Filing Delay Puts Terayon in a Bind

1/11/2006 5:20 AM Eastern

An accounting snarl surrounding 2004 revenues may cause some debt and stock-listing problems for Terayon Communication Systems Inc.

The maker of video-transmission gear announced in November that it wouldn’t be able to make its 10-Q filing deadline for third-quarter-2005 earnings because it had discovered a possible error in reporting certain revenues in the second half of 2004.

In a statement issued late Tuesday, Terayon said steady progress has been made since then to untangle the revenue figures, but the company doesn’t know when the work will be completed.

The delay is a violation of NASDAQ Marketplace rules, and on Nov. 17, the exchange issued a letter notifying Terayon that its stock may be delisted.

On Jan. 4, NASDAQ sent a second letter to the company notifying it that it had further violated exchange rules by failing to solicit proxies and to hold an annual shareholders’ meeting before Dec. 31. Terayon was unable to schedule that meeting before the end of 2005 in part because of the accounting review, according to the company.

But perhaps of greater concern for Terayon is the fact that the delay means it is no longer in compliance with filing requirements for its 5% convertible subordinated notes due in 2007. Under the bond agreement, the company must file all financial information with the Securities and Exchange Commission and the trustee of the notes.

If holders of at least 25% of the notes’ principal amount file a written notice of default based on the failure to file the 10-Q form, Terayon will have 60 days to clear up the problem and provide the 10-Q. If it cannot do so, the trustee or the bondholders could accelerate the maturity of the notes and demand that the outstanding principal -- placed at about $65 million -- be paid in full immediately.

If that were to happen, it would put a significant drain on Terayon’s bank account. The company ended 2005 with $101 million in cash and cash equivalents and short-term investment capital.