****NEW TERN RESEARCH REPORT - PART (I)****
SALT LAKE CITY APRIL 19, Pluvia Securities Research initiates coverage of Terayon Communication Systems, (NASDAQ: TERN), at the price of $90 with a STRONG SELL Recommendation and a target price of under $30
Our Sell Recommendation is based on:
1. $56 million or 58% percent of 1999 Terayon revenue came from three customers who were awarded significant amounts of discounted stock or discounted stock options. Profit margins on sales to these customers were approximately double that of margins on sales to normal customers;
2. A series of false, misleading press releases, SEC filings and public statements made by Terayon suggesting their modem technology will become the next "DOCSIS" standard, even after CableLabs - the author of the DOCSIS standard - stated Terayon's technology would NOT be included in the next standard;
3. A "Cease and Desist" letter from CableLabs to Terayon demanding Terayon stop making false misleading statements that suggest Terayon's technology will be incorporated in DOXSIS as the next industry modem standard.
4. Significant insider sales of Terayon stock while Terayon insiders failed to disclose the CableLab Cease and Desists letter and CableLab's decision NOT to incorporate Terayon's modem technology in the next DOCSIS standard.
5. Failure to disclose significant events to shareholders including a restatement of earnings while registering stock with the SEC to sell to public shareholders.
Research Report - Part (I)
OVERVIEW
Terayon sells cable modem systems that enable cable operators to deploy two-way broadband access services. Many other companies, including Cisco, Samsung, Sony, Toshiba, Thomson, 3Com, Motorola, Philips, Com21, and Nortel, offer competitive equipment. While the vast majority of the cable modems installed in the United States are based on a technology called TDMA (time division multiple access), Terayon's products are based solely on a technology called S-CDMA (synchronous code division multiple access).
Cable companies and cable equipment manufacturers in the United States have formed an industry consortium called CableLabs, of which Terayon is a member. CableLabs is responsible for developing and certifying a technology standard for cable modems and for cable headends. The purpose of the standard is to create a common technology platform by which all manufacturers will abide. CableLabs' standard is called DOCSIS, and substantially all US cable operators have endorsed the use of DOCSIS in cable headends and modems. In order to sell a material quantity of cable hardware in the United States, therefore, a manufacturer must develop a DOCSIS-compliant product.
Without standardization, Terayon is left with a proprietary technology, (S-CDMA), that none of its competitors use and that has almost no market value in the United States. Eighty-six percent of the cable households in the US are served by only eight cable companies. Each of these companies has adopted DOCSIS and will purchase and deploy DOCSIS systems.
Currently, the first version of DOCSIS, named DOCSIS 1.0, has been written, and modem products have been tested, certified, and sold according to those specifications. CableLabs has also written the specifications for DOCSIS 1.1 and plans to begin testing product in the summer of 2000 for the DOCSIS 1.1 certification process.
STATEMENTS MADE BY TERAYON
RESPONSES BY CABLELABS
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Terayon: "CableLabs has stated that if the testing of this prototype reveals that the S-CDMA advanced PHY works as claimed.it is highly likely that it will add S-CDMA advanced PHY capabilities to a future version of the DOCSIS specification."[5], [6]
CableLabs: "In November of 1999, we told Terayon that S-CDMA would not be included in the next standard." - Dick Green, the CEO of CableLabs.[7]
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Terayon: "We currently are designing and developing a DOCSIS 1.2-compliant system."[8]
CableLabs: "They've misled people. If they don't stop, we'll take action. Even the name DOCSIS 1.2 may be assigned to two other things that aren't S-CDMA." - Steve Dukes, a member of the CableLabs Certification Board.[9]
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Terayon: "In September 1999, CableLabs indicated that it wants to proceed with the advanced PHY work on two parallel tracks; one for the inclusion of Terayon S-CDMA technology, as proposed by Terayon, and one for the inclusion of Advanced TDMA technology.the intention remains to include both as operating modes in a future version of the DOCSIS specification, consistent with the original plans for DOCSIS 1.2."[10], [11], [12]
CableLabs: "There isn't even such thing as advanced PHY. No decision has been made, and no timeline has been set." - Doug Sieman, a member of the CableLabs Certification Board.[13]
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Terayon: "I'll refer to the Chairman of the DOCSIS committee indicating he expects the prototype in the middle of the year and towards approval and certification by the end of the year. I cannot necessarily speak on behalf of them and know exactly their schedule. All the process is in place to get the prototype tested against the criteria and basically approved as specification. Make no mistake - this is the advanced PHY specification that INCLUDES S-CDMA, repeat INCLUDES S-CDMA."[14]
CableLabs: "Terayon['s] [S-CDMA] won't show up in the specification" - Dan Pike, a member of the CableLabs Board of Directors.[15]
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Terayon: "[Terayon] believes the inclusion of its S-CDMA technology in DOCSIS 1.2 would give it an advantage over its competitors, who will have to adapt their products to be DOCSIS 1.2-compliant."[16]
CableLabs: "We've had problems with [Terayon] making claims about things that aren't true before."- Susan Marshall, a member of the CableLabs Certification Board.[17]
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[2] The Financial Times (London), January 19, 2000
[3] Zaki Rakib, CEO of Terayon, on a conference call to investors to announce Terayon's 4th Quarter 1999 financial results, dated 1/18/00
[4] Contact Dick Green, CEO of CableLabs at 303-xxx-xxxx, Mike Schwartz, Spokesman for CableLabs at 303- xxx-xxxx, Dave Boukavinski, Head of the Certification Effort at CableLabs at 303- xxx-xxxx, or Steve Dukes, Certification Board Member at CableLabs at 303- xxx-xxxx
[5] Terayon's Form S-3 Registration Statement, filed with the SEC on 2/11/2000, p.5, and filed with the SEC on 12/29/99, p.5.
[6] Terayon's Form 10-Q for the Period Ended September 30, 1999, p. 23, incorporated into the 2/11/00 Form S-3 by reference
[7] From a phone conversation on 2/9/00. Dick Green can be reached at 303- xxx-xxxx.
[8] Terayon's Form 10-K for the Fiscal Year Ended December 31, 1998, filed with the SEC on 3/12/99, p. 5, incorporated into the 2/11/00 Form S-3 by reference
[9] From a phone conversation on 2/9/00. Steve Dukes can be reached at 303- xxx-xxxx.
[10] Terayon's Form 10-Q for the Period Ended September 30, 1999, filed with the SEC on 11/15/99, p.13., incorporated into the 2/11/00 Form S-3 by reference
[11] Terayon's Form S-3 Registration Statement, filed with the SEC on 1/25/00, p. 8
[12] Terayon's Form S-3/A Registration Statement, filed with the SEC on 12/29/99, p.7
[13] From a phone conversation on 2/8/00. Doug Sieman can be reached at 303- xxx-xxxx.
[14] Zaki Rakib, in a conference call for the 4th quarter 1999 earnings release, hosted by Terayon on 1/18/00
[15] From a phone conversation on 2/14/00. Dan Pike can be reached at 512- xxx-xxxx.
[16] Terayon's Secondary Offering Prospectus, dated 1/21/99, p. 38
[17] From a phone conversation on 2/8/00. Susan Marshall can be reached at 720- xxx-xxxx.
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Part (II) and (III) of this report will follow shortly. Pluvia Securities Research, their agents, and or associates, have investment positions consistent with the above-stated investment opinion. All comments are the EXPRESS opinion of the authors, ALL RIGHTS RESERVED
CONTACT:
Pluvia Securities Research
Steve Pluvia
e-mail pluvia2@aol.com |
