Terayon Announces Expected Restatement of Prior Periods
March 01 2006 - 10:15PM
PR Newswire (US)
SANTA CLARA, Calif., March 1 /PRNewswire-FirstCall/ -- Terayon
Communication Systems, Inc. (NASDAQ:TERNE) today announced that the
Audit Committee of the Board of Directors has concluded that the
Company's consolidated financial statements for the year ended
December 31, 2004 and for the four quarters of 2004 and the first
two quarters of 2005 should no longer be relied upon and will be
restated. This conclusion was based in part on the final results of
the previously announced Audit Committee inquiry. The inquiry
focused on the circumstances surrounding the timing of revenue
recognition in the second half of 2004 from a customer of the
Company. The principal findings of the inquiry were: that there was
no intent by Company personnel to recognize revenue in
contravention of what Company personnel understood to be the
applicable accounting rules at the time; that Company personnel
nevertheless did not consider or sufficiently focus on the
application of certain relevant accounting rules; and that there
was no intent by Company personnel to mislead the Company's
auditors or engage in other wrongful conduct. The Audit Committee
inquiry noted that counsel was not able to interview a senior
official of the customer involved in the transaction. Based on the
results of the inquiry, the Audit Committee did not recommend any
actions against current or former Company personnel. The Audit
Committee and management are continuing to consider possible
enhancements to the Company's internal controls in light of the
results of the Audit Committee inquiry. The Audit Committee and
management have reviewed the Company's revenue recognition
practices and policies with respect to the delivery of certain
products and services (including the development and customization
of software) to a single customer under a series of contractual
arrangements. Management and the Audit Committee have also
discussed management's conclusions with Stonefield Josephson, Inc.,
the Company's independent auditor. It was previously determined
under the SEC Staff Accounting Bulletin 104, "Revenue Recognition,"
that revenue under this series of contractual arrangements was to
be recognized in two phases under two separate revenue
arrangements. Based on the guidance under American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2,
"Software Revenue Recognition," and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts," management has determined that this series of
contractual arrangements should have been treated as a single
contract, and therefore a single revenue arrangement for accounting
purposes. Using the completed-contract method as indicated under
SOP 81-1, all revenue from this series of contractual arrangements
should have been deferred until the completion of all Company
obligations under these arrangements in the fourth quarter of 2005.
Accordingly, revenue recognized in the third and fourth quarters of
2004 and in the first two quarters of 2005 under this series of
contractual arrangements should be deferred to the fourth quarter
of 2005. Also, under SOP 81-1 in relation to contract costs,
expenses previously recognized in each quarter of 2004 and in the
first two quarters of 2005 should be deferred to the fourth quarter
of 2005. The Company has also reviewed its revenue recognition
policies relating to the recognition of the sales of software and
other products bundled with post customer service contracts and has
considered the guidance under SOP 97-2, Financial Accounting
Standards Board Technical Bulletin 90-1, "Accounting for Separately
Priced Extended Warranty and Product Maintenance Contracts," as
well as Financial Accounting Standards Board, Emerging Issues Task
Force 00- 21, "Accounting for Revenue Arrangements with Multiple
Deliverables," in relation to multiple-element revenue
arrangements. Under this guidance management has determined that
during 2004, the Company did not establish vendor specific
objective evidence for its post contract service revenue element as
it related to digital video customer service. Consequently,
management anticipates an additional deferral of revenue from each
quarter of 2004 in which the revenue was recognized, in order to
recognize the revenue from software bundled with post customer
service contracts over the life of the customer service contract
period. The actual amounts of revenue and expenses to be deferred
are being reviewed by the Company and its independent auditors. The
restatement will have no impact on the Company's cash balances for
the restated periods. There can be no assurance that the Company or
its independent auditors will not identify additional issues or
other considerations in connection with the restatement and
continuing review, and that these issues or considerations will not
require additional adjustments to the Company's prior financial
results for one or more prior annual or quarterly periods. The
filing of the Company's Form 10-Q for the quarter ended September
30, 2005 will be further delayed pending the completion of the
restated consolidated historical financial statements. Because of
the delay in filing the Form 10-Q, the Company is not in compliance
with The Nasdaq Stock Market's continued listing requirement set
forth in Nasdaq Marketplace Rule 4310(c)(14). As previously
announced, the Company received letters from The Nasdaq Stock
Market dated November 17, 2005 and January 4, 2006 regarding the
Company's failure to file its Form 10-Q for the quarter ended
September 30, 2005, and its failure to solicit proxies and hold an
annual meeting of shareholders on or before December 31, 2005,
respectively. On January 17, 2006, a NASDAQ Listing Qualifications
Panel agreed to continue the listing of the Company's common stock
on The Nasdaq National Market subject to three conditions: (1) on
or before January 31, 2006, the Company was required to provide
NASDAQ with certain information related to the Audit Committee's
inquiry; (2) on or before March 31, 2006, the Company must file the
Form 10-Q for the quarter ended September 30, 2005 and all required
restatements; (3) on or before March 31, 2006, the Company must
file the proxy statement for the 2005 annual meeting, with a record
date set and a meeting to be held as soon thereafter as possible.
While the Company provided NASDAQ with a response to questions
relating to the internal accounting review on January 31, 2006 and
is making every effort to comply with the remaining requirements,
there can be no assurance that the Company will be able to do so
within the Panel's deadlines, or that the Company's common stock
will continue to be listed on the Nasdaq National Market.
Management and the Audit Committee have concluded that the
restatement constitutes a material weakness within the meaning of
the PCAOB's Audit Standard No. 2. In addition to this material
weakness, additional control deficiencies may be identified which
individually or in the aggregate may constitute additional material
weaknesses. Management and the Audit Committee are continuing to
evaluate whether there are additional material weaknesses.
Additionally, the Company has engaged a financial advisor, Chanin
Capital Partners, to explore alternatives with respect to
restructuring its outstanding 5% Convertible Subordinated Notes due
2007. The Notes currently outstanding have an aggregate principal
amount of $65 million. As previously announced, on January 12,
2006, the Company received a letter from holders of more than 25%
in aggregate principal amount of Notes outstanding providing
written notice to the Company that it is in default based on the
Company's failure to file its Form 10-Q for the quarter ended
September 30, 2005. If the default is not cured within 60 days of
this notice, March 13, 2006, an event of default will occur and the
trustee or holders of at least 25% in aggregate principal amount of
the Notes then outstanding, upon notice to the Company, may
accelerate the maturity of the Notes and declare the entire
principal amount of the Notes, together with all accrued and unpaid
interest thereon, to be due and payable immediately. The Company
previously announced in November 2005 that the SEC had initiated an
informal inquiry with regard to the subject matter of the Company's
accounting review. The Company understands that the SEC has since
issued a formal order of investigation with regard to this matter.
The Company has been and is continuing to cooperate fully with the
SEC. Meaningful Cautionary Statement Regarding Forward-Looking
Statements Except for historical information contained in this
press release, the matters discussed in this press release are
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. These forward-looking statements are subject to a
number of risks and uncertainties that may cause actual results to
differ materially from those contained in the forward-looking
information. Such forward-looking statements include, but are not
limited to, statements relating to the review of Terayon's
accounting policies, the timing, nature and expected outcome of
Terayon's accounting review and restatement process, audit and
review of consolidated financial statements, new determinations and
calculations which may result in additional restatements or may
delay the filing of one or more periodic reports with the SEC,
statements relating to the engagement of a financial adviser to
explore alternatives with respect to the convertible notes, the
delisting of the Company's common stock from the Nasdaq National
Market in the event the Company does not comply with one or more of
the Panel's conditions and is unable to secure an additional
extension from the Panel, and other statements that are not
historical facts. There can be no assurance that the restatements
or subsequent processes or filings will be completed timely, that
any modifications or changes can be timely or effectively
implemented, that errors or internal control deficiencies or
material weaknesses will not be identified during the preparation,
audit or review of annual or quarterly consolidated financial
statements or that additional adjustments for other periods will
not be required. The following factors, among others, could cause
actual results to differ from those set forth in the
forward-looking statements: the timing and results of the ongoing
accounting review into possible additional accounting errors,
whether the Company's former independent auditor agrees with the
Company's and Stonefield Josephson's conclusions regarding the need
for and the extent to which prior periods should be restated and
agrees to reaudit the Company's historical financial statements,
the possibility that prior periods may need to be audited by
Stonefield Josephson if the Company's former independent auditor
does not agree with the conclusions, the timing of the filing of
Terayon's Form 10-Q for the third quarter of fiscal year 2005, the
adverse effect on liquidity and the Company's business if the event
of default is not cured by March 13, 2006, the timing and filing of
Terayon's proxy statement for its next annual shareholders meeting,
the need for and effective implementation of any corrective actions
in connection with Terayon's accounting practices or internal
control deficiencies or material weaknesses, the timing and extent
of any restatement of prior financial results and subsequent
processes or filings, the identification of other errors in prior
annual or quarterly periods or internal control deficiencies or
material weaknesses during the preparation, audit or review of
annual or quarterly consolidated financial statements, the need for
adjustments for other periods, the timing and extent of the
reaction to any such restatement by Terayon's stockholders,
bondholders and customers, as well as changes in economic,
business, competitive, technological and/or regularly factors and
trends. In addition, the Company's financial results and stock
price may suffer as a result of this review, the restatement
process, any delay in filing periodic reports with the SEC, the
delisting of our common stock and any subsequent determinations
from this process or any actions taken by governmental or other
regulatory bodies as a result of this process. Additional factors
that may affect future results are contained in Terayon's SEC
reports, including its most recent Annual Report on Form 10-K and
Quarterly Report on Form 10-Q, particularly in the "Risk Factors"
and "Management Discussion and Analysis of Financial Condition and
Results of Operations" sections. Such filings are available at the
SEC's website http://www.sec.gov/. Terayon disclaims any obligation
or intent to update and revise the statements contained in this
release based on new information or otherwise. About Terayon
Terayon Communication Systems, Inc. provides real-time digital
video networking applications to cable, satellite and
telecommunication service providers worldwide, which have deployed
more than 6,000 of Terayon's digital video systems to localize
services and advertising on-demand and brand their programming,
insert millions of digital ads, offer HDTV and other digital video
services. Terayon maintains its headquarters in Santa Clara,
California; has sales and support offices worldwide and is on the
web at http://www.terayon.com/. DATASOURCE: Terayon Communication
Systems, Inc. CONTACT: press, Rebecca West of Atomic PR,
+1-415-402-0230, or ; or investors, Kirsten Chapman or Moriah
Shilton, both of Lippert/Heilshorn & Associates,
+1-415-433-3777, or , all for Terayon Communication Systems, Inc.
Web site: http://www.terayon.com/
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