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Mergers & acquisitions

SEC Scraps Terayon Investigation

Terayon Communication Systems Inc. has cleared an important hurdle that could pave the way for its long-awaited sale.

Terayon said it received written notification from the Securities and Exchange Commission (SEC) on April 2 that the Commission had terminated an investigation tied to Terayon's accounting review and a range of agreements with a "certain customer."

Further, "no enforcement action has been recommended at this time," Terayon said, citing the SEC notification. However, the decision to terminate the investigation "is not a finding or judgment regarding the matters investigated, and should not be construed that the parties have been exonerated or that no action may ultimately result from the SEC's investigation of the matter."

The Terayon customer in question was not disclosed in Terayon's dissemination of the SEC decision. But a 10-Q filed by Terayon on Jan. 10 suggests that it is Thomson Broadcast.

In the 10-Q, Terayon said it was cooperating with the Commission "and will continue to do so in order to bring the investigation to a conclusion as promptly as possible."

Although Terayon has been at the center of swirling acquisition rumors for months, activity has slowed in recent weeks as potential suitors dissect the digital video vendor's financial status, as well as the impact of lawsuits brought against it. (See Terayon Sweepstakes Stalls.)

Still, the leading candidates for a Terayon takeover remain the trio of Motorola Inc. (NYSE: MOT), Cisco Systems Inc. (Nasdaq: CSCO), and Harmonic Inc. (Nasdaq: HLIT).

The original SEC-related issue, as detailed in a 10-K that Terayon filed on Dec. 29, 2006, stemmed from a series of contracts that Terayon had with Thomson.

Details of that work were revealed in February 2004, when Terayon announced that Fox Broadcast Company had selected Terayon's BP 5100 digital video broadcast platform to power the broadcaster's HD delivery system.

Terayon-made software applications also played a role in the project, including one that enabled Fox affiliates to insert their own logos directly into the digital feed without compromising video quality. Thomson, meanwhile, served as the primary systems integrator.

Questions later arose regarding how Terayon recognized revenue for the hardware and software that it supplied. Originally, Terayon recognized those items separately. But the vendor, following audit and internal reviews, later determined that the series of contracts should have been treated as a single contract and as a single revenue arrangement for accounting purposes.

As a result of this review, revenues that Terayon previously recognized in the second half of 2004 and in the first two quarters of 2005 were deferred and then recognized as revenue in the quarter ended Dec. 31, 2005.

— Jeff Baumgartner, Site Editor, Cable Digital News

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