Terayon Communication Systems

» see terayon.com as it lived, on the wayback machine

~ the obituary ~

Terayon existed to sell equipment to cable television operators, which made it invisible from where I was sitting. Its customer list in the 2000 annual report reads Rogers, Shaw, Cox, Adelphia, Time Warner and UPC in Europe, and Turkey appears on no version of that list. The country got online over the copper telephone line: cable internet existed here and stayed marginal, so the whole American argument about whether the cable plant could carry data properly was an argument about somebody else's wiring.

It was a serious company for a while. Zaki and Shlomo Rakib, brothers, incorporated it in California in January 1993 and ran it out of Santa Clara, Zaki as chief executive from the start and Shlomo as chairman and president, becoming chief technology officer in February 1995. Shlomo had spent twelve years as chief engineer at PhaseCom, where the prospectus says he pioneered data and telephony applications over cable, and that one line of his biography accounts for most of what the company went on to build. It went public on 17 August 1998, selling three million shares at $13.00 for $39 million, of which $36.3 million reached the company.

Motorola closed its purchase on Friday 20 July 2007 at $1.80 a share, valuing the equity at roughly $140 million. The same day Mark Richman, the chief financial officer, filed a Form 15 ending the company's registration and entering the number of holders of record as 1. Terayon became a wholly owned subsidiary and went into Motorola's newly created Home and Network Mobility business. By then the shares had not traded on Nasdaq for fifteen months.

~ the case file ~

~ the letter from cablelabs ~

The technology was called S-CDMA, Synchronous Code Division Multiple Access, and the claim was that it could push data up a noisy cable return path where ordinary schemes failed. Terayon sold it hard, and in 2001 it got S-CDMA written into the DOCSIS 2.0 specification alongside A-TDMA, which is a genuine achievement for a company of that size. The condition attached was that it make the technology available on a royalty-free basis, so the prize for winning the standards fight was that the technology stopped being exclusively theirs.

Before that came the part the stock remembers. Richard Green, who ran CableLabs, the industry's certification body, wrote on 2 February 2000 that CableLabs had evidence Terayon was making misleading statements to the public. A month later, on 2 March, he wrote again to say the statements were more a matter of interpretation. Around those letters the share price did what share prices did in 2000: a high of $277 on 9 March, still measured before the two-for-one split that came in May, and then $94 by 14 April, four days after a close of $167.50. Five shareholder suits were filed inside a week.

The consolidated case ran on to February 2006, when mediation produced a $15.0 million settlement of which Terayon itself paid about $2.2 million and the insurers covered the rest. Two of the lead plaintiffs had been thrown out along the way, in February 2004, for being short sellers.

~ what it had left to sell ~

Revenue had gone $31.7 million in 1998, $97.0 million in 1999, $339.5 million in 2000, and then collapsed with the rest of the sector to around $130 million a year, where it sat. Light Reading reported in October 2004 that Terayon would stop investing in its struggling DOCSIS 2.0 head-end line, and by early 2005 it was out of that business for good. What remained was video processing: the CherryPicker, acquired along with Imedia for about $100 million, with more than 7,800 components deployed by 2007.

~ the thomson contract ~

Then the accounting went. On 7 November 2005 Terayon disclosed that it had begun reviewing its revenue recognition after concluding that money from one customer in the second half of 2004 might have been booked in the wrong periods. The customer was Thomson Broadcast, and the arrangements with it were involved enough that the filings simply call them the Thomson Contract. The old auditors had already resigned, effective 21 September 2005. On 1 March 2006 the company said its 2004 annual report, all four quarters of 2004 and the first two quarters of 2005 should no longer be relied upon. The audit committee found no intent by anyone at the company to recognize revenue against the rules, and the finding changed nothing about the filing deadlines already missed.

~ one dollar eighty ~

What killed Terayon was the filing calendar. A company that cannot publish its accounts cannot stay listed, and Nasdaq's Listing Qualifications Panel delisted the shares effective the opening of business on Tuesday 4 April 2006, citing the late quarterly report and the missing annual report, along with the fact that no 2005 annual meeting had been held. The 2005 annual report finally arrived on 29 December 2006, with 2004 and 2003 restated inside it. The Securities and Exchange Commission, which had opened a formal investigation in December 2005, told the company on 3 April 2007 that the investigation had been terminated with no enforcement action recommended.

Three weeks after that letter, on 23 April 2007, Terayon signed the merger agreement with Motorola. The stock was on the pink sheets as TERN.PK. Shareholders approved it on 28 June and the deal closed on 20 July. The Form 4s filed four days after that carry a footnote recording that option grants were cancelled because their exercise price was at or above the merger consideration of $1.80 per share. That footnote is the paperwork for an employee's options being worth nothing. The letter clearing the company had arrived fifteen weeks earlier and bought it nothing at all.

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