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Shareholders Hit Terayon Over DOCSIS

Shareholders filed five lawsuits last week against modem-maker Terayon Communication Systems Inc., claiming that the company violated securities laws by disseminating false and misleading statements concerning cable-modem certification.

The suits also revealed a dispute between Terayon and Cable Television Laboratories Inc. regarding the inclusion of Terayon's S-CDMA (synchronous code-division multiple-access) technology in the next round of CableLabs' Data Over Cable Service Interface Specification process.

On Feb. 2, CableLabs CEO Richard Green sent Teryon executives a "cease-and-desist" letter. "CableLabs has evidence that Terayon is making misleading statements to the public concerning the DOCSIS specifications and Terayon's possible contributions thereto," Green wrote.

Terayon responded with "informal" conversations with CableLabs executives, which led to Green drafting a second letter to Terayon March 2, Terayon spokesman John Hamburger said.

In the March 2 letter, Green said the cease-and-desist letter was "triggered by the large number of calls" CableLabs and the DOCSIS-certification board received from analysts and the media "asking us to verify thatS-CDMA would be included in the DOCSIS 1.2 specification."

Green added, "In reviewing the record, we realize that the statements were more a matter of interpretation."

Terayon is developing a prototype modem that it says will be delivered to CableLabs in the third quarter. On Feb. 25, CableLabs sent a letter to Terayon and three other companies that are authoring the new spec, noting, "It's likely (but not certain)" that the S-CDMA prototype will be included in a new DOCSIS specification.

CableLabs spokesman Mike Schwartz said the company had no comment on the Terayon issue.

A key issue for Terayon and several executives and directors named in the suit will be its lack of disclosure of the Feb. 2 cease-and-desist letter. Among other things, the suits alleged that Terayon executives sold 71,000 shares of Terayon "while in possession of materially adverse, undisclosed information"-namely, the Feb. 2 letter from CableLabs.

Terayon discussed how it's developing a DOCSIS prototype that incorporates S-CDMA in a Feb. 11 registration statement filed with the Securities and Exchange Commission. But the company made no mention of the cease-and-desist letter in the filing.

"We don't consider it to be material.and we knew we would be getting a retraction of it," Terayon spokesman John Gidding said when asked why the company didn't disclose the letter.

Terayon's stock price has ranged from $61.50 Jan. 3 to a high of $277 March 9. The week before the suits were filed, it declined from $167.50 at the April 10 close to $94 April 14. The company's share price fell to $85.44 last Thursday.

WR Hambrecht & Co. analyst Tim Savageaux-who upped his price target for Terayon from $200 to $300 March 9-said he remains bullish on the company. "I view the last 100 points as selling off based upon those concerns that were driven by the lawsuits, and I don't think they're substantial concerns," he said.