and
Qualifications Panel determined to de-list our securities from
The NASDAQ Stock Market effective as of the opening of business
on April 4, 2006, and our common stock currently trades on
the Pink Sheets. See our risk factor entitled Our common
stock has been de-listed from The NASDAQ Stock Market and trades
on the Pink Sheets. We may be unable to relist on The
NASDAQ Stock Market because we may not be able to meet the
initial listing requirements.
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Because we were unable to timely file our Quarterly Report on
Form 10-Q
for September 30, 2005, we defaulted on our Notes. On
March 21, 2006, we paid off the entire principal amount of
outstanding Notes, including all accrued and unpaid interest and
related fees, for a total of $65.6 million. As a result,
our repayment of the Notes reduced our unrestricted cash,
decreased our liquidity and could materially impair our ability
to operate our business especially if we are unable to generate
positive cash flow from operations.
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The restatement may also result in other negative ramifications,
including the potential loss of confidence by suppliers,
customers, employees, investors, and security analysts, the loss
of institutional investor interest and fewer business
development opportunities.
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Material
weaknesses or deficiencies in our internal control over
financial reporting could harm stockholder and business
confidence in our financial reporting, our ability to obtain
financing and other aspects of our business.
Maintaining an effective system of internal control over
financial reporting is necessary for us to provide reliable
financial reports. We have restated our consolidated financial
statements for the years ended December 31, 2000, 2002,
2003 and 2004 and for the four quarters in 2004 and the first
two quarters of 2005. As described in Item 9A
Controls and Procedures of this
Form 10-K,
management, under the supervision of the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), conducted an evaluation
of disclosure controls and procedures. Based on that evaluation,
the CEO and CFO concluded that our disclosure controls and
procedures were not effective at a reasonable assurance level as
of December 31, 2005 and as of the filing date of this
Form 10-K
due to the material weaknesses discussed below. Because the
material weaknesses described below have not been remediated as
of the filing date of this
Form 10-K,
the CEO and CFO continue to conclude that our disclosure
controls and procedures are not effective as of the filing date
of this
Form 10-K.
A material weakness in internal control over financial reporting
is defined by the Public Company Accounting Oversight
Boards Audit Standard No. 2 as being a significant
deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material
misstatement of the financial statements would not be prevented
or detected. A significant deficiency is a control deficiency,
or combination of control deficiencies, that adversely affects
our ability to initiate, authorize, record, process, or report
external financial data reliably in accordance with generally
accepted accounting principles (GAAP) such that there is more
than a remote likelihood that a misstatement of the annual or
interim financial statements that is more than inconsequential
will not be prevented or detected.
We were not able to fully execute the remediation plans that
were established to address material weaknesses previously
identified in 2004. As a result, these material weaknesses were
not fully remediated and remain ongoing as of December 31,
2005 and as of the date of this filing.
We have identified the following material weaknesses as of
December 31, 2005:
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insufficient controls related to the identification, capture and
timely communication of financially significant information
between certain parts of the organization and the accounting and
finance department to enable these departments to account for
transactions in a complete and timely manner;
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lack of sufficient personnel with technical accounting
experience in the accounting and finance department and
inadequate review and approval procedures to prepare external
financial statements in accordance with GAAP;
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failure in identifying the proper recognition of revenue in
accordance with GAAP, including revenue recognized in accordance
with American Institute of Certified Accountants Statement of
Position (SOP)
97-2,
Software Revenue Recognition
(SOP 97-2),
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
(SOP 81-1),
Financial Accounting Standards Board, Emerging Issues Task Force
(EITF)
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (EITF
00-21);
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the use of estimates, including monitoring and adjusting
balances related to certain accruals and reserves, including
allowance for doubtful accounts, legal charges, license fees,
restructuring charges, taxes, warranty obligations, fixed assets
and bond issue costs;
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lack of sufficient analysis and documentation of the application
of GAAP; and
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ineffective controls over the documentation, authorization and
review of manual journal entries and ineffective controls to
ensure the accuracy and completeness of certain general ledger
account reconciliations conducted in connection with period end
financial reporting.
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21
For further information about these material weaknesses, please
see Item 9A Controls and Procedures
Managements Report on Internal Control over Financial
Reporting included in this
Form 10-K.
Because of these material weaknesses, management concluded that,
as of December 31, 2005, our internal control over
financial reporting was not effective.
Because we have concluded that our internal control over
financial reporting is not effective and our independent
registered public accountants issued an adverse opinion on the
effectiveness of our internal controls, and to the extent we
identify future weaknesses or deficiencies, there could be
material misstatements in our consolidated financial statements
and we could fail to meet our financial reporting obligations.
While we are in the process of implementing the remediation
efforts described in Item 9A Controls and
Procedures Remediation Steps to Address Material
Weaknesses, we may continue to experience difficulties or delays
in implementing measures to remediate the material weaknesses.
Additionally, if the remedial measures are insufficient to
address the identified material weaknesses or if additional
material weaknesses or significant deficiencies in our internal
controls are discovered in the future, we may fail to meet our
future reporting obligations on a timely basis, our financial
statements may contain material misstatements, our operating
results may be harmed, and we may be subject to litigation.
Any failure to address the identified material weaknesses or any
additional material weaknesses or significant deficiencies in
our internal controls could also adversely affect the results of
future management evaluations and auditor attestation reports
regarding the effectiveness of our internal control over
financial reporting that are required under Section 404 of
the Sarbanes-Oxley Act of 2002.
Any material weakness or unsuccessful remediation could affect
investor confidence in the accuracy and completeness of our
financial statements. As a result, our ability to obtain any
additional financing, or additional financing on favorable
terms, could be materially and adversely affected, which, in
turn, could materially and adversely affect our business, our
strategic alternatives, our financial condition and the market
value of our securities. In addition, perceptions of us among
customers, lenders, investors, securities analysts and others
could also be adversely affected. Current material weaknesses or
any weaknesses or deficiencies identified in the future could
also hurt confidence in our business and the accuracy and
completeness of our financial statements, and adversely affect
our ability to do business with these groups.
We can give no assurances that the measures we have taken to
date, or any future measures we may take, will remediate the
material weaknesses identified or that any additional material
weaknesses will not arise in the future due to our failure to
implement and maintain adequate internal controls over financial
reporting. In addition, even if we are successful in
strengthening our controls and procedures, those controls and
procedures may not be adequate to prevent or identify
irregularities or ensure the fair presentation of our financial
statements included in our periodic reports filed with the
Commission.
Our
revenue recognition policy on digital video products has been
corrected.
We now recognize revenue from our digital video products under
SOP 97-2,
SAB 104 and EITF
00-21. Our
new revenue recognition policy under these accounting standards
is complex. We rely upon key accounting personnel and
consultants to maintain and implement the controls surrounding
such policy. If the policy is not applied on a consistent basis
or if we lose any of our key accounting personnel or consultants
the accuracy of our consolidated financial statements could be
materially affected. This could cause future delays in our
earnings announcements, regulatory filings with the Commission
and potential delays in listing with a securities exchange.
Our
common stock has been de-listed from The NASDAQ Stock Market and
trades on the Pink Sheets.
Effective April 4, 2006, our common stock was delisted from
The NASDAQ Stock Market and was subsequently quoted by the
National Quotation Service Bureau (Pink Sheets). The trading of
our common stock on the Pink Sheets may reduce the price of our
common stock and the levels of liquidity available to our
stockholders. In addition, the trading of our common stock on
the Pink Sheets may materially and adversely affect our access
to the capital markets, and the limited liquidity and reduced
price of our common stock could materially and adversely affect
our ability to raise capital through alternative financing
sources on terms acceptable to us or at
22
all. Stocks that trade on the Pink Sheets are no longer eligible
for margin loans, and a company trading on the Pink Sheets
cannot avail itself of federal preemption of state securities or
blue sky laws, which adds substantial compliance
costs to securities issuances, including pursuant to employee
option plans, stock purchase plans and private or public
offerings of securities. Our delisting from The NASDAQ Stock
Market and quotation on the Pink Sheets may also result in other
negative ramifications, including the potential loss of
confidence by suppliers, customers, employees, investors, and
security analysts, the loss of institutional investor interest
and fewer business development opportunities.
If we
are not able to become or remain current in our filings with the
Commission, we will face several adverse
consequences.
If we are unable to become and remain current in our financial
filings, we will face several restrictions. We will not be able
to have a registration statement under the Securities Act of
1933, covering a public offering of securities, declared
effective by the Commission, or make offerings pursuant to
existing registration statements; we will not be able to make an
offering to any purchasers not qualifying as accredited
investors under certain private placement
rules of the Commission under Regulation D; we will not be
eligible to use a short form registration statement
on
Form S-3
for a period of at least 12 months after the time we become
current in our periodic and current reports under the Securities
Exchange Act of 1934, as amended (Exchange Act); we will not be
able to deliver the requisite annual report and proxy statement
to our stockholders to hold our annual stockholders meeting; our
employees cannot be granted stock options, nor will they be able
to exercise stock options registered on
Form S-8,
as
Form S-8
is currently not available to us; and our common stock may not
be eligible for re-listing on The NASDAQ Stock Market or
alternative exchanges. These restrictions may impair our ability
to raise funds in the public markets, should we desire to do so,
and to attract and retain employees.
Risks
Related to Our Business
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 quarter ended
March 31, 1998. As of December 31, 2005, we had an
accumulated deficit of approximately $1.1 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.
As a result of our losses, we have had to use available cash and
cash equivalents to supplement the operation of our business.
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. In addition, we have significant
operating lease commitments for facilities and equipment that
generally cannot be cancelled in the short-term without
substantial penalties, if at all.
We
depend on capital spending from the cable, satellite and
telecommunications industries for our revenues, and any decrease
or delay in capital spending in these industries would
negatively impact our revenues, financial condition and cash
flows.
Historically, a significant portion of our revenues have been
derived from sales to cable television operators. Future demand
for our products will depend on the magnitude and timing of
capital spending by cable television operators, satellite
operators, telephone companies and broadcasters for constructing
and upgrading their systems. Customers view the purchase of our
products as a significant and strategic decision. Digital video,
movie and broadcast products are relatively complex and their
purchase generally involves a significant commitment of capital.
Our customers capital spending patterns are dependent on a
variety of factors, including:
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Cable and satellite operators and telecom providers access
to financing;
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Annual budget cycles, and the typical reduction in upgrade
projects during the winter months;
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Impact of industry consolidation and financial restructuring;
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Federal, local and foreign government regulation of
telecommunications and television broadcasting;
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Overall demand for communication services and acceptance of new
video, voice and data services;
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Evolving industry standards and network architecture;
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Delays associated with the evaluation of new services, new
standards, and system architectures by cable and satellite
operators and telecom providers;
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An emphasis on generating revenue from existing customers by
operators instead of new construction or network upgrades;
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Competitive pressures, including pricing pressures; and
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General economic conditions.
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Financial and budgetary pressures on our existing and potential
customers in the cable, satellite and telecom industries will
adversely impact purchasing decisions and may cause delays in
the purchase of our products. Any one of the above factors could
impact spending by cable operators on digital video equipment
and thus could impact our business and result in excess
inventory, decreased sales and revenue or other adverse effects.
Due to
the lengthy sale cycle involved in the sale of our products, our
financial results may vary and should not be relied on as an
indication of future performance.
Our products have a lengthy and unpredictable sales cycle that
contributes to the uncertainty of our operating results. Our
customers decision to purchase our products is often
accompanied by delays frequently associated with large capital
expenditures and implementation procedures within an
organization. Our customers generally conduct significant
technical evaluations, including customer trials, of our
products as well as competing products prior to making a
purchasing decision. Moreover, the purchase of these products
typically requires coordination and agreement among a potential
customers corporate headquarters and regional and local
operations. Even if corporate headquarters agrees to purchase
our products, local operations may retain a significant amount
of autonomy and may not elect to purchase our products.
Additionally, a portion of our expenses related to anticipated
orders is fixed and is difficult to reduce or change, which may
further impact our revenues and operating results for a
particular period.
We expect that there will be fluctuations in the number and
value of orders received. 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 period
could suffer. As a result,
period-to-period
comparisons of our results of operations are not necessarily
meaningful, and these comparisons should not be relied upon as
indications of future performance.
Additionally, because of the lengthy sales cycle combined with a
lengthy product development cycle, our customers may elect not
to purchase our products or new features or functionality
because they have elected to select alternate technologies or
vendors. We may be unable to forecast the new products, features
or functionality desired by our customers. We may spend
considerable research and development dollars without having our
products, features or functionality be accepted in the market.
Because we are now focused solely on the development of digital
video products, our inability to develop products, features and
functionality that our customers might purchase would have a
significant impact on us, and would adversely affect sales,
revenue, margins and the cash available for future development
efforts.
We may
continue to experience fluctuations in our operating results and
face unpredictability in our future revenues.
Our revenues have fluctuated and are likely to continue to
fluctuate significantly in the future due to a number of
factors, many of which we cannot control.
Period-to-period
comparisons of our operating results are not necessarily
meaningful, and these comparisons should not be relied upon as
indications of the future. Because these factors are difficult
for us to forecast, our business, financial condition and
results of operations from one period or a series of periods may
be adversely affected and may be below the expectations of
analysts and investors, resulting in
24
a decrease in the market price of our common stock. Our business
and product mix has also changed in the past several years based
on our business restructuring, making historical comparisons
more unreliable as indicators of future performance.
Factors that affect our revenues include, among others, the
following:
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The sales cycle and timing of significant customer orders, which
are dependent on the capital spending budgets of cable and
satellite operators, telecom providers and other customers;
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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, including pricing actions by our
competitors;
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New product introductions or the introduction of added features
or functionality to products by competitors or by us;
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Delays in our introduction of new products, in our introduction
of added features or functionality to our products, or our
commercialization of products that are competitive in the
marketplace;
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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;
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The ability of our products to be qualified or certified as
meeting industry standards
and/or
customer standards;
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Changes in market demand;
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Economic and financial conditions specific to the cable,
satellite and telecom industries, and general economic
conditions;
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Timing of revenue recognition;
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Changes in domestic and international regulatory environments;
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Market acceptance of new and existing products;
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The mix of our customer base, sales channels and our products
sold;
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The level of international sales; and
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Delays in our receipt of, or cancellation of, orders forecasted
by customers.
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Our financial results are affected by the gross margin we
achieve for the year relative to our gross revenues. A variety
of factors influence our gross margin for a particular period,
including, among others, the following:
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The sales mix of our products, the volume of products
manufactured, and the average selling prices (ASPs) of our
products;
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The costs of manufacturing our products;
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Delays in reducing the cost of our products and the
effectiveness of our cost reduction measures;
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The type of distribution channel through which we sell our
products; and
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Our ability to manage excess and obsolete inventory.
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Our
expenses for any given quarter are 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 in revenue.
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
25
some of our suppliers that require us to purchase minimum
quantities of their products at a specified price. Because we
have in the past 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, 2005, $12.1 million of purchase
obligations were outstanding. The obligations are generally
expected to become payable at various times throughout 2006. 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, changing industry requirements and customer demands.
Because
our customer base is highly concentrated among a limited number
of large customers, the loss of or reduced demand from these
customers could have a material adverse effect on our business,
financial condition and results of operations.
Our customers in the cable industry 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. We expect this consolidation to
continue in the foreseeable future. As of June 2006, the top ten
US Multiple System Operators (MSOs) (based on total subscribers)
collectively served 58.2 million cable subscribers, which
is approximately 89% of the total 65.6 million cable
subscribers in the US, according to Kagan Research, LLC. The top
10 MSOs are Comcast Corporation; Time Warner Cable; Cox
Communications, Inc.; Charter Communications, Inc.; Adelphia
Communications Corporation; Cablevision System Corporation;
Brighthouse Networks; Mediacom LLC; Insight Communications
Company, Inc.; and CableOne. As a result of the consolidation
among cable operators, our revenues from digital video products
has been and will continue to be highly concentrated among a
limited number of large customers.
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. Our sales to these
customers tend to vary significantly from year to year depending
on the customers budget for capital expenditures and our
new product introductions and improvements. A significant amount
of our revenues will continue to be derived from a limited
number of large customers. The loss of or reduced demand for
products from any of our major customers could have a material
adverse effect on our business, financial condition 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 may also reduce
the number of potential customers. To attract new customers and
retain existing customers, we may be faced with price
competition, which may adversely affect our gross margins and
revenues.
A portion of our sales are made to a small number of resellers,
who often incorporate our 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, our ability to
generate revenue and our results of operations may suffer.
We are attempting to diversify our customer base beyond cable
and satellite customers, principally into the telecom market, as
well as the broadcast market. Major telecom operators have begun
to implement plans to rebuild or upgrade their networks to offer
bundled video, voice and data services. In order to be
successful in this market, we may need to build alliances with
integrators that sell telecom equipment to the telecom
operators, adapt our products for telecom applications, adopt
pricing specific to the telecom industry and the integrators
that sell to the telecom operators, and build internal expertise
to handle particular contractual and technical demands of the
telecom industry. As a result of these and other factors, we
cannot give any assurances that we will be able to increase our
revenues from the telecom market, or that we can do so
profitably, and any failure to generate revenues and profits
from telecom customers could adversely affect our business,
financial condition and results of operations.
26
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 implemented a number of restructuring plans since 2001.
The employee reductions and changes in connection with our
restructuring activities, as well as any 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
accounting and finance department, which in turn may adversely
affect our future revenues 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 reductions
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 reductions, in the
future.
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, accounting and
finance, engineering, sales and marketing personnel and
employees with significant experience and expertise in video,
data networking and radio frequency design. The competition for
some of these personnel is intense, particularly for engineers
with Motion Picture Experts Group (MPEG), Internet Protocol (IP)
and real time processing experience. We may incur additional
expenses to attract and retain key personnel. We have also
recently experienced turnover in our accounting and finance
organization and have augmented internal resources to address
staffing deficiencies primarily through the engagement of
external contractors. Additionally, we have retained FTI
Consulting, Inc. to provide accounting services, which has
increased operating expenses, and we may be unable to prepare
our financial statements without their assistance. There can be
no assurances that the additional expenses we may incur, or our
efforts to recruit such individuals, will be successful.
Additionally, 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.
The loss of the services of any key personnel, or our inability
to attract or retain qualified personnel could have a material
adverse effect on our business, financial condition and results
of operations.
Our
future growth depends on developments in the digital video
industry, on the adoption of new technologies and on several
other industry trends.
Future demand for our products will depend significantly on the
growing market acceptance of several emerging services,
including digital video, high definition television (HDTV),
IP-based TV,
ad insertion, and logo overlays. The effective delivery of these
services will depend, in part, on a variety of new network
architectures and standards, such as: FTTP and DSL networks
designed to facilitate the delivery of video services by telecom
operators; new video compression standards such as MPEG-4/H.264;
the greater use of protocols such as IP; and the introduction of
new consumer devices, such as advanced set-top boxes and DVRs.
If adoption of these emerging services
and/or
technologies is not as widespread or as rapid as we expect, or
if we are unable to develop new products based on these
technologies on a timely basis, our net sales growth will be
materially and adversely affected.
Furthermore, other technological, industry and regulatory trends
will affect the growth of our business. These trends include the
following:
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Convergence, or the desire of certain network operators to
deliver a package of video, voice and data services to
consumers, also known as the triple play;
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The use of digital video applications by businesses, governments
and educators;
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The entry of telecom providers into the video business to allow
them to offer the triple play purchase of services;
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Efforts by regulators and governments in the United States and
abroad to encourage the adoption of broadband and digital
technologies; and
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The extent and nature of regulatory attitudes towards such
issues as competition between operators, access by third parties
to networks of other operators, and local franchising
requirements for telecom companies to offer video.
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If, for instance, operators do not pursue the triple
play or new video products and technology aggressively or
in the timeline we expect, our ability to sell our digital video
products and grow our revenues will be materially and adversely
affected.
The
markets in which we operate are characterized by rapidly
changing technology, and 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. 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. Digital video markets are relatively immature,
making it difficult to accurately predict the markets
future growth rates, sizes or technological directions. In view
of the evolving nature of these markets, network operators and
content aggregators may decide to adopt alternative
architectures, industry standards or technologies that are
incompatible with our current or future video products and
applications. The development and greater market acceptance of
new architectures, industry standards or technologies could
decrease the demand for our products or render them obsolete,
and could negatively impact the pricing and gross margin of our
digital video products. Our competitors, many of which have
greater resources than we do, may introduce products that are
less costly, provide superior performance or achieve greater
market acceptance than our products. If we are unable to design,
develop, manufacture and sell products that incorporate or are
compatible with these new architectures, industry standards or
technologies, our business and financial results will be
materially and adversely impacted. Our ability to realize
revenue growth depends on our ability to:
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Develop, in a timely manner, new products and applications that
keep pace with developments in technology;
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Develop products that are cost effective;
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Meet evolving customer requirements;
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Enhance our current product and applications offerings; and
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Achieve market acceptance.
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The pursuit of necessary technological advances and the
development of new products require substantial time and
expense. We may not be able to successfully develop or introduce
new or enhanced products if they are not cost effective, are not
brought to the market in a timely manner, are not in accordance
with evolving industry standards and architecture, fail to
achieve market acceptance, or are ahead of the market. If the
technologies we are currently developing or intend to develop do
not achieve feasibility or widespread market acceptance, our
business will be materially and adversely impacted. In addition,
in order to successfully develop and market certain of our
current or future digital video products, we may be required to
enter into technology development or licensing agreements with
third parties. Failure to enter into development or licensing
agreements, when necessary, could limit our ability to develop
and market new products and could cause our operating results to
suffer. The entry into such development or licensing agreements
may not be on terms favorable to us and could negatively impact
our gross margins.
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Average
selling prices of our digital video products may decline, which
would materially and adversely affect our financial
performance.
The ASPs for our digital video products may decline due to the
introduction of new products, the adoption of new industry
standards, the entry into licensing agreements, an increase in
the number of competitors, competitive pricing pressures,
promotional programs and customers possessing strong negotiating
positions which require price reductions as a condition of
purchase. The adoption of industry standards and specifications
may erode ASPs on our digital video products if the adoption of
such standards lead to the commoditization of products similar
to ours. The entry into technology development or licensing
agreements, as necessitated by industry developments and
business needs, could also reduce our ASPs. Decreasing ASPs may
also require us to sell our products at much lower gross margins
than in the past, and could result in decreased revenues even if
the number of units that we sell increases. We may experience
substantial
period-to-period
fluctuations in future revenue, gross margin and operating
results due to ASP erosion in our digital video products.
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.
We
must achieve cost reductions or increase revenues to attain
profitability.
In order to achieve profitability, we must significantly
increase our revenues, continue to reduce the cost of our
products, and maintain or reduce our operating expenses. In
prior years, we experienced revenue declines which were, in
large part, due to declining product ASPs resulting from our
transition from a proprietary platform to the Data Over Cable
System Interface Specification (DOCSIS) standards platform.
Although we have implemented expense reduction and restructuring
plans in the past that have focused on cost reductions and
operating efficiencies, we continue to 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 which, in turn, could
materially and adversely impact our business, financial
condition and results of operations.
While we continue to work 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. Reduction 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
purchases and manufacturing agreements in the past and may incur
such charges in the future.
Our
repayment of our Notes could adversely affect our financial
condition, and 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 and cash equivalents 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 unrestricted
cash, cash equivalents and short-term investments totaled
$101.3 million and $97.7 million as of
December 31, 2005 and 2004, respectively. On March 21,
2006, we paid off the entire principal amount of the outstanding
Notes due August 2007, including all accrued and unpaid interest
thereon and related fees, for an aggregate amount of
$65.6 million. Our repayment in full of the Notes reduced
our unrestricted cash, decreased our liquidity and could
materially impair our ability to operate our business,
especially if we are unable to generate positive cash flow from
operations.
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 operations and to
provide available funds for working capital. 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
29
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. No assurances can be
given 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, operating results
and liquidity.
Substantially
all of our future revenue will be derived from the sale of our
digital video products, and our operating results, financial
conditions and cash flows will depend upon our ability to
generate sufficient revenue from the sale of our digital video
products.
In January 2006 we announced that we will focus solely on our
digital video products and applications. Accordingly, we are
susceptible to adverse trends affecting this market segment,
including technological obsolescence and the entry of new
competition. We expect that this market may continue to account
for substantially all of our revenue in the near future. As a
result, our future success depends on our ability to continue to
sell our digital video products and applications, the gross
margin of such sales, our ability to maintain and increase our
market share by providing other value-added services to the
market, and our ability to successfully adapt our technology and
services to other related markets. Markets for our existing
services and products may not continue to expand and we may not
be successful in our efforts to penetrate new markets.
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 adequately. We
may not have sufficient 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 products 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.
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 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 could have a material
adverse effect on our sales for a particular period.
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 patent
litigation. 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.
30
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). There can be no assurance that
D&O Insurance will be available to us in the future or, if
D&O Insurance is available, that it will not be
prohibitively expensive.
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.
The
loss of existing reseller and system integrator relationships or
the failure to establish new relationships or strategic
partnerships could have a material adverse effect on our
business, financial conditions and results of
operations.
Our products have been traditionally sold to large cable
operators and satellite operators with recent, limited sales to
television broadcasters. A portion of our sales are made to a
small number of resellers and system integrators, who often
incorporate our products and applications in systems that are
sold to an end-user customer, which is typically a cable
operator, satellite provider or broadcast operator. The resale
relationships provide an opportunity to sell our products to our
resellers customer bases. We rely upon these resellers for
recommendations of our products during the evaluation stage of
the purchasing process, as well as for implementation and
customer support services. A number of our competitors also have
strong relationships with the resellers. Although we intend to
establish new strategic relationships with leading resellers
worldwide to gain access to new customers, including telecom
providers, we may not succeed in establishing these
relationships. Even if we do establish and maintain these
relationships, our resellers or strategic partners may not
succeed in marketing our products to their customers. Some of
our competitors have established long-standing relationships
with cable, satellite and telecom operators that may limit our
and our resellers 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. Our resellers or strategic partners may also
terminate their relationship with us upon short notice without
significant penalties.
Based on our sole focus on our digital video products, the
reduction of our sales force, and our increasing focus on the
telecom market, we are increasingly reliant on resellers and
system integrators. In order to successfully market to telecom
companies, we believe we will need to build alliances with
system integrators that sell telecom equipment to the telecom
operators. We may be unsuccessful in maintaining our current
reseller and system integrator relationships as well as
attracting system integrators that sell to telecom companies.
Some of our resellers and system integrators have sold in the
past, and may sell in the future, products that compete with our
products. The loss of existing reseller and system integrator
relationships or the failure to establish new relationships or
strategic partnerships could have a material adverse effect on
our business, financial condition and results of operations.
We may
fail to accurately forecast customer demand for our products,
which could have a negative impact on our customer relationships
and our revenues.
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 $12.1 million as of December 31, 2005,
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.
Forecasting to meet our customers demand is particularly
difficult for our products. Our ability to meet customer demand
will depend significantly on the availability of our single
contract manufacturer. In recent years,
31
in response to lower sales and falling ASPs, we significantly
reduced our headcount and other expenses. As a result, we may be
unable to respond to customer demand that increases more quickly
than we expect. If we fail to meet customers supply
expectations, our sales would be adversely affected and we may
lose key customer relationships.
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. 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.
Although we generally do not have long term supply agreements
with our customers and have limited backlog of orders for our
products, we must maintain or have available sufficient
inventory levels to satisfy anticipated demand on a timely
basis. Maintaining sufficient inventory levels to ensure prompt
delivery of our products increases the risk of inventory
obsolescence and associated write-offs, which could harm our
business, financial conditions and results of operations.
We are
dependent on a key third-party manufacturer and any failure of
our manufacturer could materially adversely affect our financial
condition and operating results.
Our products are single sourced from a manufacturer in
San Jose, California. Any interruption in the operations of
our manufacturer could adversely affect our ability to meet our
scheduled product deliveries to customers. If we experience
delays or quality control problems or any failure from our
current manufacturer, we may be unable to supply products in a
timely manner to our customers. While we believe that there are
alternative manufacturers available, we believe that the
procurement from alternative suppliers could take several
months. In addition, these alternative suppliers may not be able
to supply us products that are functionally equivalent, or make
our products available to us on a timely basis or on similar
terms. Resulting delays, quality control problems or reductions
in product shipments could materially and adversely affect on
our financial performance, 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 underlying components, such as our
semiconductor components, could harm our gross margins or
operating results. There may not be manufacturers that are able
to meet our future volume or quality requirements at a price
that is favorable to us. Any financial, operational, production
or quality assurance difficulties experienced by our single
manufacturer could harm our business and financial 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
been 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.
Our products are assembled and tested by our single manufacturer
using testing equipment that we provide. As a result of our
dependence on the contract manufacturer 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 manufacturer. The production and assembly of testing
equipment typically require 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.
We are
dependent upon international sales and there are many risks
associated with international operations, any of which could
harm our financial condition and results of
operations.
We are dependent upon international sales, even though we expect
sales to customers outside of the United States to represent a
significantly smaller percentage of our revenues for the
foreseeable future compared to our historical
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revenues. For the years ended December 31, 2005, 2004 and
2003, approximately 42%, 47% and 45%, respectively, of our net
revenues were from customers outside of the United States. We
may be unable to maintain or increase international sales of our
products. 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, trade
barriers and trade disputes;
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The uncertainty of laws and enforcement in certain countries
relating to the protection of intellectual property;
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Difficulty in complying with environmental laws;
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Difficulty in collecting accounts receivable and longer payment
cycles for international customers than those for customers in
North America;
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Currency and exchange rate 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;
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Specific social, political, labor and economic conditions, and
political and economic changes in international markets; and
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Multiple and possibly overlapping tax structures, potentially
adverse tax consequences.
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One or more of these factors may have a material adverse effect
on our future operations and consequently, on our business,
financial conditions and operating results.
While we generally invoice our foreign sales in
U.S. dollars, we invoice some of our sales in Europe in
Euros and local currency in other countries. 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 our foreign customers could result
in decreased sales. If our customers are affected by currency
devaluations or general economic downturns, their ability to
purchase our products could be reduced significantly.
We are
subject to regulation by U.S. and foreign governments and
qualification requirements by
non-governmental
agencies. If we are unable to obtain and maintain regulatory
qualifications for our existing and future products, our
financial results may be adversely affected.
The cable, satellite and telecom industries are subject to
extensive regulation in the United States and in foreign
countries, which may affect the sale of our products and the
growth of our business domestically and internationally. The
growth of our business and our financial performance depend in
part on regulations in these industries. Our products are also
subject to qualification, clearance, and approval in certain
countries, and we cannot make any assurances that we will be
able to maintain these qualifications, clearances or approvals
in all the countries in which we operate. If we do not comply
with the applicable regulatory requirements in each of the
jurisdictions where our products are sold, we may be subject to
regulatory enforcement actions which could require us to, among
other things, cease selling our products.
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 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
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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 adversely affect our business,
financial condition and results of operations.
Furthermore, foreign countries may decide to prohibit, terminate
or delay the construction of new infrastructure or the adoption
of new technology for a variety of reasons. These reasons
include environmental issues, economic downturns, availability
of favorable pricing for other communications services and the
availability and cost of related equipment. Regulations dealing
with access by competitors to the networks of incumbent
operators could slow or stop additional construction or
expansion of these operators. Increased regulation of our
customers pricing or service offerings could limit their
investments and consequently the sale of our products. Changes
in regulations could have an adverse impact on our business and
financial results.
The
markets in which we operate are intensely competitive and many
of our competitors are larger and more
established.
The markets for digital video products and applications are
extremely competitive and have been characterized by rapid
technological changes. Competitors vary in size and in the scope
and breadth of the products and services they offer. Our current
competitors include Scopus Video Networks Ltd.; RGB Networks,
Inc.; BigBand Networks; and Cisco Systems, Inc. through its
acquisition of Scientific-Atlanta, Inc. Competitors who could
enter into the digital video applications and products market
include larger and more established players such as Motorola,
Inc. Companies that have historically not had a large presence
in digital video applications and products market have recently
begun to expand their market share through mergers and
acquisitions. Further, our competitors may bundle their products
or incorporate functionality into existing products in a manner
that discourages users from purchasing our products or which may
require us to lower our selling prices resulting in lower gross
margins. Consolidation in the industry also may result in larger
competitors that may have significant combined resources with
which to compete against us. We also face competition from early
stage companies with access to significant financial backing
that seek to improve existing technologies or develop new
technologies. Increased competition could result in reductions
in price and revenues, lower profit margins, loss of customers
and loss of market share. Any one of these factors could
materially and adversely affect our business, financial
condition and operating results.
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 network operators and content
aggregators; and
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Compliance with industry standards.
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Many of our competitors and potential competitors are
substantially larger and have significant advantages over us,
including, without limitation:
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Larger and more established selling and marketing capabilities;
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Greater economies of scale;
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Significantly greater financial, technical, engineering,
marketing, distribution, customer support and other resources;
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Greater name recognition and a larger installed base of
customers; and
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Well-established relationships with our existing and potential
customers.
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34
Our competitors and potential competitors may be in a better
position to withstand any significant reduction in capital
spending by customers in these markets or to reduce selling
prices for competitive reasons. They often have broader product
lines and market focus and may not be as susceptible to
downturns in a particular market. In addition, many of our
competitors and potential competitors have been in operation
longer than we have and therefore have more long-standing and
established relationships with domestic and foreign customers.
If any of our competitors products or technologies were to
become the industry standard, our business could be seriously
harmed. If our competitors are successful in bringing these
products to market earlier, or if these products are more
technologically capable than ours, then our sales could be
materially and adversely affected. Our competitors may be in a
stronger position to respond quickly to new or emerging
technologies and changes in customer requirements. Our
competitors may also be able to devote greater resources to the
development, promotion and sale of their products and services
than we can. Accordingly, we may not be able to maintain or
expand our revenues if competition increases and we are unable
to respond effectively.
Given these competitive and other market factors, we continually
look for opportunities to compete effectively and create value
for our stockholders. We may, at any time and from time to time,
be in the process of identifying or evaluating product
development initiatives, partnerships, strategic alliances or
transactions and other alternatives in order to maintain market
position and maximize shareholder value. Market and other
competitive factors may cause us to change our strategic
direction, and we may not realize the benefits of any such
initiatives, partnerships, alliances or transactions. We cannot
assure you that any such initiatives, partnerships, alliances or
transactions that we identify and pursue would actually result
in our competing effectively, maintaining market position or
increasing stockholder value. Our failure to realize any
expected benefits from such initiatives, partnerships, alliances
or transactions could negatively impact our financial position,
results of operations, cash flows and stock price.
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 or upgrades of products,
and adversely affect our reputation, our customers
willingness to buy products from us, and market acceptance and
perception of our products. Any such errors or delays in
releasing new products or new versions or upgrades 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 ultimately are unsuccessful could result in our
expenditure of funds in litigation and divert managements
time and other resources.
We may
be unable to adequately protect or enforce our intellectual
property rights.
We rely on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and
protect proprietary rights in our products. Even though we seek
to establish and protect proprietary rights in our products,
there are risks. There are no assurances 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. There are no assurances 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.
35
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 or
effective to prevent misappropriation of our technology, trade
secrets or other proprietary information 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.
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.
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.
The industry in which we operate is characterized by vigorous
protection of intellectual property rights, which on occasion
have resulted in significant and often protracted litigation. As
is typical in our industry, we have been and may from time to
time be notified of claims asserting that we are 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 customers of our technology or
products for claims against such customers by a third party
based on claims that our technology or products infringe patents
of that third party. Currently, in the cable industry, there is
industry-wide patent litigation involving the DOCSIS standard
and certain video technologies. Our customers have been sued for
using certain DOCSIS complaint products and video products,
including our products. Our customers have requested indemnity
pursuant to the terms and conditions of our sales to them, and
we are contributing to the legal fees and costs of these
litigations. Additionally, we may have further liability under
indemnity obligations if there is a settlement or judgment.
Please see Item 3 Legal Proceedings for
additional information.
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, may result in costly and time-consuming
litigation; divert managements attention and other
resources; require us to enter into royalty arrangements;
subject us to significant 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; invalidate our proprietary rights; or damage our
reputation. Although we carry general liability insurance, our
insurance may not cover potential claims of this type and may
not be adequate to indemnify us for all liability that may be
imposed. 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 prevent us
from manufacturing and selling 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.
36
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. Payment terms in
the United States are typically 30 to 60 days, 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 current conditions 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 caused 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.
We
have and we may seek to expand our business through acquisitions
which 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.
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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;
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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.
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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, other than the digital
video products, have achieved the level of market acceptance
that was forecasted at the time of their acquisitions.
Additionally, certain product
37
groups have not achieved the level of technological development
needed to be marketable or to expand the market. 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
materially harm our business and operating results. 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.
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
video products certified by Underwriters Laboratory in order to
meet federal requirements. 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.
Compliance
with current and future environmental regulations may be costly
which could impact our future earnings.
We may be subject to environmental and other regulations due to
our production and marketing of products in certain states and
countries. In addition, we could face significant costs and
liabilities in connection with product take-back legislation,
which enables customers to return a product at the end of its
useful life and charges us with financial and other
responsibility for environmentally safe collection, recycling,
treatment and disposal. We also face increasing complexity in
our product design and procurement operations as we adjust to
new and upcoming requirements relating to the materials
composition of our products, including the restrictions on lead
and certain other substances in electronics that will apply to
specified electronics products put on the market in the European
Union as of July 1, 2006 (Restriction of Hazardous
Substances in Electrical and Electronic Equipment Directive (EU
RoHS)). The European Union has also finalized the Waste
Electrical and Electronic Equipment Directive (WEEE), which
makes producers of electrical goods financially responsible for
specified collection, recycling, treatment and disposal of past
and future covered products. The deadline for enacting and
implementing this directive by individual European Union
governments was August 13, 2004 (WEEE Legislation),
although extensions were granted in some countries. Producers
became financially responsible under the WEEE Legislation
beginning in August 2005. Other countries, such as the United
States, China and Japan, have enacted or may enact laws or
regulations similar to the EU RoHS or WEEE Legislation. Other
environmental regulations may require us to reengineer our
products to utilize components which are more environmentally
compatible. Such reengineering and component substitution may
result in additional costs to us. Although we currently do not
anticipate any material adverse effects based on the nature of
our operations and the effect of such laws, there is no
assurance that such existing laws or future laws will not have a
material adverse effect on us.
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, there are no
assurances 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 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.
New and changing laws and regulations, including the
Sarbanes-Oxley Act of 2002, new Commission regulations and
NASDAQ Stock 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. 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 continued
testing and remediation of our internal controls will be
significant and material in the year ended December 31,
2006 and may continue to be material in future 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.
Recent
and proposed regulations related to equity compensation could
adversely affect earnings, our ability to raise capital and
affect our ability to attract and retain key
personnel.
Since our inception, we have used stock options as a fundamental
component of our employee compensation packages. We believe that
our stock option plans are an essential tool to link the
long-term interests of stockholders and employees, especially
executive management, and serve to motivate management to make
decisions that will, in the long run, give the best returns to
stockholders. The Financial Accounting Standards Board has
announced changes to GAAP that requires us to record a charge to
earnings for employee stock option grants and employee stock
purchase plan rights for all future periods beginning on
January 1, 2006. In the event that the assumptions used to
compute the fair value of our stock-based awards are later
determined to be inaccurate or if we change our assumptions
significantly in future periods, our stock-based compensation
expense and results of operations could be materially affected
which could impede any capital raising efforts. Additionally, to
the extent that new accounting standards make it more difficult
or expensive to grant options to employees, we may incur
increased compensation costs, change our equity compensation
strategy or find it difficult to attract, retain and motivate
employees, each of which could materially and adversely affect
our business.
Our
stock price has been and is likely to continue to be highly
volatile.
The market price of our common stock has fluctuated
significantly in the past and is likely to fluctuate in the
future. Investors may be unable to resell our common stock at or
above their purchase price. In the past, companies that have
experienced volatility in the market price of their stock have
been subject to securities class action litigation.
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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 and technologies
industry;
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Changes in the economic performance
and/or
market valuations of technology, Internet, online service or
broadband service industries;
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Announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments, by us or
our current or potential competitors;
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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.
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In addition, the stock markets in general, including the Pink
Sheets and The NASDAQ Stock Market, and the stock price of
broadband services and technology companies in particular, have
experienced extreme price and volume volatility. This volatility
and decline have 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.
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 our stockholders of record as of February 20, 2001.
If our Board of Directors believes that a particular acquisition
is undesirable, 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. As a result, 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.
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. We are also subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law. Any
provision of our Certificate of Incorporation, Bylaws,
stockholder rights plan or Delaware law that has the effect of
delaying or preventing a change in control could limit the
opportunity for our stockholders to receive a premium for their
shares of our common stock.
We
rely on complex information technology systems and networks to
operate our business. Any significant system or network
disruption could have a material adverse impact on our
operations, sales and financial performance.
We rely on the efficient and uninterrupted operation of complex
information technology systems and networks. All information
technology systems are potentially vulnerable to damage or
interruption from a variety of sources, including but not
limited to computer viruses, security breach, energy blackouts,
natural disasters, terrorism, war and telecommunication
failures. There also may be system or network disruptions if new
or upgraded business management systems are defective or are not
installed properly. We have implemented various measures to
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manage our risks related to system and network disruptions, but
a system failure or security breach could negatively impact our
operations and financial results. In addition, we may incur
additional costs to remedy the damages caused by these
disruptions or security breaches.
We,
our sole manufacturer and our customers are vulnerable to
earthquakes, disruptions to power supply, labor issues and other
unexpected events.
Our corporate headquarters, the majority of our research and
development activities and our sole source manufacturer are
located in California, an area known for seismic activity. An
earthquake, or other significant natural disaster, could result
in an interruption in our business or the operations of our
manufacturer. Some of the other locations in which we and our
customers conduct business are prone to natural disasters. If
there is a natural disaster in any of the locations where our
customers are located, we face the risk that our customers may
incur losses or substantial business interruptions which may
impair their ability to continue to purchase their products from
us.
Our California operations may also be subject to disruptions in
power supply, such as those that occurred in 2001. In addition,
the cost of electricity and natural gas has risen significantly.
Power outages could disrupt our business operations and those of
our suppliers, and could cause us to fail to meet the
commitments to our customers. Our business may also be impacted
by labor issues related to our operations
and/or those
of our manufacturer, network operators and content aggregators,
or customers. Such an interruption could harm our current and
prospective business relationships and adversely impact 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. Disruptions in power supply, labor issues and other
unexpected events impacting our customers may affect their
purchasing decisions and thus adversely impact our financial
performance.
SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
This Annual 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, among other things, statements regarding:
|
|
|
|
|
Our belief that our current cash balances will be sufficient to
satisfy our cash requirements for at least the next
12 months;
|
|
|
|
Our belief that we are well positioned to capitalize on the
emerging digital video market because of the success our digital
video products have had with the major U.S. cable operators
and satellite providers, as well as our current success in
digital ad insertion;
|
|
|
|
Our belief that by focusing our business on higher margin
digital video products, our margins may increase;
|
|
|
|
Our belief that we are well positioned to capitalize on the
growing demand for network operators to provide advanced video
services to their subscribers;
|
|
|
|
|
|
Our belief that the ongoing migration of network operators and
content aggregators to all-digital networks represents a
significant opportunity for companies similar to ours with
products and technologies that enable our customers to maximize
their bandwidth, to utilize important new transport methods and
to deploy new services;
|
|
|
|
|
|
Our belief that networks operators and content aggregators will
increasingly rely on overlay to maintain or even increase their
advertising revenues and that our digital video processing
systems will enable them to do this more cost-effectively;
|
|
|
|
Our belief that network operators will continue their
investments in equipment to provide advanced services in a
cost-effective manner to increase average revenues per unit from
their subscribers;
|
41
|
|
|
|
|
Our belief that there will be increasing competition to our
digital video products, which may increase price competition and
lead to decreased revenue and margins;
|
|
|
|
Our expectation that research and development expenses will
decrease in 2006; and
|
|
|
|
Our expectation that general and administrative expenses will
increase in 2006 due in part to the restatement process.
|
Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, including those
discussed in Item 1A of this Report. 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 1A of this
Report on
Form 10-K,
among other things, should be considered in evaluating our
prospects and future financial performance.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our principal executive offices are located in Santa Clara,
California, where we lease approximately 63,069 square feet
under a lease that expires in September 2009. We
sub-sublease
approximately 141,000 square feet of space in
Santa Clara, California under a sublease that expires in
October 2009 with the
sub-sublease
expiring on the same date as the sublease. In the United States,
we also leased an additional facility in Costa Mesa, California
that was subleased; the lease expired in March 2006 and the
sublease expired in September 2005.
In addition, we lease properties worldwide. We had a facility in
Tel Aviv, Israel consisting of approximately 136,000 square
feet under a lease that expired in October 2005. We subleased
approximately 107,000 square feet of the Israel property,
and those subleases expired in October 2005. We have offices in
Brussels, Belgium; Hong Kong; Shanghai, China; Tel Aviv, Israel;
and Seoul, Korea. We had a facility in Ottawa, Ontario, Canada
that we subleased and the lease and sublease expired in June
2006. 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 5,
Commitments, 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 for the Northern District of
California (Court) 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, alleged 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 scheduled for November 4, 2003. On
February 23, 2004, the Court issued an order disqualifying
two of the lead plaintiffs and ordered discovery, which was
conducted. In February 2006, we mediated the case with
plaintiffs counsel. As part of the mediation, we reached a
settlement of $15.0 million. After this mediation, our
insurance carriers agreed to tender their remaining limits of
coverage, and we contributed approximately $2.2 million to
the settlement. On March 17, 2006, we, along with
plaintiffs counsel,
42
submitted the settlement to the Court and the shareholder class
for approval. The Court held a hearing to review the settlement
of the shareholder litigation on September 25, 2006. To
date, the Court has not approved the settlement.
On October 16, 2000, a lawsuit was filed against us and the
individual defendants (Zaki Rakib, Selim Rakib and Raymond
Fritz) in the Superior Court of California, San Luis Obispo
County. This lawsuit was titled Bertram v. Terayon
Communication 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. Plaintiffs 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.
In 2002, two shareholders filed derivative cases purportedly on
behalf of us 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 Superior Court of California, County of
Santa Clara. 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 securities class
action filed in April 2000. In that securities class action, we
disputed making any misleading statements. The derivative
complaints also allege claims relating to stock sales by certain
of the director and officer defendants. On September 15,
2006, we entered into a Stipulation of Settlement of Derivative
Claims. On September 18, 2006, the Superior Court of
California, County of Santa Clara approved the final
settlement of the derivative litigation entitled In re
Terayon Communication Systems, Inc. Derivative Litigation
(Case No. CV 807650). In connection with the
settlement, we paid $1.0 million in attorneys fees
and expenses to the derivative plaintiffs counsel and
agreed to adopt certain corporate governance practices.
On June 23, 2006, a putative class action lawsuit was filed
against us in the United States District Court for the Northern
District of California by I.B.L. Investments Ltd. purportedly on
behalf of all persons who purchased our common stock between
October 28, 2004 and March 1, 2006. Zaki Rakib, Jerry
D. Chase, Mark Richman and Edward Lopez are named as individual
defendants. The lawsuit focuses on the our March 1, 2006
announcement of the restatement of our financial statements for
the year ended December 31, 2004, and for the four quarters
of 2004 and the first two quarters of 2005. The plaintiffs are
seeking damages, interest, costs and any other relief deemed
proper by the court. An unfavorable ruling in this legal matter
could materially and adversely impact our results of operations.
In January 2005, Adelphia Communications Corporation (Adelphia)
sued us in the District Court of the City and County of Denver,
Colorado. Adelphias complaint alleged, among other things,
breach of contract and misrepresentation in connection with our
sale of cable modem termination systems (CMTS) products to
Adelphia and our announcement to cease future investment in the
CMTS market. Adelphia sought damages in excess of
$25.0 million and declaratory relief. We moved to dismiss
the complaint seeking an order blocking the case from going
forward at a preliminary stage. The court denied our motion to
dismiss the complaint, thereby permitting the case and discovery
to go forward. We filed a response to Adelphias complaint
and discovery began. On October 21, 2005, the parties
settled the litigation in exchange for (i) full mutual
releases of the other party for claims related to the CMTS and
customer premise equipment products and (ii) a payment to
Adelphia consisting of $3.0 million in cash,
$0.8 million of DM 6400 products at list price and
$0.8 million of modems at a price of $33.50 each. On
December 1, 2005, the United States Bankruptcy Court of the
Southern District of New York approved the settlement. On
December 15, 2005, the court dismissed the case with
prejudice.
On April 22, 2005, we filed a lawsuit in the Superior Court
of California, County of Santa Clara against Adam S.
Tom (Tom) and Edward A. Krause (Krause) and a company founded by
Tom and Krause, RGB Networks, Inc. (RGB). We sued Tom and Krause
for breach of contract and RGB for intentional interference with
contractual relations based on breaches of the Noncompetition
Agreements entered into between us and Tom and Krause,
respectively. On May 24, 2006, RGB, Tom and Krause filed a
Notice of Motion and Motion For Leave To File a Cross-Complaint,
in which the defendants stated that they intended to file
counter-claims against us for misappropriation of trade secrets,
unfair competition, tortious interference with contractual
relations and tortious interference with prospective economic
advantage. On July 6, 2006, the court granted the
defendants motion, and on July 20, defendants filed a
cross-complaint for misappropriation of trade secrets, unfair
competition, tortious
43
interference with contractual relations and tortious
interference with prospective economic advantage. On
August 21, 2006, we filed a demurrer to certain of those
claims. The court granted our demurrer as to RGBs request
for declaratory judgment. On November 9, 2006, we filed our
answer to RGBs complaint. Damages in this matter are not
capable of determination at this time and the case may be
lengthy and expensive to litigate.
On September 13, 2005, a case was filed by Hybrid Patents,
Inc. (Hybrid) against Charter Communications, Inc. (Charter) in
the United States District Court for the Eastern District of
Texas for patent infringement related to Charters use of
equipment (cable modems, CMTS and embedded multimedia terminal
adapters (eMTAs)) meeting the Data Over Cable System Interface
Specification (DOCSIS) standard and certain video equipment.
Hybrid has alleged that the use of such products violates its
patent rights. Charter has requested that we and others
supplying it with equipment indemnify Charter for these claims.
We and others have agreed to contribute to the payment of the
legal costs and expenses related to this case. On May 4,
2006, Charter filed a cross-complaint asserting its indemnity
rights against us and a number of companies that supplied
Charter with cable modems, and to date, this cross-complaint has
not been dismissed. Trial is scheduled on Hybrids claims
for July 2, 2007. At this point, the outcome is uncertain
and we can not assess damages. However, the case may be
expensive to defend and there may be substantial monetary
exposure if Hybrid is successful in its claim against Charter
and then elects to pursue other cable operators that use the
allegedly infringing products.
On July 14, 2006, a case was filed by Hybrid against Time
Warner Cable (TWC), Cox Communications Inc. (Cox), Comcast
Corporation (Comcast), and Comcast of Dallas, LP (together, the
MSOs) in the United States District Court for the Eastern
District of Texas for patent infringement related to the
MSOs use of data transmission systems and certain video
equipment. Hybrid has alleged that the use of such products
violate its patent rights. No trial date is known yet. To date,
we have not been named as a party to the action. The MSOs have
requested that we and others supplying them with cable modems
and equipment indemnify the MSOs for these claims. We and others
have agreed to contribute to the payment of legal costs and
expenses related to this case. At this point, the outcome is
uncertain and we cannot assess damages. However, the case may be
expensive to defend and there may be substantial monetary
exposure if Hybrid is successful in its claim against the MSOs
and then elects to pursue other cable operators that use the
allegedly infringing products.
On September 16, 2005, a case was filed by Rembrandt
Technologies, LP (Rembrandt) against Comcast in the United
States District Court for the Eastern District of Texas alleging
patent infringement. In this matter, Rembrandt alleged that
products and services sold by Comcast infringe certain patents
related to cable modem, voice-over internet, and video
technology and applications. To date, we have not been named as
a party in the action, but we have received a subpoena for
documents and a deposition related to the products we sold to
Comcast. We continue to comply with this subpoena. Comcast
requested that we and others supplying them with products for
indemnity related to the products that we sold to them. We and
others have agreed to contribute to the payment of legal costs
and expenses related to this case. Trial is scheduled on
Rembrandts claims for August 6, 2007. At this point,
the outcome is uncertain and we cannot assess damages. However,
the case may be expensive to defend and there may be substantial
monetary exposure if Rembrandt is successful in its claim
against Comcast and then elects to pursue other cable operators
that use the allegedly infringing products.
On June 1, 2006, a case was filed by Rembrandt against
Charter, Cox, CSC Holdings, Inc. (CSC) and Cablevisions Systems
Corp. (Cablevision) in the United States District Court for the
Eastern District of Texas alleging patent infringement. In this
matter, Rembrandt alleged that products and services sold by
Charter infringe certain patents related to cable modem,
voice-over internet, and video technology and applications. To
date, we have not been named as a party in the action, but
Charter has made a request for indemnity related to the products
that we and others have sold to them. We have not received an
indemnity request from Cox, CSC and Cablevision but we expect
that such request will be forthcoming shortly. To date, we and
others have not agreed to contribute to the payment of legal
costs and expenses related to this case. Trial date of this
matter is not known at this time. At this point, the outcome is
uncertain and we cannot assess damages. However, the case may be
expensive to defend and there may be substantial monetary
exposure if Rembrandt is successful in its claim against Charter
and then elects to pursue other cable operators that use the
allegedly infringing products.
On June 1, 2006, a case was filed by Rembrandt against TWC
in the United States District Court for the Eastern District of
Texas alleging patent infringement. In this matter, Rembrandt
alleged that products and services sold by
44
TWC infringe certain patents related to cable modem, voice-over
internet, and video technology and applications. To date, we
have not been named as a party in the action, but TWC has made a
request for indemnity related to the products that we and others
have sold to them. We and others have agreed to contribute to
the payment of legal costs and expenses related to this case.
Trial date of this matter is not known at this time. At this
point, the outcome is uncertain and we cannot assess damages.
However, the case may be expensive to defend and there may be
substantial monetary exposure if Rembrandt is successful in its
claim against TWC and then elects to pursue other cable
operators that use the allegedly infringing products.
On September 13, 2006, a second case was filed by Rembrandt
against TWC in the United States District Court for the Eastern
District of Texas alleging patent infringement. In this matter,
Rembrandt alleged that products and services sold by TWC
infringe certain patents related to the DOCSIS standard. To
date, we have not been named as a party in the action, but TWC
has made a request for indemnity related to the products that we
and others have sold to them. We and others have agreed to
contribute to the payment of legal costs and expenses related to
this case. Trial date of this matter is not known at this time.
At this point, the outcome is uncertain and we cannot assess
damages. However, the case may be expensive to defend and there
may be substantial monetary exposure if Rembrandt is successful
in its claim against TWC and then elects to pursue other cable
operators that use the allegedly infringing products.
We have received letters claiming that our technology infringes
the intellectual property rights of others. We have consulted
with our patent counsel and reviewed 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.
Furthermore, we have in the past agreed to, and may from time to
time in the future agree to, indemnify a customer of our
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 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 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, results of operations and financial condition.
In December 2005, the Commission issued a formal order of
investigation in connection with our accounting review of the
Thomson Contract. These matters were previously the subject of
an informal Commission inquiry. We have been cooperating fully
with the Commission and will continue to do so in order to bring
the investigation to a conclusion as promptly as possible.
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
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 financial condition and 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
|
There were no matters submitted to a vote of security holders
during the year ended December 31, 2005.
45
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
(a) Prior to April 4, 2006, our common stock was
traded on The NASDAQ Stock Market under the symbols
TERN and TERNE. Our common stock was
delisted from The NASDAQ Stock Market on April 4, 2006 and
currently is quoted on the Pink Sheets under the symbol
TERN.PK. The following table sets forth, for the
periods indicated, the high and low per share sale prices of our
common stock as reported on The NASDAQ Stock Market, for the
respective periods.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.73
|
|
|
$
|
1.99
|
|
Second Quarter
|
|
$
|
3.78
|
|
|
$
|
2.52
|
|
Third Quarter
|
|
$
|
4.10
|
|
|
$
|
2.91
|
|
Fourth Quarter
|
|
$
|
3.95
|
|
|
$
|
1.97
|
|
Year Ended December 31, 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
|
|
As of December 19, 2006, the closing price of our common
stock on the Pink Sheets was $1.87.
(b) As of November 30, 2006, there were approximately
522 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.
(c) We have not declared or paid 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.
(d) The following table provides certain information about
our common stock that may be issued under our equity
compensation plans as of December 31, 2005. 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
|
|
|
Common Stock
|
|
|
|
Issuance Under
|
|
|
to be Issued
|
|
Weighted Average
|
|
Equity Compensation
|
|
|
Upon 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)
|
|
|
10,132,904
|
|
|
$
|
4.23
|
|
|
|
4,065,127
|
|
Equity compensation plans not
approved by Terayon stockholders(2)
|
|
|
2,899,082
|
|
|
$
|
6.70
|
|
|
|
1,465,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,031,986
|
|
|
$
|
4.78
|
|
|
|
5,530,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes options to purchase common stock outstanding under the
Terayon Communication Systems, Inc. 1995 Stock Option Plan, as
amended (1995 Plan), the Terayon Communication Systems, Inc.
1997 Equity Incentive Plan, as amended (1997 Plan), and the
Terayon Communication Systems, Inc. 1998 Non-Employee Directors
Stock Option Plan, as amended (1998 Plan). Does not include
600,371 shares of our common stock that were available for
issuance under the Terayon Communication Systems, Inc. 1998
Employee Stock Purchase Plan, as |
46
|
|
|
|
|
amended, which was also approved by our stockholders, including
the Terayon Communication Systems, Inc. 1998 Employee Stock
Purchase Plan Offering for Foreign Employees. The 1997 Plan was
amended on June 13, 2000 to, among other things, provide
for an increase in the number of shares of our common stock on
each January 1 beginning January 1, 2001 through
January 1, 2007, by the lesser of 5% of our common stock
outstanding on such January 1 or 3,000,000 shares. In May
2003, the 1997 Plan was amended to reduce the number of
authorized shares in the 1997 Plan by 6,237,826 shares. In
May 2005, the 1997 Plan was amended to reduce the number of
authorized shares in the 1997 Plan by 4,000,000 shares. |
|
(2) |
|
Includes options to purchase common stock outstanding under the
Terayon Communication Systems, Inc. 1999 Non-Officer Equity
Incentive Plan, as amended (1999 Plan), Mainsail Equity
Incentive Plan, TrueChat Equity Incentive Plan, and options
issued outside of any equity incentive plan. See Note 10,
Stockholders Equity, to Consolidated Financial
Statements for additional information regarding the provisions
of the 1999 Plan. |
47
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data has been
restated or adjusted, as applicable, and is derived from our
consolidated financial statements and should be read in
conjunction with the consolidated financial statements and notes
thereto and with Managements Discussion and Analysis
of Financial Condition and Results of Operations and other
financial data included elsewhere in this report. Our historical
results of operations are not necessarily indicative of results
of operations to be expected for any future period. We have not
amended our previously filed Annual Reports on
Form 10-K
or Quarterly Reports on
Form 10-Q
for the periods affected by the restatement. The information
that has been previously filed or otherwise reported for these
periods is superseded by the information in this
Form 10-K.
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements for more
detailed information regarding the restatement of our
consolidated financial statements for the years ended
December 31, 2005, 2004 and 2003 and our selected
consolidated financial data as of and for the years ended
December 31, 2005, 2004, 2003, 2002 and 2001.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
(as restated)(1)
|
|
|
(as restated)(1)
|
|
|
(as restated)
|
|
|
(as adjusted)(5)
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated statement of
operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
90,664
|
|
|
$
|
136,484
|
|
|
$
|
130,187
|
|
|
$
|
130,730
|
|
|
$
|
279,481
|
|
Cost of goods sold
|
|
|
55,635
|
|
|
|
101,887
|
|
|
|
103,835
|
|
|
|
101,808
|
|
|
|
263,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
35,029
|
|
|
|
34,597
|
|
|
|
26,352
|
|
|
|
28,922
|
|
|
|
16,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17,650
|
|
|
|
33,199
|
|
|
|
42,634
|
|
|
|
58,696
|
|
|
|
79,927
|
|
Sales and marketing
|
|
|
22,534
|
|
|
|
24,145
|
|
|
|
26,781
|
|
|
|
35,704
|
|
|
|
55,701
|
|
General and administrative
|
|
|
20,356
|
|
|
|
12,039
|
|
|
|
11,934
|
|
|
|
15,639
|
|
|
|
33,163
|
|
Goodwill amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,410
|
|
Restructuring charges, executive
severance and asset write-offs(2)
|
|
|
2,257
|
|
|
|
12,336
|
|
|
|
2,803
|
|
|
|
8,922
|
|
|
|
587,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,797
|
|
|
|
81,719
|
|
|
|
84,152
|
|
|
|
118,961
|
|
|
|
781,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,768
|
)
|
|
|
(47,122
|
)
|
|
|
(57,800
|
)
|
|
|
(90,039
|
)
|
|
|
(764,986
|
)
|
Interest income (expense) and
other income (expense), net
|
|
|
966
|
|
|
|
(59
|
)
|
|
|
1,891
|
|
|
|
(618
|
)
|
|
|
1,645
|
|
Gain on early extinguishment of
debt(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,983
|
|
|
|
192,303
|
|
Income tax benefit (expense)
|
|
|
(149
|
)
|
|
|
76
|
|
|
|
(316
|
)
|
|
|
(238
|
)
|
|
|
13,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,951
|
)
|
|
$
|
(47,105
|
)
|
|
$
|
(56,225
|
)
|
|
$
|
(39,912
|
)
|
|
$
|
(557,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.35
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(8.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share(4)
|
|
|
77,154
|
|
|
|
75,751
|
|
|
|
74,074
|
|
|
|
72,718
|
|
|
|
68,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
101,301
|
|
|
$
|
97,735
|
|
|
$
|
138,640
|
|
|
$
|
206,503
|
|
|
$
|
333,888
|
|
Working capital
|
|
|
22,045
|
|
|
|
107,052
|
|
|
|
138,035
|
|
|
|
178,091
|
|
|
|
320,150
|
|
Total assets
|
|
|
146,648
|
|
|
|
156,981
|
|
|
|
213,099
|
|
|
|
279,169
|
|
|
|
469,981
|
|
Convertible debentures
|
|
|
65,367
|
|
|
|
65,588
|
|
|
|
65,809
|
|
|
|
66,030
|
|
|
|
177,368
|
|
Long-term obligations (less
current portion)
|
|
|
1,455
|
|
|
|
2,076
|
|
|
|
1,356
|
|
|
|
1,936
|
|
|
|
181,868
|
|
Accumulated deficit
|
|
|
(1,062,438
|
)
|
|
|
(1,035,487
|
)
|
|
|
(988,382
|
)
|
|
|
(932,157
|
)
|
|
|
(892,245
|
)
|
Total stockholders equity
|
|
|
20,657
|
|
|
|
44,943
|
|
|
|
90,563
|
|
|
|
142,191
|
|
|
|
181,052
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
48
|
|
|
(2) |
|
See Note 6, Accrued Severance Pay, and
Note 7, Restructuring Charges and Asset
Write-offs, to Consolidated Financial Statements for an
explanation for restructuring charges, executive severance and
asset write-offs. |
|
(3) |
|
See Note 8, Convertible Subordinated Notes, to
Consolidated Financial Statements for an explanation of the
repurchase of subordinated convertible notes and
reclassification of related gains. |
|
(4) |
|
See Note 2, Summary of Significant Accounting
Policies, to Consolidated Financial Statements for an
explanation of the method employed to determine the number of
shares used to compute per share data. |
|
(5) |
|
We made three adjustments to the financial statements for the
year ended December 31, 2001 which resulted in a decrease
in accumulated net loss of $6.7 million. The largest
adjustment of $7.9 million gain related to the redemption
of a portion of the embedded derivative (Issuer Call Option)
contained in our $500.0 million of 5% convertible
subordinated Notes due August 2007 (Notes) and the remaining
$1.9 million and $0.6 million related to our analysis
of the allowance for doubtful accounts and an adjustment for a
previously recorded tax accrual, respectively. During 2001, we
repurchased $325.9 million of face value of Notes,
requiring $7.0 million of the bond premium to be redeemed.
An additional $1.0 million was recorded to reflect the
amortization of the bond premium. As part of our review of the
allowance for doubtful accounts, we determined that an
adjustment to increase bad debt expense and the corresponding
allowance for doubtful accounts by $1.9 million was
necessary for the year ended December 31, 2001. In 2001, we
recorded a foreign income tax contingent expense to accrue for
potential tax liabilities related to post-acquisition activities
of foreign subsidiaries. During the restatement process, it was
determined that this original accrual was not substantiated and
accordingly, should not have been recorded, and we adjusted the
balance accordingly as of December 31, 2001. |
49
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The discussion and analysis set forth below reflects the
restatement as described below and in Note 3,
Restatement of Consolidated Financial Statements, to
Consolidated Financial Statements. For this reason, the data set
forth in this section may not be comparable to discussions and
data in our previously filed Annual Reports on
Form 10-K
or Quarterly Reports on
Form 10-Q.
Restatement
of Consolidated Financial Statements and Related
Proceedings
On November 7, 2005, the Company announced that it
initiated a review of its revenue recognition policies after
determining that certain revenues recognized in the second half
of the year ended December 31, 2004 from a customer may
have been recorded in incorrect periods. The review included the
Companys revenue recognition policies and practices for
current and past periods and its internal control over financial
reporting. Additionally, the Audit Committee of the Board of
Directors (Audit Committee) conducted an independent inquiry
into the circumstances related to the accounting treatment of
certain of the transactions at issue and retained independent
legal counsel to assist with the inquiry.
On March 1, 2006, the Company announced that the Audit
Committee had completed its independent inquiry and that the
Company would restate its consolidated financial statements for
the year ended December 31, 2004 and for the four quarters
of 2004 and the first two quarters of 2005. The principal
findings of the Audit Committee review were: there was no intent
by Company personnel to recognize revenue in contravention of
what Company personnel understood to be the applicable rules at
the time; that Company personnel did not consider or
sufficiently focus on relevant accounting rules; and there was
no intent by Company personnel to mislead the Companys
auditors or engage in other wrongful conduct. Additionally, the
Audit Committee and management reviewed the Companys
revenue recognition practices and policies as they related to
the delivery of certain products and services (including the
development and customization of software) to Thomson Broadcast
(Thomson) under a series of contractual arrangements (Thomson
Contract). The Company had recognized revenue under this series
of contractual arrangements under two separate revenue
arrangements in accordance with Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition (SAB 101), as
amended by SAB No. 104 (SAB 104). However, based
on the guidance under American Institute of Certified Public
Accountants Statement of Position (SOP)
97-2,
Software Revenue Recognition
(SOP 97-2),
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts
(SOP 81-1),
SAB 104 and Financial Accounting Standards Board (FASB),
Emerging Issues Task Force (EITF)
00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables (EITF
00-21),
management determined that this series of contractual
arrangements should have been treated as a single contract, and
therefore a single revenue arrangement for accounting purposes.
Factors that contributed to the determination of a single
revenue arrangement included the documentation of the series of
contractual arrangements under a single memorandum of
understanding (MOU) and the ongoing nature of discussions
between parties to define product specifications and
deliverables that extended beyond the initial agreed upon
contracted deliverables. Additionally, the Company determined it
could not reasonably estimate progress towards completion of the
project, and therefore, in accordance with
SOP 81-1,
used the completed contract method. As a result, revenue
previously recognized in the third and fourth quarters of 2004
and in the first two quarters of 2005 under this series of
contractual arrangements was deferred and ultimately recognized
as revenue in the quarter ended December 31, 2005 upon
completion of the Thomson Contract and final acceptance received
from Thomson for all deliverables under the Thomson Contract.
Direct contract expenses, primarily research and development,
associated with the completion of the project previously
recognized in each quarter of 2004 and in the first two quarters
of 2005 were also deferred and ultimately recognized in the
quarter ended December 31, 2005 in accordance with the
completed contract methodology under
SOP 81-1.
On March 1, 2006, the Company announced a further review of
the Companys revenue recognition policies relating to the
recognition of products and related software sold in conjunction
with post-contract support (PCS) under
SOP 97-2,
SAB 104, EITF
00-21 and
FASB Technical
Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts. As a result, management
determined that the Company did not account properly for the
sale of digital video products under
SOP 97-2
and did not establish vendor specific objective evidence (VSOE)
of fair value for its PCS revenue element related to these
sales. Accordingly, revenue for digital video products sold in
conjunction with PCS and previously recognized as separate
elements in each quarter
50
of 2003 and 2004, and also in the first and second quarters of
2005 was deferred and recognized over the contract service
period.
On November 8, 2006, the Company announced that the Audit
Committee, upon the recommendation of management, had concluded
that the Companys consolidated financial statements for
the years ended December 31, 2003, 2002 and 2000 and for
the quarters of 2003, 2002 and 2000 should no longer be relied
upon. The restatement of financial statements for 2003 would
correct errors primarily relating to revenue recognition, cost
of goods sold and estimates of reserves. The restatement of
financial statements for 2000 and 2002 would correct errors
primarily relating to the need to separately value and account
for embedded derivatives associated with the Companys
5% convertible subordinated notes issued in July 2000, and
other estimates. While no determination was made that the
financial statements for 2001 could not be relied upon,
adjustments would be made to 2001 that would be reflected in the
financial statements to be included in its periodic reports to
be filed with the Securities and Exchange Commission
(Commission) and reported as adjusted.
The Companys previous auditors resigned effective as of
September 21, 2005 and on that date, the Audit Committee
engaged Stonefield Josephson, Inc. (Stonefield) as the
Companys new independent registered public accounting
firm. On May 26, 2006, the Company announced that it had
engaged Stonefield, its current independent auditor, to re-audit
the Companys consolidated financial statements for the
year ended December 31, 2004 and, if necessary, to audit
the Companys consolidated financial statements for the
year ended December 31, 2003. On November 8, 2006, the
Company announced that it had engaged Stonefield to re-audit the
Companys consolidated financial statements for the year
ended December 31, 2003.
In June 2006, the Company, through outside counsel, retained FTI
Consulting, Inc. to provide an independent accounting
perspective in connection with the accounting issues under
review.
In connection with the Companys accounting review of the
Thomson Contract referred to above, the Commission initiated a
formal investigation. This matter was previously the subject of
an informal Commission inquiry. The Company has been cooperating
fully with the Commission and will continue to do so in order to
bring the investigation to a conclusion as promptly as possible.
The
Restatement and Other Related Matters
The following is a description of the significant adjustments to
previously reported financial statements resulting from the
restatement process and additional matters addressed in the
course of the restatement. While this description does not
purport to explain each correcting entry, the Company believes
that it fairly describes the significant factors underlying the
adjustments and the overall impact of the restatement in all
material respects.
Revenue Recognition. The Company did
not properly account for revenue as described below. As part of
the restatement process, the Company applied the appropriate
revenue recognition methods to each element of all
multiple-element contracts, corrected other errors related to
revenue recognition and corrected errors to other accounts,
including cost of goods sold and deferred revenue resulting in
adjustments to these accounts in each period covered by the
restatement.
Video Product and Post Contract Support. The
Company did not properly recognize revenue in accordance with
generally accepted accounting principles (GAAP), specifically
SOP 97-2
for its digital video products. The Company previously
recognized revenue for its digital video products in accordance
with SAB 101, as amended by SAB 104 based upon meeting
the revenue recognition criteria in SAB 104. In order for
the Company to recognize revenue from individual elements within
a multiple element arrangement under
SOP 97-2,
the Company must establish vendor specific objective evidence
(VSOE) of fair value for each element. The Company determined
that it did not establish VSOE of fair value for the undelivered
element of PCS on the digital video products. Therefore, as part
of the restatement process the Company corrected this error and
recognized revenue of the hardware element sold in conjunction
with the undelivered PCS element ratably over the period of the
customer support contract. The cost of goods sold for the sale
for the hardware element and the PCS element was also recognized
ratably over the period of the customer support contract.
Accordingly, revenue and cost of goods sold previously
recognized based on meeting the revenue recognition
51
criteria in SAB 104 for the individual elements for digital
video products sold in conjunction with PCS in each quarter of
2003, 2004 and 2005 were deferred and recognized ratably over
the contract service period.
Thomson Contract. The Company recognized
revenue as it related to the delivery of certain products and
services (including the development and customization of
software) to Thomson under a series of contractual arrangements
under a single memorandum of understanding (MOU) in accordance
with SAB 101, as amended by SAB 104. However, based on
SOP 97-2
and
SOP 81-1,
this series of contractual arrangements should have been treated
as a single contract, and therefore as a single revenue
arrangement for accounting purposes. Factors that contributed to
the determination of a single revenue arrangement included the
documentation of the series of contractual arrangements under a
single MOU and the ongoing nature of discussions between parties
to define product specifications and deliverables that extended
beyond the initial agreed upon contracted deliverables. In
accordance with
SOP 81-1,
the Company determined it would not reasonably estimate progress
towards completion of the project and therefore used the
completed contract methodology. As a result, $7.8 million
of revenue previously recognized in the third and fourth
quarters of 2004 and $0.3 million of revenue previously
recognized in the first two quarters of 2005 were deferred and
ultimately recognized as revenue in the quarter ended
December 31, 2005 upon completion of the Thomson Contract
and final acceptance received from Thomson for all deliverables
under the Thomson Contract. Additionally, $1.2 million of
cost of goods sold previously recognized in 2004 and
$1.8 million related to direct development costs previously
recognized from the fourth quarter of 2003 through the second
quarter of 2005 were also deferred and ultimately recognized in
the quarter ended December 31, 2005.
Inventory Consignment. During the quarter
ended December 31, 2003, the Company entered into an
agreement to consign specific spare parts inventory to a certain
customer for the customers demonstration and evaluation
purposes. The consignment period was to terminate during the
quarter ended March 31, 2004, at which time the customer
would either purchase or return the spare parts inventory to the
Company. During the quarter ended March 31, 2004, the
Company notified the customer that the consignment period
terminated and in accordance with the agreement, the customer
should either return or purchase the spare parts inventory. The
Company did not receive a reply and subsequently invoiced the
customer $0.9 million for the spare parts inventory in the
quarter ended March 31, 2004. During the quarter ended
June 30, 2004, the customer agreed to purchase a portion of
the spare parts inventory and returned the remaining spare parts
inventory to the Company. Accordingly, for the quarter ended
June 30, 2004, the Company issued the customer a credit
memo for $0.9 million, which was the amount of the sale
that was invoiced in the quarter ended March 31, 2004 and
was the entire amount originally consigned to the customer.
During the course of the restatement, it was determined that at
March 31, 2004, accounts receivable was overstated by
$0.9 million, inventory was understated by
$0.5 million and both deferred revenue and deferred cost of
goods sold were overstated by $0.9 million and
$0.5 million, respectively. As a result, the consolidated
balance sheets for the quarters ended March 31, 2004 and
June 30, 2004 were appropriately revised to correct these
errors.
Other Revenue Adjustments. The Company also
made other adjustments in 2003, 2004 and 2005 to correct the
recognition of revenue for transactions where the Company did
not properly apply SAB 101, as amended by SAB 104. The
Company made other immaterial adjustments for certain
transactions related to revenue. See Note 3,
Restatement of Consolidated Financial Statements, to
Consolidated Financial Statements.
Allowance for Doubtful Accounts. During
the restatement process, the Company reassessed its accounting
regarding the allowance for doubtful accounts based on its
visibility of its collections and write-offs of the allowance
for doubtful accounts. Prior to 2004, the Companys policy
was to estimate the allowance for doubtful accounts and the
corresponding bad debt expense based on a fixed percentage of
revenue during a specific period. Beginning in 2004, the Company
adopted a specific reserve methodology for estimating the
allowance for doubtful accounts and corresponding bad debt
expense. During the restatement, the Company adjusted the
allowance for doubtful accounts and bad debt with a reduction of
$5.2 million, an increase of $1.9 million and an
increase of $0.6 million for the years ended
December 31, 2000, 2001 and 2002, respectively, to reflect
the specific reserve methodology and to correct errors resulting
from the Companys former policy. The Company made
adjustments to the allowance for doubtful accounts of
$0.1 million, $0.6 million, and $0.3 million for
the years ended December 31, 2003 and 2004 and for the
first two quarters of 2005, respectively.
52
In addition, during the restatement, the Company made other
adjustments to the allowance for doubtful accounts to offset the
accounts receivable and related reserve related to customers who
were granted extended payment terms, experiencing financial
difficulties or where collectibility was not reasonably assured.
Accordingly, the Company classifies these customers as those
with extended payment terms or with
collectibility issues. For these customers, the
Company historically deferred all revenue and recognized the
revenue when the fee was fixed or determinable or collectibility
reasonably assured or cash was received, assuming all other
criteria for revenue recognition were met. The Company adjusted
the allowance for doubtful accounts, eliminating the receivable
and related reserve, for these customers by an increase of
$5.7 million, a decrease of $4.4 million and by an
immaterial amount for the years ended December 31, 2003 and
2004 and for the first two quarters of 2005, respectively.
In summary, the above restatements gave rise to an adjustment to
the allowance for doubtful accounts of an increase of
$5.8 million, a decrease of $3.8 million and an
increase of $0.3 million for the years ended
December 31, 2003 and 2004 and for the first two quarters
of 2005, respectively. The allowance for doubtful accounts
related to international customers was reduced by
$0.5 million based on the activity for the year ended
December 31, 2004.
Deferred Revenues and Deferred Cost of Goods
Sold. As part of the restatement process, the
Company determined that it did not properly account for deferred
revenue as it related to specific transactions to certain
customers where the transaction did not satisfy revenue
recognition criteria of SAB 104 related to customers with
acceptance terms, transactions with free-on-board (FOB)
destination shipping terms, customers where the arrangement fee
was not fixed or determinable or customers where collectibility
was not reasonably assured. While revenue was generally not
recognized for these customers, the Company improperly
recognized a deferred revenue liability and a deferred cost of
goods sold asset, thereby overstating assets and liabilities,
and during the restatement determined that deferred revenues and
deferred cost of goods sold should not be recognized for these
transactions. As a result, the Company adjusted deferred
revenues by $1.6 million, $1.0 million and
$0.9 million for the years ended 2003 and 2004 and the
first two quarters of 2005, respectively, and adjusted deferred
cost of goods sold by $0.9 million, $0.3 million and
$0.6 million for the years ended 2003 and 2004 and the
first two quarters of 2005, respectively.
Use of Estimates. The Company did not
correctly estimate, monitor and adjust balances related to
certain accruals and provisions as set forth below.
Access Network Electronics. In July 2003, the
Company sold certain assets related to its Miniplex products to
Verilink Corporation (Verilink). The assets were originally
acquired through the Companys acquisition of Access
Network Electronics (ANE) in April 2000. As part of the
agreement with Verilink, Verilink agreed to assume all warranty
obligations related to ANE products sold by the Company prior
to, on, or after July 2003. The Company agreed to reimburse
Verilink for up to $2.4 million of warranty obligations for
ANE products sold by the Company prior to July 2003 related to
certain power supply failures of the product and other general
warranty repairs (Warranty Obligation). The $2.4 million
Warranty Obligation negotiated with Verilink included up to
$1.0 million for each of two specific customer issues and a
general warranty obligation of $0.4 million that expired in
the quarter ended March 31, 2005. During the sale process,
the Company disclosed to Verilink that it had received an
official specific customer complaint related to the sale of the
Miniplex product to one of the two customers. In accordance with
SFAS No. 5, Accounting for
Contingencies, the Company established a reserve as a
result of this complaint. Under the agreement with Verilink, the
Company was able to quantify its exposure at $1.0 million
based upon the terms of the Warranty Obligation. No other
obligations were accrued by the Company related to the Miniplex
products because the Company had not received formal notice of
any complaints from other customers. The Company amortized the
$1.0 million warranty accrual starting in the quarter ended
March 31, 2004 through the expiration of the Warranty
Obligation in the quarter ended March 31, 2005. However,
during the course of the restatement, the Company determined
that the warranty obligation accrual should not have been
reduced unless there were actual expenses incurred in connection
with either the obligation or upon the expiration of the
Warranty Obligation in the quarter ended March 31, 2005.
Since the Company did not incur any expenses in connection with
this obligation and did not establish a basis for this
reduction, during the restatement, the Company corrected the
reduction of this accrual by $0.2 million in each of the
four quarters of 2004 and deferred the reduction of the warranty
accrual until the warranty period expired in the quarter ended
March 31, 2005. Accordingly, the $1.0 million
reduction of the warranty obligation in the quarter ended
March 31, 2005,
53
reduced cost of goods sold by $0.8 million for that period
and increased cost of goods sold by $0.2 million in each
quarter of 2004.
Israel Restructuring Reserve. During 2001, the
Board of Directors approved a restructuring plan and the Company
incurred restructuring charges in the amount of
$12.7 million for excess leased facilities of which
$7.4 million related to Israel and $1.7 million
remained accrued at December 31, 2004. In 2002, the Company
did not include in its assessment the ability to generate and
collect sublease income in its Israel facility. As a result, the
Company increased its reserve by $1.2 million due to
lowered sublease assumptions. In the quarter ended
December 31, 2004, the Company analyzed the reserve and
reduced the reserve by $1.5 million to $1.7 million
reducing operating expenses. During the restatement process, the
Company determined that $1.2 million of the
$1.5 million reserve reduction recognized in the quarter
ended December 31, 2004 properly related to the year ended
December 31, 2002. As a result, the Company reversed the
previously recorded $1.2 million increase in restructuring
reserve expense in 2002, thereby decreasing the net loss for the
quarter ended December 31, 2002. The Company also corrected
the entry that reduced the restructuring reserve in 2004 by
reversing the $1.2 million decrease in the reserve that
occurred in 2004.
License Fee. In 1999, the Company entered into
an intellectual property (IP) license agreement (License
Agreement) with a third party. Pursuant to the License
Agreement, the Company recorded a prepaid asset of
$2.0 million related to its licensing of the IP. The
License Agreement allowed the Company to incorporate the IP into
manufactured products for the cost of the license
fee which was $2.0 million. Additionally, the Agreement
also incorporated a clause for the Company to pay a royalty fee
of $1 per unit of component products sold to
third parties by the Company. During 1999, the Company began
designing semiconductor chips using this IP and paying the
license fee for the IP. In June 2000, the Company made its final
payment on the $2.0 million license, and the Company had a
$2.0 million prepaid asset. The Company amortized the
prepaid asset based on applying the royalty rate of $1 per
unit established in the License Agreement. However, the Company
incorrectly applied the $1 per unit rate to units
produced rather than units sold. As part of
correcting this error, the Company adjusted the amortization
rate of the prepaid asset to reflect actual units sold resulting
in a reduction in the per unit amortization rate. Adjustments to
cost of goods sold were a decrease of $0.8 million in 2003,
an increase of $0.5 million in 2004 and an increase of
$0.2 million during the first two quarters of 2005.
Goods Received Not Invoiced. The Company
maintains an account to accrue for obligations arising from
instances in which the Company has received goods but has not
yet received an invoice for the goods (RNI). During 2002 the
Company established the reserve after management determined that
the process being used to track RNI obligations was not properly
stating the liability. During the quarter ended March 31,
2004, the Company analyzed the RNI account, determined that it
was carrying an excess reserve of $0.8 million and began
amortizing the $0.8 million excess reserve at the rate of
$0.2 million per quarter thereby decreasing operating
expenses by that amount in each quarter of 2004. During the
restatement, the Company determined that the excess reserve
should have been reduced to zero as of December 31, 2002
and adjusted the financial statements accordingly. The impact of
this change is to decrease operating expenses by
$0.8 million in 2002 and increase operating expenses by
$0.8 million during 2004.
Other. In conjunction with the restatement,
the Company also made other adjustments and reclassifications to
its accounting for various other errors for the periods
presented, including: (1) correction of estimates of legal
expenses, property tax and excess and obsolete inventory
accruals; (2) reclassification to the proper accounting
period of: bonus accruals to employees; federal income taxes
payable; and operating expenses related to an operating lease;
(3) correction of accounting for impaired and disposed
assets; and (4) expenses related to an extended warranty
provided to a customer. See Note 3, Restatement of
Consolidated Financial Statements, to Consolidated
Financial Statements.
Convertible Subordinated Notes. In July
2000, the Company issued $500.0 million of
5% convertible subordinated notes (Notes) due in August
2007 resulting in net proceeds to the Company of approximately
$484.0 million. The Notes were 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. Under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS 133),
54
the Notes are considered a hybrid instrument since, and as
described below, they contained multiple embedded derivatives.
The Notes contained several embedded derivatives. First, the
Notes contain a contingent put (Contingent Put) where in the
event of any default by the Company, the Trustee or holders of
at least 25% of the principal amount of the Notes outstanding
may declare all unpaid principal and accrued interest to be due
and payable immediately. Second, the Notes contain an investor
conversion option (Investor Conversion Option) where the holder
of the Notes may convert the debt security into Company common
stock at any time after 90 days from original issuance and
prior to August 1, 2007. The number of shares of common
stock that is issued upon conversion is determined by dividing
the principal amount of the security by the specified conversion
price in effect on the conversion date. The initial conversion
price was $84.01 which was subject to adjustment under certain
circumstances described in the Indenture. Third, the Notes
contain a liquidated damages provision (Liquidated Damages
Provision) that obligated the Company to pay liquidated damages
to investors of 50 basis points on the amount of
outstanding securities for the first 90 days and
100 basis points thereafter, in the event that the Company
did not file an initial shelf registration for the securities
within 90 days of the closing date. In the event that the
Company filed its initial shelf registration within 90 days but
failed to keep it effective for a two year period from the
closing date, the Company would pay 50 basis points on the
amount of outstanding securities for the first 90 days and 100
basis points thereafter. Fourth, the Notes contain an
issuers call option (Issuer Call Option) that allowed the
Company to redeem some or all of the Notes at any time on or
after October 24, 2000 and before August 7, 2003 at a
redemption price of $1,000 per $1,000 principal amount of
the Notes, plus accrued and unpaid interest, if 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 the mailing of the redemption
notice. In addition, if the Company redeemed the Notes, it was
also required to make a cash payment of $193.55 per $1,000
principal amount of the Notes less the amount of any interest
actually paid on the Notes prior to redemption. The Company had
the option to redeem the Notes at any time on or after
August 7, 2003 at specified prices plus accrued and unpaid
interest.
Under SFAS 133, an embedded derivative must be separated
from its host contract (i.e., the Notes) and accounted for as a
stand-alone derivative if the economic characteristics and risks
of the embedded derivative are not considered clearly and
closely related to those of the host. An embedded
derivative would not be considered clearly and closely related
to the host if there was a possible future interest rate
scenario (even though it may be remote) in which the embedded
derivative would at least double the initial rate of return on
the host contract and the effective rate would be twice the
current market rate as a contract that had similar terms as the
host and was issued by a debtor with similar credit quality.
Furthermore, per SFAS 133, the embedded derivative would
not be considered clearly and closely related to the host
contract if the hybrid instrument could be settled in such a way
the investor would not recover substantially all of its initial
investment.
During the restatement process, the Company determined under
SFAS 133 that both the Issuer Call Option and the
Liquidated Damages Provision represented an embedded derivative
that was not clearly and closely related to the host contract,
and therefore needed to be bifurcated from the Notes and valued
separately. As it related to the Liquidated Damages Provision
and based on a separate valuation that included Black-Scholes
valuation methodologies, the Company assessed a valuation of
$0.4 million. Based on the need to amortize the
$0.4 million over the
7-year life
of the Notes, the impact to the Companys financial results
related to the Liquidated Damages Provision was not material.
As it related to the Issuer Call Option and based on a separate
valuation that included Black-Scholes valuation methodologies,
the Company assessed a valuation of $11.9 million. As a
result, at the time the Notes were issued in July 2000, the
Company should have created an asset to record the value of the
Issuer Call Option for $11.9 million and created a bond
premium to the Notes for $11.9 million. In accordance with
SFAS 133, the asset value would then be marked to market at
the end of each accounting period and the bond premium would be
amortized against interest expense at the end of each accounting
period. Due to the decrease in the price of the Companys
common stock, the value of the Issuer Call Option became
effectively zero and the Company should have written off the
asset related to the Issuer Call Option in 2000. Additionally,
as part of the bond repurchase activity where the Company
repurchased $325.9 million and $109.1 million of face
value of the Notes (for a total of $435.0 million) that
occurred in 2001 and 2002, the Company should have recognized an
additional gain from the retirement of the bond premium
associated
55
with the Issuer Call Option of $7.0 million in 2001 and
$1.9 million in 2002. The Company determined that the
$7.0 million non-cash gain on the early retirement of the
premium to be immaterial to 2001 financial results.
In the quarter ended March 31, 2006, the Company paid off
the entire principal amount of the outstanding Notes, including
all accrued and unpaid interest and related fees, for a total of
$65.6 million. In addition, the Company recognized
$0.3 million into other income, net representing the
remaining unamortized bond premium associated with the Issuer
Call Option.
56
The following tables present the effect of the restatement
adjustments by financial statement line item for the
consolidated statements of income, balance sheets and statements
of cash flows:
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
Cumulative Effect
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
of Prior Year
|
|
|
Current Year
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
As Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,188
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,188
|
|
|
|
Short-term investments
|
|
|
108,452
|
|
|
|
|
|
|
|
|
|
|
|
108,452
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
29,799
|
|
|
|
2,723
|
|
|
|
(7,587
|
)
|
|
|
24,935
|
|
|
(a),(b)
|
Other current receivables
|
|
|
3,662
|
|
|
|
|
|
|
|
|
|
|
|
3,662
|
|
|
|
Inventory, net
|
|
|
16,364
|
|
|
|
|
|
|
|
913
|
|
|
|
17,277
|
|
|
(c)
|
Other current assets
|
|
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
Short-term Deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
322
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
191,348
|
|
|
|
2,723
|
|
|
|
(6,352
|
)
|
|
|
187,719
|
|
|
|
Property and equipment, net
|
|
|
11,871
|
|
|
|
|
|
|
|
|
|
|
|
12,059
|
|
|
|
Fixed asset
|
|
|
|
|
|
|
548
|
|
|
|
(360
|
)
|
|
|
|
|
|
(e)
|
Restricted cash
|
|
|
9,212
|
|
|
|
|
|
|
|
|
|
|
|
9,212
|
|
|
|
Other assets, net
|
|
|
2,809
|
|
|
|
|
|
|
|
|
|
|
|
4,109
|
|
|
|
Long-term Deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
(f)
|
License fee
|
|
|
|
|
|
|
188
|
|
|
|
762
|
|
|
|
|
|
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
215,240
|
|
|
$
|
3,459
|
|
|
$
|
(5,600
|
)
|
|
$
|
213,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,049
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,286
|
|
|
|
Israel restructuring
|
|
|
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
|
|
(h)
|
Received not invoiced
|
|
|
|
|
|
|
(1,940
|
)
|
|
|
|
|
|
|
|
|
|
(i)
|
Common area maintenance
|
|
|
|
|
|
|
313
|
|
|
|
(313
|
)
|
|
|
|
|
|
(j)
|
Accrued payroll and related expenses
|
|
|
6,537
|
|
|
|
|
|
|
|
|
|
|
|
6,537
|
|
|
|
Deferred revenues
|
|
|
3,423
|
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
|
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(205
|
)
|
|
|
|
|
|
(k)
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
(1,228
|
)
|
|
|
|
|
|
(l)
|
Accrued warranty expenses
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
|
5,229
|
|
|
|
Warranty reserve
|
|
|
|
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
(m)
|
Accrued restructuring and executive
severance
|
|
|
2,647
|
|
|
|
1,834
|
|
|
|
|
|
|
|
1,586
|
|
|
(n)
|
Israel restructuring
|
|
|
|
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
|
(h)
|
Restructuring reclass between
short-term and long-term
|
|
|
|
|
|
|
|
|
|
|
(1,717
|
)
|
|
|
|
|
|
(o)
|
Accrued vendor cancellation charges
|
|
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
2,869
|
|
|
|
Accrued other liabilities
|
|
|
5,284
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
4,706
|
|
|
(n)
|
Reclass short-term portion of
deferred rent
|
|
|
|
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
(p)
|
Tax accrual
|
|
|
|
|
|
|
(631
|
)
|
|
|
33
|
|
|
|
|
|
|
(q)
|
Interest payable
|
|
|
1,358
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
1,356
|
|
|
|
Current portion of capital lease
obligations
|
|
|
124
|
|
|
|
1
|
|
|
|
1
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
53,800
|
|
|
|
(934
|
)
|
|
|
(3,181
|
)
|
|
|
49,685
|
|
|
|
Long-term obligations
|
|
|
3,118
|
|
|
|
(1,514
|
)
|
|
|
(248
|
)
|
|
|
1,356
|
|
|
(n),(p)
|
Long-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
2,207
|
|
|
|
2,207
|
|
|
(r)
|
Accrued restructuring and executive
severance
|
|
|
1,853
|
|
|
|
(90
|
)
|
|
|
1,716
|
|
|
|
3,479
|
|
|
(n),(o)
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
949
|
|
|
|
(221
|
)
|
|
|
65,809
|
|
|
(s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
123,852
|
|
|
|
(1,589
|
)
|
|
|
273
|
|
|
|
122,536
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
Additional paid-in capital
|
|
|
1,082,036
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
1,082,034
|
|
|
|
Accumulated deficit
|
|
|
(987,560
|
)
|
|
|
5,048
|
|
|
|
(5,870
|
)
|
|
|
(988,382
|
)
|
|
(t)
|
Deferred compensation
|
|
|
(22
|
)
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(23
|
)
|
|
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
91,388
|
|
|
|
5,048
|
|
|
|
(5,873
|
)
|
|
|
90,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
215,240
|
|
|
$
|
3,459
|
|
|
$
|
(5,600
|
)
|
|
$
|
213,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
57
Explanation
of Current Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions and to adjust the
allowance for doubtful accounts based on the Companys
reassessment of the account. |
|
(b) |
|
To reflect other adjustments and reclassifications. |
|
(c) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(e) |
|
To adjust for the reversal of a fixed asset write off reserve
and to recognize a loss on the disposal of assets. |
|
(f) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(g) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(h) |
|
To correct an adjustment originally recorded during the quarter
ended December 31, 2004 that wrote-off excess Israel
restructuring liabilities. During the restatement, management
concluded the adjustment should have occurred during 2002. |
|
(i) |
|
To correct an adjustment originally recorded during each quarter
of 2004 to the received not invoiced (RNI) account. During the
restatement, management concluded that the adjustment should
have occurred in 2002. |
|
(j) |
|
To adjust for an unrecorded liability for common area
maintenance in prior period. |
|
(k) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(l) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(m) |
|
To adjust the accrual to reflect an updated extended warranty
model. |
|
(n) |
|
To reflect a reclassification adjustment made after the filing
of the original financial statements. |
|
(o) |
|
To reflect short-term and long-term portion of restructuring
liabilities. |
|
(p) |
|
To reflect the short-term portion of deferred rent. |
|
(q) |
|
To reverse an accrual of income taxes payable recorded in prior
periods. |
|
(r) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(s) |
|
To record amortization of bond premium to interest income. |
|
(t) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
58
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2004
|
|
|
|
|
|
|
|
|
Cumulative Effect
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
of Prior Period
|
|
|
Current Quarter
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
As Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
76,060
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76,060
|
|
|
|
Short-term investments
|
|
|
47,151
|
|
|
|
|
|
|
|
|
|
|
|
47,151
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
29,041
|
|
|
|
(4,864
|
)
|
|
|
1,108
|
|
|
|
25,285
|
|
|
(a),(n)
|
Inventory, net
|
|
|
19,267
|
|
|
|
913
|
|
|
|
(336
|
)
|
|
|
20,307
|
|
|
(b)
|
Inventory consignment
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
(c)
|
Other current assets
|
|
|
4,623
|
|
|
|
322
|
|
|
|
|
|
|
|
5,465
|
|
|
|
Short-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
520
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
176,142
|
|
|
|
(3,629
|
)
|
|
|
1,755
|
|
|
|
174,268
|
|
|
|
Property and equipment, net
|
|
|
10,821
|
|
|
|
188
|
|
|
|
(94
|
)
|
|
|
10,915
|
|
|
|
Intangibles and other assets, net
|
|
|
11,609
|
|
|
|
1,300
|
|
|
|
|
|
|
|
13,198
|
|
|
|
Long-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
(e)
|
License fee
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
198,572
|
|
|
$
|
(2,141
|
)
|
|
$
|
1,950
|
|
|
$
|
198,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
21,362
|
|
|
$
|
(763
|
)
|
|
$
|
|
|
|
$
|
20,791
|
|
|
|
Received not invoiced
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
(g)
|
Accrued payroll and related expenses
|
|
|
5,072
|
|
|
|
|
|
|
|
|
|
|
|
5,072
|
|
|
|
Deferred revenues
|
|
|
4,451
|
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
3,449
|
|
|
|
Inventory consignment
|
|
|
|
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
(c)
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
1,168
|
|
|
|
|
|
|
(h)
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
(i)
|
Accrued warranty expenses
|
|
|
4,605
|
|
|
|
(280
|
)
|
|
|
|
|
|
|
4,524
|
|
|
|
Access Network Electronics
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
(j)
|
Accrued restructuring and executive
severance
|
|
|
6,598
|
|
|
|
(2,895
|
)
|
|
|
|
|
|
|
2,797
|
|
|
(k)
|
Restructuring reclass between
short-term and long-term
|
|
|
|
|
|
|
|
|
|
|
(906
|
)
|
|
|
|
|
|
(l)
|
Accrued vendor cancellation charges
|
|
|
1,399
|
|
|
|
|
|
|
|
|
|
|
|
1,399
|
|
|
|
Accrued other liabilities
|
|
|
4,137
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
3,799
|
|
|
(k)
|
Reclass short-term portion of
deferred rent
|
|
|
|
|
|
|
|
|
|
|
(248
|
)
|
|
|
|
|
|
(m)
|
Rebate obligation
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
(n)
|
Tax accrual
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
(o)
|
Other current obligations
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
570
|
|
|
|
Interest payable
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
Current portion of capital lease
obligations
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
48,194
|
|
|
|
(5,720
|
)
|
|
|
(73
|
)
|
|
|
42,401
|
|
|
|
Long-term obligations
|
|
|
3,472
|
|
|
|
1,468
|
|
|
|
1,156
|
|
|
|
6,096
|
|
|
(k),(l),(m)
|
Long-term deferred revenue
|
|
|
|
|
|
|
2,207
|
|
|
|
1,168
|
|
|
|
3,375
|
|
|
(p)
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
728
|
|
|
|
(55
|
)
|
|
|
65,754
|
|
|
(q)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
116,747
|
|
|
|
(1,317
|
)
|
|
|
2,196
|
|
|
|
117,626
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
Additional paid-in capital
|
|
|
1,082,770
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
1,082,770
|
|
|
|
Accumulated deficit
|
|
|
(997,807
|
)
|
|
|
(822
|
)
|
|
|
(248
|
)
|
|
|
(998,877
|
)
|
|
(r)
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,441
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
81,825
|
|
|
|
(824
|
)
|
|
|
(246
|
)
|
|
|
80,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
198,572
|
|
|
$
|
(2,141
|
)
|
|
$
|
1,950
|
|
|
$
|
198,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
59
Explanation
of Current Quarterly Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions and to adjust the
allowance for doubtful accounts based on the Companys
reassessment of the account. |
|
(b) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(c) |
|
To reverse invoicing of consigned inventory sale and related
deferral of net revenue and COGS. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(e) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(f) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(g) |
|
To correct an adjustment originally recorded during each quarter
of 2004 to the received not invoiced (RNI) account. During the
restatement, management concluded that the adjustment should
have occurred in 2002. |
|
(h) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(i) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(j) |
|
To reverse 2004 amortization of ANE warranty reserve and to
recognize in the quarter ended March 31, 2005. |
|
(k) |
|
The cumulative amount was adjusted from the prior period to
reflect the reclassification adjustment made after the filing of
the original financial statements. |
|
(l) |
|
To reflect short-term and long-term portion of restructuring
liabilities. |
|
(m) |
|
To reflect the short-term portion of deferred rent. |
|
(n) |
|
To reclassify to accrued other liabilities rebate obligations
with a single customer previously recorded as contra-accounts
receivable during the quarter. |
|
(o) |
|
To reverse an accrual of income taxes payable recorded in prior
periods. |
|
(p) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(q) |
|
To record amortization of bond premium to interest income. |
|
(r) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
60
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2004
|
|
|
|
|
|
|
|
|
Cumulative Effect
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
of Prior Period
|
|
|
Current Quarter
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
As Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,783
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47,783
|
|
|
|
Short-term investments
|
|
|
68,489
|
|
|
|
|
|
|
|
|
|
|
|
68,489
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
27,884
|
|
|
|
(3,756
|
)
|
|
|
4,641
|
|
|
|
28,769
|
|
|
(a),(l)
|
Inventory, net
|
|
|
21,403
|
|
|
|
1,040
|
|
|
|
(177
|
)
|
|
|
21,803
|
|
|
(b)
|
Inventory consignment
|
|
|
|
|
|
|
|
|
|
|
(463
|
)
|
|
|
|
|
|
(c)
|
Other current assets
|
|
|
4,321
|
|
|
|
842
|
|
|
|
|
|
|
|
5,432
|
|
|
|
Short-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
169,880
|
|
|
|
(1,874
|
)
|
|
|
4,270
|
|
|
|
172,276
|
|
|
|
Property and equipment, net
|
|
|
10,045
|
|
|
|
94
|
|
|
|
|
|
|
|
10,139
|
|
|
|
Other assets, net
|
|
|
11,432
|
|
|
|
1,589
|
|
|
|
|
|
|
|
13,271
|
|
|
|
Long-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
447
|
|
|
|
|
|
|
(e)
|
License fee
|
|
|
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
|
|
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
191,357
|
|
|
$
|
(191
|
)
|
|
$
|
4,520
|
|
|
$
|
195,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,480
|
|
|
$
|
(571
|
)
|
|
$
|
|
|
|
$
|
16,102
|
|
|
|
Received not invoiced
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
(g)
|
Accrued payroll and related expenses
|
|
|
4,919
|
|
|
|
|
|
|
|
|
|
|
|
4,919
|
|
|
|
Deferred revenues
|
|
|
5,091
|
|
|
|
(1,002
|
)
|
|
|
|
|
|
|
3,813
|
|
|
|
Inventory consignment
|
|
|
|
|
|
|
|
|
|
|
(463
|
)
|
|
|
|
|
|
(c)
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
567
|
|
|
|
|
|
|
(h)
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
|
(i)
|
Accrued warranty expenses
|
|
|
4,191
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
4,311
|
|
|
|
Access Network Electronics
|
|
|
|
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
(j)
|
Accrued restructuring and executive
severance
|
|
|
9,070
|
|
|
|
(3,801
|
)
|
|
|
|
|
|
|
5,343
|
|
|
|
Restructuring reclass between
short-term and long-term
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
(k)
|
Accrued vendor cancellation charges
|
|
|
713
|
|
|
|
|
|
|
|
|
|
|
|
713
|
|
|
|
Accrued other liabilities
|
|
|
4,382
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
4,413
|
|
|
|
Rebate obligation
|
|
|
|
|
|
|
|
|
|
|
520
|
|
|
|
|
|
|
(l)
|
Tax accrual
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
|
(m)
|
Other current obligations
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,208
|
|
|
|
(5,793
|
)
|
|
|
561
|
|
|
|
40,976
|
|
|
|
Long-term obligations
|
|
|
3,156
|
|
|
|
2,624
|
|
|
|
(73
|
)
|
|
|
5,707
|
|
|
(k)
|
Long-term deferred revenue
|
|
|
|
|
|
|
3,375
|
|
|
|
2,901
|
|
|
|
6,276
|
|
|
(n)
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
673
|
|
|
|
(56
|
)
|
|
|
65,698
|
|
|
(o)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
114,445
|
|
|
|
879
|
|
|
|
3,333
|
|
|
|
118,657
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
Additional paid-in capital
|
|
|
1,082,811
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
1,082,809
|
|
|
|
Accumulated deficit
|
|
|
(1,002,668
|
)
|
|
|
(1,070
|
)
|
|
|
1,189
|
|
|
|
(1,002,549
|
)
|
|
(p)
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,534
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
76,912
|
|
|
|
(1,070
|
)
|
|
|
1,187
|
|
|
|
77,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
191,357
|
|
|
$
|
(191
|
)
|
|
$
|
4,520
|
|
|
$
|
195,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
61
Explanation
of Current Quarterly Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions and to adjust the
allowance for doubtful accounts based on the Companys
reassessment of the account. |
|
(b) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(c) |
|
To reverse invoicing of consigned inventory sale and related
deferral of net revenue and COGS. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(e) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(f) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(g) |
|
To correct an adjustment originally recorded during each quarter
of 2004 to the received not invoiced (RNI) account. During the
restatement, management concluded that the adjustment should
have occurred in 2002. |
|
(h) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(i) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(j) |
|
To reverse 2004 amortization of ANE warranty reserve and to
recognize in the quarter ended March 31, 2005. |
|
(k) |
|
To reflect short-term and long-term portion of restructuring
liabilities. |
|
(l) |
|
To reclassify to accrued other liabilities rebate obligations
with a single customer previously recorded as contra-accounts
receivable during the quarter. |
|
(m) |
|
To reverse an accrual of income taxes payable recorded in prior
periods. |
|
(n) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(o) |
|
To record amortization of bond premium to interest income. |
|
(p) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
62
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004
|
|
|
|
|
|
|
|
|
Cumulative Effect
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
of Prior Period
|
|
|
Current Quarter
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
As Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
64,150
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,150
|
|
|
|
Short-term investments
|
|
|
47,757
|
|
|
|
|
|
|
|
1
|
|
|
|
47,758
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
20,475
|
|
|
|
885
|
|
|
|
(2,054
|
)
|
|
|
19,306
|
|
|
(a),(k)
|
Inventory, net
|
|
|
15,529
|
|
|
|
400
|
|
|
|
(278
|
)
|
|
|
15,651
|
|
|
(b)
|
Other current assets
|
|
|
3,586
|
|
|
|
1,111
|
|
|
|
|
|
|
|
4,599
|
|
|
|
Short-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
151,497
|
|
|
|
2,396
|
|
|
|
(2,429
|
)
|
|
|
151,464
|
|
|
|
Property and equipment, net
|
|
|
9,134
|
|
|
|
94
|
|
|
|
|
|
|
|
9,228
|
|
|
|
Other assets, net
|
|
|
10,865
|
|
|
|
1,839
|
|
|
|
|
|
|
|
12,866
|
|
|
|
Long-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
385
|
|
|
|
|
|
|
(d)
|
License fee
|
|
|
|
|
|
|
|
|
|
|
(223
|
)
|
|
|
|
|
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
171,496
|
|
|
$
|
4,329
|
|
|
$
|
(2,267
|
)
|
|
$
|
173,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,128
|
|
|
$
|
(378
|
)
|
|
$
|
|
|
|
$
|
10,942
|
|
|
|
Received not invoiced
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
(f)
|
Accrued payroll and related expenses
|
|
|
4,368
|
|
|
|
|
|
|
|
|
|
|
|
4,368
|
|
|
|
Deferred revenues
|
|
|
4,345
|
|
|
|
(1,278
|
)
|
|
|
|
|
|
|
3,541
|
|
|
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
(g)
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(393
|
)
|
|
|
|
|
|
(h)
|
Accrued warranty expenses
|
|
|
4,043
|
|
|
|
120
|
|
|
|
|
|
|
|
4,363
|
|
|
|
Access Network Electronics
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
(i)
|
Accrued restructuring and executive
severance
|
|
|
7,914
|
|
|
|
(3,727
|
)
|
|
|
|
|
|
|
4,604
|
|
|
|
Restructuring reclass between
short-term and long-term
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
(j)
|
Accrued vendor cancellation charges
|
|
|
2,133
|
|
|
|
|
|
|
|
|
|
|
|
2,133
|
|
|
|
Accrued other liabilities
|
|
|
4,459
|
|
|
|
31
|
|
|
|
|
|
|
|
3,813
|
|
|
|
Rebate obligation
|
|
|
|
|
|
|
|
|
|
|
(736
|
)
|
|
|
|
|
|
(k)
|
Tax accrual
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
(l)
|
Interest payable and current
portion of capital lease obligations
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
38,932
|
|
|
|
(5,232
|
)
|
|
|
606
|
|
|
|
34,306
|
|
|
|
Long-term obligations
|
|
|
3,417
|
|
|
|
2,551
|
|
|
|
(418
|
)
|
|
|
5,550
|
|
|
(j)
|
Long-term deferred revenue
|
|
|
|
|
|
|
6,276
|
|
|
|
2,643
|
|
|
|
8,919
|
|
|
(m)
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
617
|
|
|
|
(55
|
)
|
|
|
65,643
|
|
|
(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
107,430
|
|
|
|
4,212
|
|
|
|
2,776
|
|
|
|
114,418
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
Additional paid-in capital
|
|
|
1,083,420
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
1,083,420
|
|
|
|
Accumulated deficit
|
|
|
(1,016,188
|
)
|
|
|
119
|
|
|
|
(5,044
|
)
|
|
|
(1,021,113
|
)
|
|
(o)
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,469
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(2,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
64,066
|
|
|
|
117
|
|
|
|
(5,043
|
)
|
|
|
59,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
171,496
|
|
|
$
|
4,329
|
|
|
$
|
(2,267
|
)
|
|
$
|
173,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
63
Explanation
of Current Quarterly Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions and to adjust the
allowance for doubtful accounts based on the Companys
reassessment of the account. |
|
(b) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(c) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21 and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped free-on-board destination or
with acceptance provisions. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(e) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(f) |
|
To correct an adjustment originally recorded during each quarter
of 2004 to the received not invoiced (RNI) account. During the
restatement, management concluded that the adjustment should
have occurred in 2002. |
|
(g) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(h) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(i) |
|
To reverse 2004 amortization of ANE warranty reserve and to
recognize in the quarter ended March 31, 2005. |
|
(j) |
|
To reflect short-term and long-term portion of restructuring
liabilities. |
|
(k) |
|
To reverse the reclassification to accrued other liabilities of
rebate obligations with a single customer previously recorded as
contra-receivables originally recorded in the quarter ended
September 30, 2004. The correcting reclassification was
performed for the quarter ended March 31, 2004 and
June 30, 2004 as part of the restatement. |
|
(l) |
|
To reverse an accrual of income taxes payable recorded in prior
periods. |
|
(m) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(n) |
|
To record amortization of bond premium to interest income. |
|
(o) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
64
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Effect of
|
|
|
Current
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Prior Period
|
|
|
Quarter
|
|
|
As
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,218
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
43,218
|
|
|
|
Short-term investments
|
|
|
54,517
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
54,517
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
19,660
|
|
|
|
(1,169
|
)
|
|
|
68
|
|
|
|
18,559
|
|
|
(a)
|
Other current receivables
|
|
|
1,044
|
|
|
|
|
|
|
|
|
|
|
|
1,044
|
|
|
|
Inventory, net
|
|
|
17,144
|
|
|
|
122
|
|
|
|
(49
|
)
|
|
|
17,666
|
|
|
(b)
|
E&O vendor cancellation
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
(c)
|
Other current assets
|
|
|
2,042
|
|
|
|
1,013
|
|
|
|
|
|
|
|
3,516
|
|
|
|
Short-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
461
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
137,625
|
|
|
|
(33
|
)
|
|
|
928
|
|
|
|
138,520
|
|
|
|
Property and equipment, net
|
|
|
5,760
|
|
|
|
94
|
|
|
|
|
|
|
|
5,854
|
|
|
|
Restricted cash
|
|
|
8,827
|
|
|
|
|
|
|
|
|
|
|
|
1,241
|
|
|
|
Non-current deposits reclass
|
|
|
|
|
|
|
|
|
|
|
(7,586
|
)
|
|
|
|
|
|
(e)
|
Other assets, net
|
|
|
1,522
|
|
|
|
2,001
|
|
|
|
|
|
|
|
11,366
|
|
|
|
Long-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
(f)
|
License fee
|
|
|
|
|
|
|
|
|
|
|
(159
|
)
|
|
|
|
|
|
(g)
|
Non-current deposits reclass
|
|
|
|
|
|
|
|
|
|
|
7,587
|
|
|
|
|
|
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
153,734
|
|
|
$
|
2,062
|
|
|
$
|
1,185
|
|
|
$
|
156,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,845
|
|
|
$
|
(186
|
)
|
|
$
|
|
|
|
$
|
7,846
|
|
|
|
Received not invoiced
|
|
|
|
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
(h)
|
Accrued payroll and related expenses
|
|
|
4,181
|
|
|
|
|
|
|
|
|
|
|
|
4,493
|
|
|
|
Tax accrual reclass
|
|
|
|
|
|
|
|
|
|
|
(245
|
)
|
|
|
|
|
|
(e)
|
Bonus accrual
|
|
|
|
|
|
|
|
|
|
|
557
|
|
|
|
|
|
|
(i)
|
Deferred revenues
|
|
|
2,579
|
|
|
|
(804
|
)
|
|
|
|
|
|
|
4,965
|
|
|
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
3,395
|
|
|
|
|
|
|
(j)
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(205
|
)
|
|
|
|
|
|
(k)
|
Accrued warranty expenses
|
|
|
3,870
|
|
|
|
320
|
|
|
|
|
|
|
|
4,670
|
|
|
|
Access Network Electronics
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
(l)
|
Warranty reserve
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
|
|
|
|
(m)
|
Accrued restructuring and executive
severance
|
|
|
3,902
|
|
|
|
(3,310
|
)
|
|
|
|
|
|
|
3,744
|
|
|
|
Israel restructuring
|
|
|
|
|
|
|
|
|
|
|
1,177
|
|
|
|
|
|
|
(n)
|
Restructuring reclass between
short-term and long-term
|
|
|
|
|
|
|
|
|
|
|
1,975
|
|
|
|
|
|
|
(o)
|
Accrued vendor cancellation charges
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
|
|
Accrued other liabilities
|
|
|
4,317
|
|
|
|
(646
|
)
|
|
|
|
|
|
|
3,873
|
|
|
|
Legal accrual
|
|
|
|
|
|
|
|
|
|
|
(448
|
)
|
|
|
|
|
|
(p)
|
Property tax
|
|
|
|
|
|
|
|
|
|
|
(240
|
)
|
|
|
|
|
|
(q)
|
Tax accrual
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
|
(r)
|
Tax accrual reclass
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
(e)
|
Interest payable and current
portion of capital lease obligations
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,571
|
|
|
|
(4,626
|
)
|
|
|
7,523
|
|
|
|
31,468
|
|
|
|
Long-term obligations
|
|
|
2,077
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
2,076
|
|
|
|
Long-term deferred revenue
|
|
|
|
|
|
|
8,919
|
|
|
|
2,165
|
|
|
|
11,084
|
|
|
(s)
|
Accrued restructuring and executive
severance
|
|
|
1,664
|
|
|
|
2,133
|
|
|
|
(1,975
|
)
|
|
|
1,822
|
|
|
(o)
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
562
|
|
|
|
(55
|
)
|
|
|
65,588
|
|
|
(t)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
97,393
|
|
|
|
6,988
|
|
|
|
7,657
|
|
|
|
112,038
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
Additional paid-in capital
|
|
|
1,083,711
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
1,083,709
|
|
|
|
Accumulated deficit
|
|
|
(1,024,091
|
)
|
|
|
(4,925
|
)
|
|
|
(6,471
|
)
|
|
|
(1,035,487
|
)
|
|
(u)
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,582
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(2,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
56,341
|
|
|
|
(4,926
|
)
|
|
|
(6,472
|
)
|
|
|
44,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
153,734
|
|
|
$
|
2,062
|
|
|
$
|
1,185
|
|
|
$
|
156,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
65
Explanation
of Current Quarterly Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions and to adjust the
allowance for doubtful accounts based on the Companys
reassessment of the account. |
|
(b) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(c) |
|
To reverse E&O reserves related to CMTS product based on
revised demand forecast. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(e) |
|
To reflect other adjustments and reclassifications. |
|
(f) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(g) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(h) |
|
To correct an adjustment originally recorded during each quarter
of 2004 to the received not invoiced (RNI) account. During the
restatement, management concluded that the adjustment should
have occurred in 2002. |
|
(i) |
|
To accrue for retention and other miscellaneous bonuses earned
by employees in 2004. |
|
(j) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(k) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(l) |
|
To reverse 2004 amortization of ANE warranty reserve and to
recognize in the quarter ended March 31, 2005. |
|
(m) |
|
To adjust the accrual to reflect an updated extended warranty
model. |
|
(n) |
|
To correct an adjustment originally recorded during the quarter
ended December 31, 2004 that wrote-off excess Israel
restructuring liabilities. During the restatement, management
concluded the adjustment should have occurred during 2002. |
|
(o) |
|
To reflect short-term and long-term portion of restructuring
liabilities. |
|
(p) |
|
To correct legal accrual adjustment recorded as of
December 31, 2004 and to reflect a liability at
March 31, 2005. |
|
(q) |
|
To reverse an accrual of property taxes related to the
Santa Clara facility. |
|
(r) |
|
To reverse an accrual of income taxes payable recorded in prior
periods. |
|
(s) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments for product sales when the fee
was not fixed or determinable, when collectibility was not
reasonably assured, or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(t) |
|
To record amortization of bond premium to interest income. |
|
(u) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
66
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005
|
|
|
|
|
|
|
|
|
Cumulative Effect
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
of Prior Period
|
|
|
Current Quarter
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
As Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,637
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,637
|
|
|
|
Short-term investments
|
|
|
69,180
|
|
|
|
|
|
|
|
|
|
|
|
69,180
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
19,736
|
|
|
|
(1,101
|
)
|
|
|
(782
|
)
|
|
|
17,853
|
|
|
(a)
|
Other current receivables
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
1,242
|
|
|
|
Inventory, net
|
|
|
18,611
|
|
|
|
522
|
|
|
|
437
|
|
|
|
19,342
|
|
|
(b)
|
E&O vendor cancellation
|
|
|
|
|
|
|
|
|
|
|
(228
|
)
|
|
|
|
|
|
(c)
|
Other current assets
|
|
|
1,634
|
|
|
|
1,474
|
|
|
|
|
|
|
|
5,126
|
|
|
|
Short-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
2,018
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
141,040
|
|
|
|
895
|
|
|
|
1,445
|
|
|
|
143,380
|
|
|
|
Property and equipment, net
|
|
|
4,840
|
|
|
|
94
|
|
|
|
1
|
|
|
|
4,935
|
|
|
|
Restricted cash
|
|
|
8,817
|
|
|
|
(7,586
|
)
|
|
|
|
|
|
|
1,241
|
|
|
|
Restricted cash - long-term reclass
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
(e)
|
Other assets, net
|
|
|
710
|
|
|
|
9,844
|
|
|
|
|
|
|
|
9,638
|
|
|
|
Long-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
(777
|
)
|
|
|
|
|
|
(f)
|
License fee
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
(g)
|
Restricted cash - long-term reclass
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
155,407
|
|
|
$
|
3,247
|
|
|
$
|
540
|
|
|
$
|
159,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,278
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
8,278
|
|
|
|
Accrued payroll and related expenses
|
|
|
3,601
|
|
|
|
557
|
|
|
|
|
|
|
|
3,601
|
|
|
(h)
|
Bonus accrual
|
|
|
|
|
|
|
|
|
|
|
(557
|
)
|
|
|
|
|
|
(i)
|
Deferred revenues
|
|
|
9,072
|
|
|
|
2,386
|
|
|
|
|
|
|
|
25,283
|
|
|
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
|
|
|
(j)
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
13,979
|
|
|
|
|
|
|
(k)
|
Accrued warranty expenses
|
|
|
3,141
|
|
|
|
800
|
|
|
|
|
|
|
|
3,140
|
|
|
|
Access Network Electronics
|
|
|
|
|
|
|
|
|
|
|
(801
|
)
|
|
|
|
|
|
(l)
|
Accrued restructuring and executive
severance
|
|
|
3,092
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
3,093
|
|
|
(m)
|
Restructuring reclass between
short-term and long-term
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
Accrued vendor cancellation charges
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
373
|
|
|
|
Accrued other liabilities
|
|
|
4,031
|
|
|
|
(689
|
)
|
|
|
|
|
|
|
3,791
|
|
|
(h)
|
Legal accrual
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
(n)
|
Interest payable and current
portion of capital lease obligations
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,130
|
|
|
|
2,897
|
|
|
|
13,074
|
|
|
|
48,101
|
|
|
|
Long-term obligations
|
|
|
1,725
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
1,724
|
|
|
|
Long-term deferred revenue
|
|
|
|
|
|
|
11,084
|
|
|
|
(5,693
|
)
|
|
|
5,391
|
|
|
(o)
|
Accrued restructuring and executive
severance
|
|
|
1,772
|
|
|
|
158
|
|
|
|
(158
|
)
|
|
|
1,772
|
|
|
(m)
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
507
|
|
|
|
(56
|
)
|
|
|
65,532
|
|
|
(p)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
100,708
|
|
|
|
14,645
|
|
|
|
7,167
|
|
|
|
122,520
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
Additional paid-in capital
|
|
|
1,085,008
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
1,085,008
|
|
|
|
Accumulated deficit
|
|
|
(1,026,695
|
)
|
|
|
(11,396
|
)
|
|
|
(6,629
|
)
|
|
|
(1,044,720
|
)
|
|
(q)
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,918
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
54,699
|
|
|
|
(11,398
|
)
|
|
|
(6,627
|
)
|
|
|
36,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
155,407
|
|
|
$
|
3,247
|
|
|
$
|
540
|
|
|
$
|
159,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
67
Explanation
of Current Quarterly Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions and to adjust the
allowance for doubtful accounts based on the Companys
reassessment of the account. |
|
(b) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(c) |
|
To reverse E&O reserves related to CMTS product based on
revised demand forecast. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(e) |
|
To reflect other adjustments and reclassifications. |
|
(f) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(g) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(h) |
|
The cumulative amount was adjusted from the prior period to
reflect the reclassification adjustment made after the filing of
the original financial statements. |
|
(i) |
|
To accrue for retention and other miscellaneous bonuses earned
by employees in 2004. |
|
(j) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(k) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(l) |
|
To reverse 2004 amortization of ANE warranty reserve and to
recognize in the quarter ended March 31, 2005. |
|
(m) |
|
To reflect short-term and long-term portion of restructuring
liabilities. |
|
(n) |
|
To correct legal accrual adjustment recorded as of
December 31, 2004 and to reflect the liability at
March 31, 2005. |
|
(o) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination or with acceptance provisions. |
|
(p) |
|
To record amortization of bond premium to interest income. |
|
(q) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
68
CONSOLIDATED
BALANCE SHEET
EFFECTS OF THE RESTATEMENT
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
Cumulative Effect
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
of Prior Period
|
|
|
Current Quarter
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjustments
|
|
|
As Restated(1)
|
|
|
Notes
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,605
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,605
|
|
|
|
Short-term investments
|
|
|
66,383
|
|
|
|
|
|
|
|
|
|
|
|
66,383
|
|
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
|
19,957
|
|
|
|
(1,883
|
)
|
|
|
(1,620
|
)
|
|
|
16,454
|
|
|
(a)
|
Other current receivables
|
|
|
1,758
|
|
|
|
|
|
|
|
|
|
|
|
1,758
|
|
|
|
Inventory, net
|
|
|
12,759
|
|
|
|
731
|
|
|
|
672
|
|
|
|
13,942
|
|
|
(b)
|
E&O vendor cancellation
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
|
|
|
(c)
|
Other current assets
|
|
|
2,100
|
|
|
|
3,492
|
|
|
|
|
|
|
|
8,546
|
|
|
|
Short-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
2,954
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
141,562
|
|
|
|
2,340
|
|
|
|
1,786
|
|
|
|
145,688
|
|
|
|
Property and equipment, net
|
|
|
4,538
|
|
|
|
95
|
|
|
|
(1
|
)
|
|
|
4,632
|
|
|
|
Restricted cash
|
|
|
8,763
|
|
|
|
(7,576
|
)
|
|
|
|
|
|
|
1,241
|
|
|
|
Restricted cash - long-term reclass
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
(e)
|
Other assets, net
|
|
|
633
|
|
|
|
8,928
|
|
|
|
|
|
|
|
11,949
|
|
|
|
Long-term deferred cost of goods
sold
|
|
|
|
|
|
|
|
|
|
|
2,545
|
|
|
|
|
|
|
(f)
|
License fee
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
|
(g)
|
Restricted cash - long-term reclass
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
155,496
|
|
|
$
|
3,787
|
|
|
$
|
4,227
|
|
|
$
|
163,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,572
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,572
|
|
|
|
Accrued payroll and related expenses
|
|
|
3,147
|
|
|
|
|
|
|
|
|
|
|
|
3,147
|
|
|
|
Deferred revenues
|
|
|
14,005
|
|
|
|
16,211
|
|
|
|
|
|
|
|
34,431
|
|
|
|
Thomson direct development costs
|
|
|
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
|
|
|
(h)
|
Short-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
4,388
|
|
|
|
|
|
|
(i)
|
Accrued warranty expenses
|
|
|
2,722
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
2,722
|
|
|
|
Accrued restructuring and executive
severance
|
|
|
1,991
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1,991
|
|
|
|
Accrued vendor cancellation charges
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
374
|
|
|
|
Accrued other liabilities
|
|
|
3,609
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
3,369
|
|
|
|
Interest payable and current
portion of capital lease obligations
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,776
|
|
|
|
15,971
|
|
|
|
4,215
|
|
|
|
51,962
|
|
|
|
Long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
|
|
|
|
5,390
|
|
|
|
6,049
|
|
|
|
11,439
|
|
|
(j)
|
Accrued restructuring and executive
severance
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
3,441
|
|
|
|
Convertible subordinated notes
|
|
|
65,081
|
|
|
|
451
|
|
|
|
(55
|
)
|
|
|
65,477
|
|
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
100,298
|
|
|
|
21,812
|
|
|
|
10,209
|
|
|
|
132,319
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
Additional paid-in capital
|
|
|
1,085,820
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
1,085,818
|
|
|
|
Accumulated deficit
|
|
|
(1,027,203
|
)
|
|
|
(18,025
|
)
|
|
|
(5,980
|
)
|
|
|
(1,051,208
|
)
|
|
(l)
|
Treasury stock, at cost
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
Accumulated other comprehensive loss
|
|
|
(2,723
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,198
|
|
|
|
(18,025
|
)
|
|
|
(5,982
|
)
|
|
|
31,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
155,496
|
|
|
$
|
3,787
|
|
|
$
|
4,227
|
|
|
$
|
163,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3, Restatement of Consolidated Financial
Statements, to Consolidated Financial Statements. |
69
Explanation
of Current Quarterly Adjustments:
|
|
|
(a) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination and to adjust the allowance for doubtful accounts
based on the Companys reassessment of the account. |
|
(b) |
|
To reflect the cumulative effects of adjustments for
transactions shipped
free-on-board
destination. |
|
(c) |
|
To reverse E&O reserves related to CMTS product based on
revised demand forecast. |
|
(d) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination. |
|
(e) |
|
To reflect other adjustments and reclassifications. |
|
(f) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred cost of goods sold related to the
change in revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination. |
|
(g) |
|
To correct pre-paid amortization on license fee based on a new
royalty rate. |
|
(h) |
|
To defer direct development costs based on
SOP 81-1
until recognition of revenue at completion of contract. The
costs were previously recognized in the period incurred. |
|
(i) |
|
To reflect the cumulative effects of adjustments for the
short-term portion of deferred revenue related to the change in
revenue recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination. |
|
(j) |
|
To reflect the cumulative effects of adjustments for the
long-term portion of deferred revenue to the change in revenue
recognition policy to
SOP 97-2,
EITF 00-21
and
SOP 81-1,
and to reflect other adjustments when collectibility was not
reasonably assured or when revenue and related costs were
deferred for transactions shipped
free-on-board
destination. |
|
(k) |
|
To record amortization of bond premium to interest income. |
|
(l) |
|
To reflect cumulative effects of restatement adjustments on
accumulated deficit. |
70
CONSOLIDATED STATEMENT OF OPERATIONS
EFFECTS OF THE RESTATEMENT
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated(1)
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated(1)
|
|
|
Revenues
|
|
$
|
150,538
|
|
|
$
|
(14,054
|
)
|
|
$
|
136,484
|
|
|
$
|
133,485
|
|
|
$
|
(3,298
|
)
|
|
$
|
130,187
|
|
Cost of goods sold
|
|
|
106,920
|
|
|
|
(5,033
|
)
|
|
|
101,887
|
|
|
|
101,034
|
|
|
|
2,801
|
|
|
|
103,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
43,618
|
|
|
|
(9,021
|
)
|
|
|
34,597
|
|
|
|
32,451
|
|
|
|
(6,099
|
)
|
|
|
26,352
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
33,959
|
|
|
|
(760
|
)
|
|
|
33,199
|
|
|
|
42,839
|
|
|
|
(205
|
)
|
|
|
42,634
|
|
Sales and marketing
|
|
|
24,145
|
|
|
|
|
|
|
|
24,145
|
|
|
|
26,781
|
|
|
|
|
|
|
|
26,781
|
|
General and administrative
|
|
|
11,216
|
|
|
|
823
|
|
|
|
12,039
|
|
|
|
12,127
|
|
|
|
(193
|
)
|
|
|
11,934
|
|
Restructuring charges, executive
severance and asset write-offs
|
|
|
11,159
|
|
|
|
1,177
|
|
|
|
12,336
|
|
|
|
2,803
|
|
|
|
|
|
|
|
2,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80,479
|
|
|
|
1,240
|
|
|
|
81,719
|
|
|
|
84,550
|
|
|
|
(398
|
)
|
|
|
84,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(36,861
|
)
|
|
|
(10,261
|
)
|
|
|
(47,122
|
)
|
|
|
(52,099
|
)
|
|
|
(5,701
|
)
|
|
|
(57,800
|
)
|
Interest expense, net
|
|
|
(1,312
|
)
|
|
|
222
|
|
|
|
(1,090
|
)
|
|
|
(362
|
)
|
|
|
221
|
|
|
|
(141
|
)
|
Other income, net
|
|
|
1,566
|
|
|
|
(535
|
)
|
|
|
1,031
|
|
|
|
2,424
|
|
|
|
(392
|
)
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax benefit (expense)
|
|
|
(36,607
|
)
|
|
|
(10,574
|
)
|
|
|
(47,181
|
)
|
|
|
(50,037
|
)
|
|
|
(5,872
|
)
|
|
|
(55,909
|
)
|
Income tax benefit (expense)
|
|
|
76
|
|
|
|
|
|
|
|
76
|
|
|
|
(316
|
)
|
|
|
|
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(36,531
|
)
|
|
$
|
(10,574
|
)
|
|
$
|
(47,105
|
)
|
|
$
|
(50,353
|
)
|
|
$
|
(5,872
|
)
|
|
$
|
(56,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
$
|
(0. |