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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
 
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended December 31, 2009
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Transition Period from          to          
 
Commission File Number: 001-33355
 
 
 
 
BigBand Networks, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
     
Delaware   04-3444278
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification Number)
 
475 Broadway Street
Redwood City, California 94063
(Address of principal executive offices and zip code)
(650) 995-5000
(Registrant’s telephone number, including area code)
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.001 par value
  The NASDAQ Global Market
 
Securities registered pursuant to Section 12(g) of the Act:
None.
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
       (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the voting stock held by non-affiliates of the issuer as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2009) was approximately $221 million. The number of shares outstanding of the registrant’s common stock as of March 1, 2010 was 67,314,145.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Proxy Statement relating to its 2010 Annual Stockholders’ Meeting are incorporated by reference in Part III of this Annual Report on Form 10-K.
 


 

 
BigBand Networks, Inc.

FORM 10-K
for the fiscal year ended December 31, 2009

TABLE OF CONTENTS
 
                 
        Page
 
Special Note Regarding Forward-Looking Statements     3  
 
PART I.
  Item 1.     Business     4  
  Item 1A.     Risk Factors     16  
  Item 1B.     Unresolved Staff Comments     29  
  Item 2.     Properties     29  
  Item 3.     Legal Proceedings     29  
  Item 4.     Submission of Matters to a Vote of Security Holders     29  
 
PART II.
  Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     29  
  Item 6.     Selected Financial Data     30  
  Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     32  
  Item 7A.     Quantitative and Qualitative Disclosures about Market Risk     45  
  Item 8.     Financial Statements and Supplementary Data     47  
  Item 9.     Changes In and Disagreements With Accountants on Accounting and Financial Disclosures     81  
  Item 9A.     Controls and Procedures     81  
  Item 9B.     Other Information     83  
 
PART III.
  Item 10.     Directors, Executive Officers and Corporate Governance     86  
  Item 11.     Executive Compensation     86  
  Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     86  
  Item 13.     Certain Relationships and Related Transactions, and Director Independence     87  
  Item 14.     Principal Accountant Fees and Services     87  
 
PART IV.
  Item 15.     Exhibits, Financial Statement Schedules     87  
Signatures     90  
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1


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This Annual Report on Form 10-K (Form 10-K) includes forward looking statements. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “project,” “intend,” “expect” and similar expressions are intended to identify forward looking statements. We have based these forward looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, long-term and long-term business operations and objectives, and financial needs. These forward looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” in Item 1A of this Form 10-K. In light of these risks, uncertainties and assumptions, the forward looking events and circumstances discussed in this Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward looking statements.
 
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the risks, uncertainties and events described in the section entitled “Risk Factors” and elsewhere in this Form 10-K could have a material adverse effect on our business, results of operations and financial condition.
 
You should not rely upon our forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that our future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-K to conform these statements to actual results or to changes in our expectations.
 
This Form 10-K also contains statistical data and estimates that we obtained from industry publications and reports generated by Forrester Research. Although we have assessed the information in the publications and found it to be reasonable and believe the publications are reliable, we have not independently verified the data.
 
You should read this Form 10-K and the documents that we reference in this Form 10-K and have filed with the Securities and Exchange Commission (SEC) with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we currently expect.


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Item 1.   BUSINESS
 
Overview
 
We develop, market and sell network-based platforms that enable cable multiple system operators (MSOs) and telecommunications companies (collectively, service providers) to offer video services across coaxial, fiber and copper networks. We were incorporated in Delaware in December 1998. Since that time, we have developed significant expertise in rich media processing, communications networking and bandwidth management. Our customers are using our platforms to expand high-definition television (HDTV) services, and enable high-quality video advertising programming to subscribers. Our Broadcast Video, TelcoTV, Switched Digital Video and IPTV (Personalized Video) solutions are comprised of a combination of software and programmable hardware platforms. We have sold our solutions to more than 200 customers globally. We sell our products and services to customers in the U.S. and Canada through our direct sales force. Domestically, our customers include Bright House, Cablevision, Charter, Comcast, Cox, Time Warner Cable and Verizon, which are seven of the ten largest service providers in the U.S. We sell to customers internationally through a combination of direct sales and resellers. Our largest international resellers include Guangdong Tongke, Sugys and Ssangyong, who sell to end users such as Jiangsu Cable and LG Powercom.
 
Industry Background
 
MSOs and telecommunications companies derive most of their revenues from consumer subscriptions for video, voice or data services and from advertising. To attract and retain subscribers, service providers are increasingly bundling video, voice and data services, and offering richer and more personalized services. The competition for video subscriptions has been increasing over time, with initial competition coming from satellite video providers, more recently between cable MSOs and telecommunications companies and most recently from the entry of media companies, such as Hulu and Apple, offering video programming directly to consumers through the Internet. In this competition, the service providers are competing on the volume of HD programs and personalization that they can offer to subscribers.
 
Consumer Demands
 
Given increasing competition, service providers are attempting to differentiate their offerings by addressing changing consumer behavior and evolving advertiser demands. Spurred by the delivery of video over the Internet, consumers are increasingly directing their spending on video services to those providers offering services that more offer greater personalization of content, a higher quality experience and greater ease and speed of access to their video services.
 
  •  Personalization.  With the proliferation in content, consumers are seeking content that is increasingly customized to their personal interests. This personalized content spans everything from the purchase of downloadable episodes of television programming to customized video programming, such as Video on Demand (VOD) and niche channel packages.
 
  •  Richer Video Content.  Consumers are demanding a higher quality experience, whether online or in their television viewing. As a result, consumers are continuing to purchase HDTVs and high-speed data services to access richer content, such as HD programming, user-generated video clips and interactive online video games. For example, Forrester Research estimates that 57% of all U.S. households will have HD televisions by the end of 2010.
 
  •  Ease and Speed of Access.  In an increasingly mobile world, consumers desire faster access to content from virtually anywhere using a wide range of devices, such as portable media players, televisions, mobile phones, personal digital assistants and personal computers.
 
Consumers have been able to gain greater personalization, richer content and better access to their voice and data services using network-based technologies. For video, however, there has been only a limited response to these consumer demands. To offer richer, more personalized content at the speeds consumers expect, and to capture the


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larger video subscription opportunity, service providers are developing networks with the bandwidth to deliver richer video services and the intelligence to tailor video services and direct advertising to individual subscribers.
 
Advertiser Demands
 
Traditionally, advertisers attempted to reach consumers through media channels such as broadcast television that distributed the same advertising to wide audiences. The Internet offers advertisers a distribution channel that delivers more relevant ads, while at the same time offering the interactivity required to measure return on ad spending. Today, advertisers are demanding that advertising on video services offer similar relevancy, interactivity and measurability.
 
  •  Relevancy.  Advertisers are demanding that their advertisements be addressed to a relevant audience. For example, they desire to target video advertising to particular geographic zones, and ultimately want to tailor advertising to specific subscribers.
 
  •  Interactivity.  Advertisers want to provide consumers with an easy and immediate way to respond to an advertisement. For example, advertisers would like to provide subscribers with the ability to use a remote control to immediately access additional product information associated with a television advertisement.
 
  •  Measurability.  Advertisers are seeking ad distribution networks that allow them to measure the effectiveness of their ad spending and are willing to pay more for video advertisements that result in a higher consumer response rate.
 
To encourage advertisers to direct more spending toward television advertisements, service providers must be able to deliver relevant advertisements and measure the effectiveness of marketing campaigns for advertisers. The current video networks of service providers are limited in their ability to provide the intelligence necessary for the relevancy, interactivity and measurability required to meet the expanding demands of advertisers.
 
Intelligent, High-Bandwidth Video Networks are Needed
 
Current service provider networks are not fully equipped for increasingly rich and interactive video content. Cable MSOs that originally built their networks for the one-way broadcast of analog video content still lack the capacity to deliver as much of the rich content and interactivity increasingly required by consumers and advertisers. Telecommunications companies originally constructed low-bandwidth networks capable of delivering highly interactive voice services, but without the bandwidth necessary to fully deliver rich video services. Collectively, cable MSOs and telecommunications companies share a need to develop intelligent, high-bandwidth video networks for their consumer and advertiser customers.
 
Delivering high-quality, personalized video services and relevant video-based advertising has strained service providers’ existing network infrastructures. For a robust delivery of these services, service providers must overcome the following challenges:
 
  •  Bandwidth Limitations Posed by Video.  Service providers’ fixed-bandwidth networks are not fully equipped for the volume and richness of content being demanded by subscribers. For example, a typical HDTV video stream requires 19.4 megabits per second (Mbps) of continuous bandwidth, which is up to ten times the bandwidth required by a standard definition video stream and substantially greater than the 10 Mbps limit of most copper-based network data connections. To meet the demand for more and richer content such as HDTV, service providers must either undertake a costly capital expansion of their network infrastructures or use their existing infrastructure more efficiently.
 
  •  Difficulty of Delivering a High-Quality Video Experience. Service provider networks are inherently prone to packet loss, error and delay. This problem is exacerbated as the richness and volume of the content being delivered across the network increases. Importantly, HDTV is approximately 1,000 times more sensitive to packet loss, error and delay than voice and data services. To ensure a consistent high-quality subscriber viewing experience, service providers must find solutions that maintain the integrity of the video streams as these streams are delivered across their networks.


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  •  Lack of Customized Video Programming.  Existing networks lack the intelligence to allow service providers to understand and react to subscriber television viewing behavior. As a result, service providers lack the ability to deliver video programming packages tailored to the interests of specific subscribers or groups of subscribers. To deliver customized video programming, service providers require networks that will enable them to understand subscriber viewing behavior and, based on that understanding, allow them to deliver new video channels and programming packages to specific subscribers or groups of subscribers.
 
  •  Requirement for More Relevant Video Advertising.  Advertisers are demanding that their advertisements be addressed to a relevant audience. To satisfy this demand, service providers need the capability to deliver video advertising to particular geographic segments and demographic groups, and ultimately, to tailor advertising to specific subscribers. In most broadcast implementations, service providers lack the capability to distinguish one subscriber from another and the capacity to insert tailored advertising into a continuous video stream without degrading service quality. Service providers are seeking solutions that will enable the seamless insertion of relevant advertisements into video streams.
 
  •  High Cost of Infrastructure Investment.  Service providers have invested heavily to establish their existing network infrastructures, including the deployment of a significant number of cable set-top boxes. Service providers must either make significant investments to upgrade or replace their existing infrastructure, or find ways to extend the useful life of their installed equipment. Service providers generally prefer network-based capital investments since these costs can be allocated across many subscribers without costly replacement of existing set-top boxes.
 
  •  Need to Rapidly Deliver Advanced Services.  Historically, service providers have needed to make very large capital expenditures to purchase replacement network equipment to support next-generation services. With the increasing pace of change, service providers require platforms with the flexibility to rapidly deploy advanced video services while minimizing lengthy and capital-intensive network upgrades.
 
Service providers face common challenges — how to rapidly and economically offer an increasing amount of video content, deliver a more compelling user experience and deliver more relevant programming and advertising to their subscribers. The technical and bandwidth challenges associated with delivering video services creates a need for platforms designed for reliable and cost-effective video delivery.
 
The BigBand Offering
 
We develop, market and sell network-based platforms that enable service providers to offer video services across coaxial, fiber and copper networks. Our software and hardware solutions are used to offer video services commercially to tens of millions of subscribers, 24 hours a day, seven days a week and have been successfully deployed by leading service providers worldwide, including seven of the ten largest service providers in the U.S.
 
We combine rich media processing, modular software and high-speed switching and routing with carrier-class hardware designed to address specific service provider needs into our solutions. Our solutions enable service providers to deliver high-quality video services and offer more effective video advertising. We offer our customers Broadcast Video, TelcoTV, Switched Digital Video and IPTV (Personalized Video) solutions.
 
Our solution offers the following key benefits:
 
  •  Intelligent Bandwidth Management.  Using our solutions, service providers can address their increasing bandwidth needs. For example, we offer what we believe to be the most widely deployed switched digital video solution commercially available today. Our Switched Digital Video solution only transmits channels to subscribers when the subscribers in a service group are in the process of watching those channels, instead of broadcasting all channels to all subscribers all the time. This enables service providers to achieve 50% or greater savings in bandwidth usage for digital subscribers, allowing service providers to offer additional services (such as HDTV channels) without altering the subscriber viewing experience.
 
  •  High-Quality Video Experience.  Our solutions allow service providers to minimize the likelihood of video quality errors by detecting potential video quality degradation in real-time and correcting such degradation before the video stream is delivered to subscribers. Our Broadcast Video solution is designed to increase the


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  volume and quality of video delivered across a fixed-bandwidth network by optimizing the delivery of video streams, while our program level redundancy functionality adds the switching capability to automatically provision an alternative video stream should the quality of the primary stream begin to degrade.
 
  •  Enhanced Video Personalization.  Using our solutions, service providers have the ability to understand the viewing habits of their customers and, as a result, can more accurately tailor programming packages to the interests of their subscribers. For example, our Switched Digital Video solution enables service providers to satisfy consumer demand for increasingly personalized content by expanding the number of channels that can be offered because selected channels are only delivered when the channel is requested by a subscriber in the service group. Using this solution, one of our customers was able to offer additional channel packages tailored to demographic groups.
 
  •  Ability to Deliver Relevant Video Advertising.  Our solutions allow service providers to insert advertising tailored to specific subscriber groups. For example, using our IPTV solution, service providers can simultaneously insert different ads into multiple copies of the same program and forward them to specific geographic zones. This allows service providers to attract advertisers interested in reaching niche markets.
 
  •  Improved Return on Existing Infrastructure Investment.  Our network-based solutions allow service providers to manage service quality from the network, rather than deploying costly personnel and equipment at the customer premises. Because our solutions are deployed at the network level, service providers can leverage their infrastructure investment across many subscribers and avoid the hardware and service costs associated with an upgrade of equipment in the homes of subscribers.
 
  •  High Availability.  Our solutions are built utilizing carrier class hardware that provides our customers with solutions that offer improved uptime of the platforms for the video services they deliver to consumers. The high availability of our platforms is designed to reduce the cost of maintenance of these platforms, and as a result reduce the total cost of ownership.
 
  •  Platform Flexibility.  Our solutions feature a fully programmable hardware and modular software architecture. Our field-upgradable hardware is designed to meet service provider platform flexibility requirements and to minimize the need to replace existing hardware.
 
Strategy
 
Our objective is to be the leading provider of network-based products that enable the delivery of high-bandwidth, high-quality video services and more effective video advertising. Key elements of our strategy include the following:
 
  •  Enhance Technology Leadership Position.  Our core strength is our media processing and video systems design expertise. We use this expertise to deliver what we believe to be the most-widely deployed switched digital video product commercially available today. We will continue leveraging our expertise to deliver solutions that focus on optimizing network infrastructure and enabling delivery of a high-quality user experience.
 
  •  Leverage Modular Architecture to Accelerate New Product Introduction. We have created a series of media processing software modules that, when combined with our programmable hardware and switching fabric, serve as the foundation for a range of network-based solutions. We believe our software modules can serve as the foundation for rapidly delivering solutions that address our customers’ bandwidth and service delivery needs.
 
  •  Expand Footprint Within Existing Customer Base.  We have customer relationships with a number of service providers both in the U.S. and internationally, including seven of the ten largest service providers in the U.S. We believe these customer relationships give us a strong advantage in understanding our customers’ network challenges and delivering timely solutions. We will continue to work closely with our customers on the designs of their network architectures and emerging services, expand our relationships with these customers to deploy more of our existing applications and develop and deliver new applications to address their network challenges.


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  •  Expand Customer Base.  Service providers deploy video services to subscribers across networks based on coaxial, fiber and copper. We have successfully deployed our solutions across these access technologies. We are currently providing Verizon with a solution that allows digital transmission of video over fiber-optic lines. Other telecommunications companies deploying video services over existing DSL lines leverage our media processing expertise to provide such video services. Still others use our solutions to carry services over coaxial cable. We intend to leverage our media processing expertise to penetrate new customers worldwide, regardless of the type of access networks they use.
 
  •  Broaden Advanced Advertising Capabilities.  We currently enable service providers to insert video advertisements targeted to subscribers in specific geographic zones. We intend to collaborate with our customers to continue developing and deploying next-generation advertising solutions.
 
Solutions
 
We are a category leader in digital video networking. Our video networking solutions enable service providers to move, manage and monetize video. We deliver proven network-based platforms to empower service providers to transition from broadcast to the delivery of personalized video services. Our product solutions are a combination of advanced networking and video processing hardware platforms with software modules that optimize existing infrastructures and bandwidth to deliver application-specific functions. We believe our approach of combining carrier-grade, purpose-built platforms with modular software delivers a faster return on investment and a lower total cost of ownership compared to platforms offered by our competitors. We deliver the following product solutions:
 
Switched Digital Video.  We believe we were the first company to develop and commercially deploy a switched digital video solution. Traditionally, service providers broadcast all channels to all subscribers at all times. Our Switched Digital Video solution enables service providers to transmit video channels to subscribers only when the subscribers in a smaller subset of subscribers within a network, called a service group, are in the process of watching those channels. Depending on the number of subscribers and the amount of duplicate channels within a service group, our Switched Digital Video solution typically allows service providers to achieve up to 50% bandwidth savings in the delivery of digital video content and use the reclaimed bandwidth to offer additional content. This reclaimed bandwidth can be used to deliver niche video packages, more HDTV channels, high-speed data service and/or voice service. The diagram below illustrates how bandwidth can be reclaimed using our Switched Digital Video solution, which broadcasts only those channels that are being watched within a service group.
 
(DIGITAL VIDEO LOGO)
 
In addition, our Switched Digital Video solution gives our service providers real-time access to the actual viewing habits of their subscriber groups, information that is increasingly valuable as they and their advertisers seek to tailor advertising or personalized channel services to specific subscriber groups and individual subscribers. We deliver our Switched Digital Video solution by combining our core media processing modules with our Broadband Multimedia-Service Router hardware platform, which we refer to as our BMR, BigBand Server and Management Suite, and Broadband Edge QAM or BEQ.
 
Broadcast Video.  Historically, video content was broadcast only in analog form. Analog video presents a number of limitations to service providers, including deterioration of video quality, higher cost to insert relevant advertising in the video stream, and the cost of converting analog to digital for certain digital devices in the home, such as digital video recorders. Our Broadcast Video solutions enable advanced digital media processing and transport technologies for service providers. For example, we were first to implement what we believe has become the industry’s de facto network architecture for digital simulcast.


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Our digital simulcast product application enables service providers to create a digital version of analog inputs and deliver both analog and digital video streams to subscribers. This gives service providers a cost-efficient way of migrating subscribers from analog to digital video, which uses lower cost all-digital set-top boxes, while still supporting a large installed base of analog set-top boxes and televisions. In addition, our digital simulcast product application allows service providers to insert advertisements into the digital video stream and deliver those advertisements either in digital or analog form to subscribers. This offers our customers incremental revenue opportunities through the ability to insert advertisements into the digital stream targeted to specific geographic zones. We deliver our Broadcast Video solution by combining our BMR with our core media processing modules with advanced splicing capability.
 
TelcoTV.  Telecommunications companies use our BMR to provide a very high-quality viewing experience to their subscribers, while still benefiting from the use of digital video transport throughout their networks. We enable telecommunications companies to leverage their existing Synchronous Optical Network, or SONET, infrastructure, which was originally designed for voice communications, to transport video content throughout the network. This provides significant cost savings as telecommunications companies are not required to build a dedicated video transport network. They deploy our solution in network locations called video serving offices, or VSOs, that provide service directly to consumers. Our TelcoTV solution integrates our core media processing modules, our BMR radio frequency, or RF, modulation, and local content insertion.
 
Personalized Video.  We now offer service providers our Media Services Platform (MSP2000), a carrier-grade, network-based platform designed to enable service providers to offer a range of personalized video applications such as linear, zoned, and ultimately addressable advertising, or time-shifted delivery of television programming. This enables service providers to offer high quality, differentiated video services in conjunction with new revenues, for example increasing ad revenues via more targeting.
 
IPTV over DOCSIS.  We offer an alternative solution to deliver IP video services to home computers, IP set top boxes and other IP consumer devices via standard DOCSIS 3.0 cable modems, which we market under the name vIP PASS. vIP PASS leverages the control plane of our Converged Video Exchange (CVEx) and Switched Digital Video, and our universal edge QAMs to offload video transport from the cable modem termination system. It is designed to provide cable MSOs an economical alternative for delivery of managed IP services, compared to an investment in additional cable modem termination system downstream channel capacity.
 
Platforms and Technologies
 
Our intelligent, network-based applications are built on an architecture that combines modular software with extensible and scalable hardware platforms. Our chassis-based hardware platforms offer field-upgradeable hardware, high-speed switching and routing with general-purpose processing capabilities. On top of this hardware, we layer software that provides rich media processing capabilities to support more services and more subscribers. Our hardware platforms have been engineered to comply with the Level-3 Network Equipment Building System standard, or NEBS, which is a set of telecommunications industry safety and environmental design guidelines for equipment in central offices. Our platforms consist of the following:
 
BigBand Broadband Multimedia-Service Router (BMR).  Our Broadband Multimedia-Service Router is a platform that is designed for the real-time processing and switching of video. The BMR platform is a protocol-neutral architecture that processes and switches MPEG, IP and Ethernet packets. We accelerate our software media processing functionality through digital signal processors (DSPs) and field programmable gate arrays (FPGAs), which also allow the BMR to be upgraded or reconfigured over time from remote locations. The BMR is a chassis-based design that provides carrier-class reliability and the flexibility to expand functionality and capacity as network requirements evolve by adding new network cards. The BMR also supports the transmission of digital and analog signals using radio frequency, or RF, interfaces to the physical cable network through QAM, quadrature phase shift keying and analog RF.
 
BigBand Broadband Edge QAM (BEQ).  Our Broadband Edge QAM platforms are used to convert digital video and data streams into quadrature amplitude modulated (QAM) RF streams that transport video and data across cable networks to subscriber set top boxes and cable modems. The services that are transported can include Switched Digital Video, Video on Demand, Broadcast Video and DOCSIS High Speed Data. Our QAM platforms


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are modular and employ digital signal processors, FPGAs and our own proprietary RF technology and algorithms. They are noted for their high signal quality and thermal efficiency.
 
BigBand Media Services Platform (MSP2000).  Our Media Services Platform is designed to manage large numbers of IP video streams combined with rich media processing to enable a range of personalized video applications such as linear, zoned, and addressable advertising. Our MSP2000 is a chassis-based platform that is designed to provide carrier-class reliability, scale and flexibility, including the ability to grow subscriber services and new applications over time with the addition of new hardware line cards. The BigBand MSP2000 is based on industry standards, open interfaces and established network protocols to simplify the platform integration into existing service provider networks.
 
Converged Video Exchange (CVEx).  Our CVEx platform is a control plane solution designed to manage large numbers of video sessions while optimizing network bandwidth utilization. The CVEx platform is a fundamental component of our Switched Digital Video deployments and offers Edge Resource Manager (ERM) functionality to share QAM capacity across different network services. In addition, CVEx serves as the control plane for our vIP Pass solution to deliver managed IP video services with high performance and cost effectively across video QAMs.
 
Software Applications
 
We have created a set of software modules that define the attributes and functionality of our solutions. Our software architecture allows these modules to be combined with one another in various configurations. Selected modular software components are described below:
 
  •  RateShaping.  Our RateShaping module combines digital signal processing and statistical multiplexing using complex algorithms to enable more video streams to be transported using the same amount of bandwidth. With RateShaping, we conserve bandwidth by intelligently allocating bandwidth to programs that require more, while reducing bandwidth to programs that require less. The diagram below depicts how our RateShaping module can take variable-rate video streams and adjust them to conform to a fixed amount of bandwidth capacity.
 
(DIGITAL VIDEO LOGO)
 
  •  RateClamping.  The amount of bandwidth required to deliver a digital video program varies based on the complexity of the picture being transmitted within that program. For applications where a constant bit rate is desired, such as Switched Digital Video, RateClamping converts variable input feeds into constant bit rate streams, with the output bandwidth determined according to the service provider’s priorities. RateClamping is frequently utilized to deliver services such as VOD, Switched Digital Video and network-based digital video recorders. The diagram below depicts how our RateClamping module can convert variable-rate video streams into constant-rate video streams.
 
(DIGITAL VIDEO LOGO)
 
  •  Splicing.  Our Splicing functionality allows an alternate program, usually an advertisement, to be seamlessly inserted into an existing video stream. Using our Splicing functionality, service providers


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  can perform hundreds of concurrent splices of different advertisements to multiple advertising zones, targeting different neighborhoods, in a single BMR. Our Splicing functionality is integral to our Broadcast Video solution.
 
  •  Program-level Redundancy.  Our Redundancy module inspects a video stream at the individual program level to detect errors and switches to the back-up source program without interrupting other programs on the same transport stream. By contrast, other competitive redundancy solutions do not detect problems with individual programs, which can result in a lower quality viewer experience.
 
  •  Metadata Processing.  Our applications process metadata such as the name of the program, plot summary and actors. This allows the service provider to actively control the type and amount of metadata that is provided to the subscriber’s television, thus enabling the service provider to populate program guide content and provide enhanced interactive TV functions.
 
Customers
 
We sell our products to cable MSOs and telecommunications companies worldwide, both directly and through resellers. In the U.S., our products are deployed by seven of the ten largest service providers. Our significant customers for 2009 were as follows:
 
         
Bright House Networks
  Cox Communications   Ssangyong
Cableone
  Delta NV   Sugys
Cablevision Systems
  Guangdong Tongke   Time Warner Cable
Charter Communications
  Knology, Inc.   Verizon
Comcast
  Multikabel NV   Videotron
 
A substantial majority of our sales have been to a limited number of large customers. However, our large customers have changed over time. Sales to our five largest customers represented 78%, 81% and 75%, respectively, of our net revenues for the years ended December 31, 2009, 2008 and 2007. In 2009, Charter Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues. In both 2008 and 2007, Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues. Although we are attempting to broaden our customer base by penetrating new markets and expanding internationally, we expect that for the foreseeable future, a limited number of large customers will continue to comprise a large percentage of our revenues. Net revenues from sales to customers outside of the U.S. represented 11%, 9% and 17%, respectively, of our net revenues for the years ended December 31, 2009, 2008 and 2007.
 
We sell our solutions to a number of our large customers pursuant to master purchase agreements. For example, we sell our TelcoTV and Management Software solutions, as well as customer support and training services, to Verizon pursuant to a master purchase agreement that is effective through December 31, 2010. Among other things, this agreement provides that our TelcoTV solution will be the exclusive edge modulation solution for Verizon, subject to performance against certain previously-negotiated service metrics. In addition, the agreement provides for pricing (including previously-negotiated annual price reductions), the terms of a five-year hardware and software warranty and the terms of the five-year service commitment. Likewise, we sell our Switched Digital Video and Broadcast Video solutions to Time Warner Cable and Charter Communications in conformance with master purchase agreements between the parties. While the agreements with Time Warner Cable and Charter Communications have lapsed, the parties have continued to operate in conformance with such master purchase agreements. Among other things, these agreements provide for pricing, a one-year hardware and software warranty, and service terms. In general, our master purchase agreements do not guarantee amounts of purchases by customers. Thus, our business is more dependent on the ordering patterns of our customers, rather than the terms of the master purchase agreements with these customers.
 
Backlog
 
We schedule production of our products based upon our backlog, open contracts, informal commitments from customers and sales projections. Our backlog consists of firm purchase orders by customers for delivery within the next six months. As of December 31, 2009, our backlog was $6.7 million, compared to $7.0 million as of


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December 31, 2008. Anticipated orders from customers may fail to materialize and delivery schedules may be deferred or cancelled for a number of reasons, including reductions in capital spending by service providers or changes in specific customer requirements. Because of the complexity of our customer acceptance and revenue recognition criteria, in addition to backlog, we have significant deferred revenues. As a result, our backlog alone is not necessarily indicative of revenues for any future periods.
 
Sales and Marketing
 
We sell our products in the U.S. primarily through our direct sales force and internationally through a combination of direct sales to service providers and sales through independent resellers. Our direct sales force, distributors and resellers are supported by our highly trained technical staff, which includes application engineers who work closely with service providers to develop technical proposals and design systems to optimize performance and economic benefits to potential customers. Our sales offices outside of the U.S. are located in China, Hong Kong and Korea. International resellers are generally responsible for importing our products and providing certain installation, technical support and other services to customers in their territory.
 
Our marketing organization develops strategies for product lines and market segments, and, in conjunction with our sales force, identifies the evolving technical and application needs of customers so that our product development resources can be deployed to meet anticipated product requirements. Our marketing organization is also responsible for setting price levels, forecasting demand and generally supporting the sales force, particularly at major accounts. We have programs in place to heighten industry awareness of BigBand Networks and our products, including participation in technical conferences, industry initiatives, publication of articles in industry journals and exhibitions at trade-shows.
 
Customer Service and Technical Support
 
We offer our customers a range of support offerings, including program management, training, installation and post-sales technical support. As a part of our pre-sales effort, our engineers design the implementation of our products in our customers’ environments to meet their performance and interoperability requirements. We also offer training classes to assist them in the management of our solutions.
 
Our technical support organization, offers support worldwide 24 hours a day, seven days a week. For our direct customers, we offer tiered customer support programs depending upon the service needs of our customers’ deployments. Using our standard support package, our customers receive telephone support and access to online technical information. Under our enhanced support package, in addition to the standard support offerings, our customers are entitled to software product upgrades and maintenance releases, advanced return materials authorization and on-site support, if necessary. Support contracts typically have a one-year term. For end customers purchasing through resellers, primary product support is provided by our resellers, with escalation support provided by us.
 
Research and Development
 
We focus our research and development efforts on developing new products and systems, and adding new features to existing products and systems. Our development strategy is to identify features, products and systems for both software and hardware that are, or are expected to be, needed by our customers. Our success in designing, developing, manufacturing and selling new or enhanced products depends on a variety of factors, including the identification of market demand for new products, product selection, timely implementation of product design and development, product performance, effective manufacturing and assembly processes and effective sales and marketing. Because our research and development efforts are complex, we may not be able to successfully develop new products, and any new products we develop may not achieve market acceptance.
 
Research and development expense was $46.4 million, $54.0 million and $51.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.


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Intellectual Property
 
As of December 31, 2009, we held 33 issued U.S. patents and had numerous U.S. patent applications pending. Our issued patents will expire between 2019 and 2025. Although we attempt to protect our intellectual property rights through patents, copyrights, trademarks, trade secrets, licensing arrangements and other measures, there is a risk that any patent, trademark, copyright or other intellectual property right owned by us may be invalidated, circumvented or challenged; that these intellectual property rights may not provide competitive advantages to us; and that any of our pending or future patent applications may not be issued with the scope of the claims sought by us, if at all. Others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own. In addition, effective patent, copyright, trademark, trade secret and other intellectual property protection may be unavailable or limited in certain foreign countries in which we do business currently or may do business in the future.
 
We generally enter into confidentiality or license agreements with our employees, consultants, vendors and customers, and generally limit access to and distribution of our confidential and proprietary information. Nevertheless, we cannot assure you that the steps taken by us will prevent misappropriation of our technology. In addition, from time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. For example, on June 5, 2007, we filed a lawsuit in federal court against Imagine Communications, Inc., alleging patent infringement. Any such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition.
 
From time to time, it may be necessary for us to enter into technology development or licensing agreements with third parties. Although many companies are often willing to enter into such technology development or licensing agreements, we may not be able to negotiate these agreements on terms acceptable to us, or at all. Our failure to enter into technology development or licensing agreements, when necessary, could limit our ability to develop and market new products and could cause our business to suffer.
 
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the networking industry have extensive patent portfolios. From time to time, third parties, including certain of these leading companies, have asserted and may assert exclusive patent, copyright, trademark and other intellectual property rights against us or our customers. Although these third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, operating results or financial condition to be materially adversely affected.
 
Manufacturing and Suppliers
 
We outsource the manufacturing of our products. Flextronics Corporation and Benchmark Electronics, Inc. each serves as a sole contract manufacturer for particular lines of our video products. Once our products are manufactured, they are sent to our facility in Southborough, Massachusetts. We believe that outsourcing our manufacturing enables us to conserve capital, better adjust manufacturing volumes to meet changes in demand and more quickly deliver products.
 
We submit purchase orders to our contract manufacturers that describe the type and quantities of our products to be manufactured, the delivery date and other delivery terms. Neither Benchmark nor Flextronics has a written contractual obligation to accept any purchase order that we submit.
 
We and our contract manufacturers purchase many of our components from a sole supplier or a limited group of suppliers. We do not have a written agreement with many of these component suppliers, and we do not require our contract manufacturers to have written agreements with these component manufacturers. As a result, we may not be able to obtain an adequate supply of components on a timely basis. Our reliance on sole or limited suppliers involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing, quality and timely delivery of components. We monitor the supply of the component parts and the availability of alternative sources. If our supply of any key component is disrupted, we may be unable to deliver


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our products to our customers on a timely basis, which could result in lost or delayed revenues, injury to our reputation, increased manufacturing costs and exposure to claims by our customers. Even if alternate suppliers are available, we may have difficulty identifying them in a timely manner, we may incur significant additional expense in changing suppliers, and we may experience difficulties or delays in the manufacturing of our products.
 
Our manufacturing operations consist primarily of supply chain managers, new product introduction and test engineering personnel. Our manufacturing organization designs, develops and implements complex test processes to help ensure the quality and reliability of our products. The manufacturing of our products is a complex process, and we may experience production problems or manufacturing delays in the future. Any difficulties we experience in managing relationships with our contract manufacturers, or any interruption in our own or our contract manufacturers operations, could impede our ability to meet our customers’ requirements and harm our business, operating results and financial condition.
 
Competition
 
The markets for our products are extremely competitive and are characterized by rapid technological change. The principal competitive factors in our markets include the following:
 
  •  product performance, features, interoperability and reliability;
 
  •  technological expertise;
 
  •  relationships with service providers;
 
  •  price of products and services and cost of ownership;
 
  •  sales and distribution capabilities;
 
  •  customer service and support;
 
  •  compliance with industry standards and certifications;
 
  •  size and financial stability of operations;
 
  •  breadth of product line;
 
  •  intellectual property portfolio;
 
  •  ability to scale manufacturing; and
 
  •  ability to interoperate with other vendors.
 
We believe we compete principally on the performance, features, interoperability and reliability of our products and our technological expertise. Several companies, including companies that are significantly larger and more established, such as Cisco Systems and Motorola, also compete in the markets we target. Many of these larger competitors have substantially broader product offerings and bundle their products or incorporate functionality into existing products in a manner that discourages users from purchasing our products or that may require us to add incremental features and functionality to differentiate our products or lower our prices. Furthermore, many of our competitors have greater financial, technical, marketing, distribution, customer support and other resources, as well as better name recognition and access to customers than we do.
 
Conditions in our markets could change rapidly and significantly as a result of technological advancements or continuing market consolidation. The development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Our competitors may introduce products that are less costly, provide superior performance or achieve greater market acceptance than our products. In addition, these larger competitors often have broader product lines and market focus, are in a better position to withstand any significant reduction in capital spending by customers in these markets, and will therefore not be as susceptible to downturns in a particular market. These competitive pressures are likely to continue to adversely impact our business. We may not be able to compete successfully in the future, and competition may harm our business.


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We believe standards bodies may commoditize the markets in which we compete and would require that we add incremental features and functions to differentiate our products. If the product design or technology of our competitors were to become an industry standard, our business could be seriously harmed.
 
Employees
 
As of December 31, 2009, we had employees as follows:
 
         
By function:
       
Servicing and manufacturing
    90  
Research and development
    262  
Sales and marketing
    70  
General and administrative
    62  
         
Total employees
    484  
         
By location:
       
United States
    235  
Israel
    170  
Rest of world
    79  
         
Total employees
    484  
         
 
We also engage a number of temporary personnel and consultants. None of our employees are represented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages, and we consider our relations with our employees to be good. Our future success will depend upon our ability to attract and retain qualified personnel. Competition for qualified personnel remains strong, and we may not be successful in retaining our key employees or attracting skilled personnel.
 
Financial Information About Segments and Geographic Areas
 
For information about revenues and long-lived assets by geographical region, see “Notes to Consolidated Financial Statements, Note 9 — Segment Reporting” included in Part II, Item 8 of this Annual Report on Form 10-K. We report as a single reporting segment.
 
Additional Information
 
We file registration statements, periodic and current reports, proxy statements, and other materials with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Office of Public Reference at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings.
 
Our Internet address is http://www.bigbandnet.com. We make available, free of charge, through the Investor Relations section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The contents of our website are not incorporated into, or otherwise to be regarded as part of this Form 10-K.


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Item 1A.   RISK FACTORS
 
An investment in our equity securities involves significant risks. Any of these risks, as well as other risks not currently known to us or that we currently consider immaterial, could have a material adverse effect on our business, prospects, financial condition or operating results. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.
 
We depend on cable multiple system operators (MSOs) and telecommunications companies adopting advanced technologies for substantially all of our net revenues, and any decrease or delay in capital spending for these advanced technologies would harm our operating results, financial condition and cash flows.
 
Almost all of our sales depend on cable MSOs and telecommunications companies adopting advanced technologies, and we expect these sales to continue to constitute a significant majority of our sales for the foreseeable future. Demand for our products will depend on the magnitude and timing of capital spending by service providers on advanced technologies for constructing and upgrading their network infrastructure, and a reduction or delay in this spending could have a material adverse effect on our business.
 
The capital spending patterns of our existing and potential customers depend on a variety of factors, including:
 
  •  annual budget cycles;
 
  •  overall consumer demand for video services and the acceptance of newly introduced services;
 
  •  competitive pressures, including pricing pressures;
 
  •  changes in general economic conditions due to fluctuations in the equity and credit markets or otherwise;
 
  •  the impact of industry consolidation;
 
  •  the strategic focus of our customers and potential customers;
 
  •  technology adoption cycles and network architectures of service providers, and evolving industry standards that may impact them;
 
  •  the status of federal, local and foreign government regulation of telecommunications and television broadcasting, and regulatory approvals that our customers need to obtain;
 
  •  discretionary customer spending patterns;
 
  •  bankruptcies and financial restructurings within the industry; and
 
  •  work stoppages or other labor- or labor market-related issues that may impact the timing of orders and revenues from our customers.
 
In 2009, we saw reduced capital spending by our customers. Any continued slowdown or delay in the capital spending by service providers as a result of any of the above factors would likely have a significant adverse impact on our quarterly revenue and profitability levels.
 
Our operating results are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors or our guidance, causing our stock price to decline.
 
Our operating results have fluctuated in the past and are likely to continue to fluctuate, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside of our control. These factors include:
 
  •  the level and timing of capital spending by our customers;
 
  •  the timing, mix and amount of orders, especially from significant customers;
 
  •  the level of our deferred revenue balances;


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  •  changes in market demand for our products;
 
  •  our mix of products sold;
 
  •  the mix of software and hardware products sold;
 
  •  our unpredictable and lengthy sales cycles, which typically range from six to 18 months;
 
  •  the timing of revenue recognition on sales arrangements, which may include multiple deliverables and result in delays in recognizing revenue;
 
  •  our ability to design, install and receive customer acceptance of our products;
 
  •  materially different acceptance criteria in key customers’ agreements, which can result in large amounts of revenue being recognized, or deferred, as the different acceptance criteria are applied to large orders;
 
  •  new product introductions by our competitors;
 
  •  market acceptance of new or existing products offered by us or our customers;
 
  •  competitive market conditions, including pricing actions by our competitors;
 
  •  our ability to complete complex development of our software and hardware on a timely basis;
 
  •  unexpected changes in our operating expenses;
 
  •  the impact of new accounting, income tax and disclosure rules;
 
  •  the cost and availability of components used in our products;
 
  •  the potential loss of key manufacturer and supplier relationships; and
 
  •  changes in domestic and international regulatory environments.
 
We establish our expenditure levels for product development and other operating expenses based on projected sales levels, and our expenses are relatively fixed in the short term. Accordingly, variations in the timing of our sales can cause significant fluctuations in our operating results. As a result of all these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors or our guidance, which would likely cause the trading price of our common stock to decline substantially.
 
Our customer base is highly concentrated, and there are a limited number of potential customers for our products. The loss of any of our key customers would likely reduce our revenues significantly.
 
Historically, a large portion of our sales have been to a limited number of large customers. Our five largest customers accounted for approximately 78% of our net revenues for the year ended December 31, 2009, compared to 81% for the year ended December 31, 2008. Charter Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues for the year ended December 31, 2009. Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues for the year ended December 31, 2008. We believe that for the foreseeable future our net revenues will be concentrated in a limited number of large customers.
 
We anticipate that a large portion of our revenues will continue to depend on sales to a limited number of customers, and we do not have contracts or other agreements that guarantee continued sales to these or any other customers. Consequently, reduced capital expenditures by any one of our larger customers (whether caused by adverse financial conditions, more cautious spending patterns due to the ongoing economic uncertainty or other factors) is likely to have a material negative impact on our operating results. In addition, as the consolidation of ownership of cable MSOs and telecommunications companies continues, we may lose existing customers and have access to a shrinking pool of potential customers. We expect to see continuing industry consolidation due to the significant capital costs of constructing video, voice and data networks and for other reasons. Further business combinations may occur in our customer base, which will likely result in our customers gaining increased purchasing leverage over us. This may reduce the selling prices of our products and services and as a result may harm our business and financial results. Many of our customers desire to have two sources for the products we sell to


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them. As a result, our future revenue opportunities could be limited, and our profitability could be adversely impacted. The loss of, or reduction in orders from, any of our key customers would significantly reduce our revenues and have a material adverse impact on our business, operating results and financial condition.
 
If revenues forecasted for a particular period are not realized in such period due to the lengthy, complex and unpredictable sales cycles of our products, our operating results for that or subsequent periods will be harmed.
 
The sales cycles of our products are typically lengthy, complex and unpredictable and usually involve:
 
  •  a significant technical evaluation period;
 
  •  a significant commitment of capital and other resources by service providers;
 
  •  substantial time required to engineer the deployment of new technologies for new video services;
 
  •  substantial testing and acceptance of new technologies that affect key operations; and
 
  •  substantial test marketing of new services with subscribers.
 
For these and other reasons, our sales cycles generally have been between six and 18 months, but can last longer. If orders forecasted for a specific customer for a particular quarter do not occur in that quarter, our operating results for that quarter or subsequent quarters could be substantially lower than anticipated. Our quarterly and annual results may fluctuate significantly due to revenue recognition rules and the timing of the receipt of customer orders.
 
Additionally, we derive a large portion of our net revenues from sales that include the network design, installation and integration of equipment, including equipment acquired from third parties to be integrated with our products to the specifications of our customers. We base our revenue forecasts on the estimated timing to complete the network design, installation and integration of our customer projects and customer acceptance of those products. The systems of our customers are both diverse and complex, and our ability to configure, test and integrate our systems with other elements of our customers’ networks depends on technologies provided to our customers by third parties. As a result, the timing of our revenue related to the implementation of our solutions in these complex networks is difficult to predict and could result in lower than expected revenue in any particular quarter. Similarly, our ability to deploy our equipment in a timely fashion can be subject to a number of other risks, including the availability of skilled engineering and technical personnel, the availability of equipment produced by third parties and our customers’ need to obtain regulatory approvals.
 
The markets in which we operate are intensely competitive, many of our competitors are larger, more established and better capitalized than we are, and some of our competitors have integrated products performing functions similar to our products into their existing network infrastructure offerings, and consequently our existing and potential customers may decide against using our products in their networks, which would harm our business.
 
The markets for selling network-based hardware and software products to service providers are extremely competitive and have been characterized by rapid technological change. We compete broadly with system suppliers including ARRIS Group, Cisco Systems, Harmonic, Motorola, SeaChange International and a number of smaller companies. Many of our competitors are substantially larger and have greater financial, technical, marketing and other resources than we have. Given their capital resources, long-standing relationships with service providers worldwide, and broader product lines, many of these large organizations are in a better position to withstand any significant reduction in capital spending by customers in these markets. If we are unable to overcome these resource advantages, our competitive position would suffer.
 
In addition, other providers of network-based hardware and software products offer functionality aimed at solving similar problems addressed by our products. For example, several vendors have announced products designed to compete with our Switched Digital Video solution. The inclusion of functionality perceived to be similar to our product offerings in our competitors’ products that already have been accepted as necessary components of network architecture may have an adverse effect on our ability to market and sell our products. In addition, our customers’ other vendors that can provide a broader product offering may be able to offer pricing or other concessions that we are not able to match because we currently offer a more modest suite of products and have


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fewer resources. If our existing or potential customers are reluctant to add network infrastructure from new vendors or otherwise decide to work with their other existing vendors, our business, operating results and financial condition will be adversely affected.
 
In recent years, we have seen consolidation among our competitors, such as Cisco’s acquisition of Scientific Atlanta, Motorola’s acquisition of Terayon, and purchases of Video on Demand, or VOD, solutions by each of ARRIS Group, Cisco, Harmonic and Motorola. In addition, some of our competitors have entered into strategic relationships with one another to offer a more comprehensive solution than would be available individually. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in the evolving industry for video by increasing the amount of commercial and technical integration of their video products. Due to our comparatively small size and comparatively narrow product offerings, our ability to compete will depend on our ability to partner with companies to offer a more complete overall solution. If we fail to do so, our competitive position will be harmed and our sales will likely suffer. These combined companies may offer more compelling product offerings and may be able to offer greater pricing flexibility, making it more difficult for us to compete while sustaining acceptable gross margins. Finally, continued industry consolidation may impact customers’ perceptions of the viability of smaller companies, which may affect their willingness to purchase products from us. These competitive pressures could harm our business, operating results and financial condition.
 
We have been unable to achieve sustained profitability, which could harm the price of our stock.
 
Historically, we have experienced significant operating losses and we were not profitable in the years ended December 31, 2007 and 2009. If we fail to achieve or sustain profitability in the future, it will harm our long-term business and we may not meet the expectations of the investment community, which would have a material adverse impact on our stock price.
 
We may not accurately anticipate the timing of the market needs for our products and develop such products at the appropriate times at significant research and development expense, or we may not gain market acceptance of our several emerging video services and/or adoption of new network architectures and technologies, any of which could harm our operating results and financial condition.
 
Accurately forecasting and meeting our customers’ requirements is critical to the success of our business. Forecasting to meet customers’ needs is particularly difficult for newer products and products under development. Our ability to meet customer demand depends on our ability to configure our solutions to the complex architectures that our customers have developed, the availability of components and other materials and the ability of our contract manufacturers to scale their production of our products. Our ability to meet customer requirements depends on our ability to obtain sufficient volumes of required components and materials in a timely fashion. If we fail to meet customers’ supply expectations, our net revenues will be adversely affected, and we will likely lose business. In addition, our priorities for future product development are based on how we expect the market for video services to develop in the U.S. and in international markets.
 
Future demand for our products will depend significantly on the growing market acceptance of several emerging video services including HDTV, addressable advertising, video delivered over telecommunications company networks and video delivered over Internet Protocol by cable MSOs. The effective delivery of these services will depend on service providers developing and building new network architectures to deliver them. If the introduction or adoption of these services or the deployment of these networks is not as widespread or as rapid as we or our customers expect, our revenue opportunities will be limited.
 
Our product development efforts require substantial research and development expense, as we develop new technology, including BigBand MSP2000 and technology primarily related to the delivery of video over IP networks. In addition, as many of our products are new solutions, there is a risk of delays in delivery of these solutions. Our research and development expense was $46.4 million for 2009, and there can be no assurance that we will achieve an acceptable return on our research and development efforts, and no assurance that we will be able to deliver our solutions in time to achieve market acceptance.
 
Additionally, our customers are adopting new technologies, standards and formats. In particular, service providers are transitioning from delivering video via radio frequency, which has historically represented a large


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majority of our revenues, to delivering video over IP. While we are in the process of developing products based this and other new formats in order to remain competitive, we do not have such products at this time and cannot be certain when, if at all, we will have products in support of such new formats.
 
Our ability to grow will depend significantly on our delivery of products that help enable telecommunications companies to provide video services. If the demand for video services from telecommunications companies does not materialize or if these service providers find alternative methods of delivering video services, future sales of our Video products will suffer.
 
Prior to 2006, our sales were primarily to cable MSOs. Since 2006, we have generated significant revenues from telecommunications companies, though our revenues from these customers declined for 2009 compared to 2008. This decline was primarily attributable to our largest Telco customer slowing the purchase of our solutions. Our ability to grow will depend on our selling video products to telecommunications companies. Although a number of our existing products are being deployed in telecom networks, we will need to devote considerable resources to obtain orders, qualify our products and hire knowledgeable personnel to address telecommunications company customers, each of which will require significant time and financial commitment. These efforts may not be successful in the near future, or at all. If technological advancements allow these telecommunications companies to provide video services without upgrading their current system infrastructure or provide them a more cost-effective method of delivering video services than our products, projected sales of our Video products will suffer. Even if these providers choose our Video solutions, they may not be successful in marketing video services to their customers, in which case additional sales of our products would likely be limited.
 
Selling successfully to telecommunication companies will be a significant challenge for us. Several of our largest competitors have mature customer relationships with many of the largest telecommunications companies, while we have limited recent experience with sales and marketing efforts designed to reach these potential customers. In addition, telecommunications companies face specific network architecture and legacy technology issues that we have only limited expertise in addressing. If we fail to penetrate the telecommunications market successfully, our growth in revenues and our operating results would likely be adversely impacted.
 
We anticipate that our gross margins will fluctuate with changes in our product mix and expected decreases in the average selling prices of our hardware and software products, which will adversely impact our operating results.
 
In 2009, we experienced some decline in our product gross margins. We expect the decline in gross margins to continue in 2010. It is unlikely we will be able to maintain these high margins in future periods. Our industry has historically experienced a decrease in average selling prices. We anticipate that the average selling prices of our products will continue to decrease in the future in response to competitive pricing pressures, increased sales discounts and new product introductions by our competitors. We may experience substantial decreases in future operating results due to a decrease of our average selling prices. For example, our master agreement with Verizon provides for contractually-negotiated annual price reductions. Additionally, our failure to develop and introduce new products on a timely basis would likely contribute to a decline in our gross margins, which could have a material adverse effect on our operating results and cause the price of our common stock to decline. We also anticipate that our gross margins will fluctuate from period to period as a result of the mix of products we sell in any given period. If our sales of lower margin products significantly expand in future quarterly periods, our overall gross margin levels and operating results would be adversely impacted.
 
Lower deferred revenue balances will make future period results less predictable.
 
Historically, we have had relatively high deferred revenue balances at quarter end, which has provided us with some measure of predictability for future periods. As of December 31, 2009, our deferred revenue balance was lower than both December 31, 2008 and December 31, 2007. This lower deferred revenue balance makes our quarterly revenue more dependent on orders both received and shipped within the same quarter, and therefore less predictable. This lack of deferred revenues could cause additional revenue volatility and harm our stock price.


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Continued weak general economic conditions may adversely affect our financial condition and results of operations and make our future business more difficult to forecast and manage.
 
Our business is sensitive to changes in general economic conditions, both in the U.S. and globally. Due to the continued tight credit markets and concerns regarding the availability of credit, our current or potential customers may delay or reduce purchases of our products, which would adversely affect our revenues and therefore harm our business and results of operations.
 
More generally, we are unable to predict how deep the current economic uncertainty will last. There can be no assurances that government responses to the recession will restore confidence in the U.S. and global economies. We expect our business to be adversely impacted by any significant or prolonged weakness in the U.S. or global economies as our customers’ capital spending is expected to be reduced during an economic downturn. The uncertainty regarding the U.S. and global economies also has made it more difficult for us to forecast and manage our business.
 
Our efforts to develop additional channels to market and sell our products internationally may not succeed.
 
Our video solutions traditionally have been sold directly to large cable MSOs with recent sales directly to telecommunications companies. To date, we have not focused on smaller service providers and have had only limited access to service providers in certain international markets, including Asia and Europe. Although we intend to establish strategic relationships with leading distributors worldwide in an attempt to reach new customers, we may not succeed in establishing these relationships. Even if we do establish these relationships, the distributors may not succeed in marketing our products to their customers. Some of our competitors have established long-standing relationships with cable MSOs and telecommunications companies that may limit our and our distributors’ ability to sell our products to those customers. Even if we were to sell our products to those customers, it would likely not be based on long-term commitments, and those customers would be able to terminate their relationships with us at any time without significant penalties.
 
International sales represented $15.7 million of our net revenues for 2009 compared to $15.9 million for 2008. Our international sales depend on our development of indirect sales channels in Europe and Asia through distributor and reseller arrangements with third parties. However, we may not be able to successfully enter into additional reseller and/or distribution agreements and/or may not be able to successfully manage our product sales channels. In addition, many of our resellers also sell products from other vendors that compete with our products and may choose to focus on products of those vendors. Additionally, our ability to utilize an indirect sales model in these international markets will depend on our ability to qualify and train those resellers to perform product installations and to provide customer support. If we fail to develop and cultivate relationships with significant resellers, or if these resellers do not succeed in their sales efforts (whether because they are unable to provide support or otherwise), we may be unable to grow or sustain our revenue in international markets.
 
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial results and cash flows.
 
Because a substantial portion of our employee base is located in Israel, we are exposed to fluctuations in currency exchange rates between the U.S. dollar and the Israeli New Shekel. These fluctuations could have a material adverse impact on our financial results and cash flows. A decrease in the value of the U.S. dollar relative to foreign currencies could increase our operating expenses and the cost of raw materials to the extent we must purchase components or pay employees in foreign currencies.
 
Currently, we hedge a portion of our anticipated future expenses and certain assets and liabilities denominated in the Israeli New Shekel. The hedging activities we undertake are intended to partially offset the impact of currency fluctuations. As our hedging program is relatively short-term in nature, a material long-term change in the value of the U.S. dollar versus the Israeli New Shekel could increase our operating expenses in the future.


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Our products must interoperate with many software applications and hardware found in our customers’ networks. If we are unable to ensure that our products interoperate properly, our business would be harmed.
 
Our products must interoperate with our customers’ existing networks, which often have varied and complex specifications, utilize multiple protocol standards, software applications and products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our products interoperate properly with these existing networks. To meet these requirements, we must undertake development efforts that require substantial capital investment and employee resources. We may not accomplish these development efforts quickly or cost-effectively, if at all. For example, our products currently interoperate with set-top boxes marketed by vendors such as Cisco Systems and Motorola and with VOD servers marketed by ARRIS Group and SeaChange. If we fail to maintain compatibility with these set-top boxes, VOD servers or other software or equipment found in our customers’ existing networks, we may face substantially reduced demand for our products, which would adversely affect our business, operating results and financial condition.
 
We have entered into interoperability arrangements with a number of equipment and software vendors for the use or integration of their technology with our products. In these cases, the arrangements give us access to and enable interoperability with various products in the digital video market that we do not otherwise offer. If these relationships fail, we will have to devote substantially more resources to the development of alternative products and the support of our products, and our efforts may not be as effective as the combined solutions with our current partners. In many cases, these parties are either companies with which we compete directly in other areas, such as Motorola, or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of these customers. A number of our competitors have stronger relationships with some of our existing and potential partners and, as a result, our ability to successfully partner with these companies may be harmed. Our failure to establish or maintain key relationships with third party equipment and software vendors may harm our ability to successfully sell and market our products. We are currently investing, and plan to continue to invest, significant resources to develop these relationships. Our operating results could be adversely affected if these efforts do not generate the revenues necessary to offset this investment.
 
In addition, if we find errors in the existing software or defects in the hardware used in our customers’ networks or problematic network configurations or settings, as we have in the past, we may have to modify our software or hardware so that our products will interoperate with our customers’ networks. This could cause longer installation times for our products and could cause order cancellations, either of which would adversely affect our business, operating results and financial condition.
 
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services would have a material adverse effect on our sales and results of operations.
 
Once our products are deployed within our customers’ networks, our customers depend on our support organization to resolve any issues relating to our products. If we or our channel partners do not effectively assist our customers in deploying our products, or succeed in helping our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell our products to existing customers would be adversely affected and our reputation with potential customers could be harmed. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. Our failure to maintain high-quality support and services would have a material adverse effect on our business, operating results and financial condition.
 
If we fail to comply with new laws and regulations, or changing interpretations of existing laws or regulations, our future revenues could be adversely affected.
 
Our products are subject to various legal and regulatory requirements and changes. For example, effective June 12, 2009, federal law required that television broadcast stations stop broadcasting in analog format and broadcast only in digital format. This change may have accelerated the timing of sales of our digital products, and consequently the revenue associated with our broadcast solutions may not continue at recent levels, which could


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disappoint our investors causing our stock price to fall. These and other similar implementations of laws and interpretations of existing regulations could cause our customers to forgo or change the timing of spending on new technology rollouts, such as switched digital video, which could make our results more difficult to predict, or harm our revenues.
 
Additionally, governments in the U.S. and other countries have adopted laws and regulations regarding privacy and advertising that could impact important aspects of our business. In particular, governments are considering new limits or requirements with respect to our customers’ collection, use, storage and disclosure of personal information for marketing purposes. Any legislation enacted or regulation issued could dampen the growth and acceptance of addressable advertising which is enabled by our products. If the use of our products to increase advertising revenue is limited or becomes unlawful, our business, results of operations and financial condition would be harmed.
 
Our expansion of international operations or reliance on operations of contract manufacturers or developers may not succeed.
 
As of December 31, 2009, approximately 79% of our research and development headcount is located outside the U.S., primarily in Israel and increasingly in China. Managing research and development operations in numerous locations requires substantial management oversight. If we are unable to expand our international operations successfully and in a timely manner, our business, operating results and financial condition may be harmed. Such expansion may be more difficult or take longer than we anticipate, and we may not be able to successfully market, sell, deliver and support our products internationally.
 
Our international operations, and the international operations of our contract manufacturers and our outsourced development contractors, are subject to a number of risks, including:
 
  •  continued uncertainty in the global economy;
 
  •  fluctuations in the value of local currencies in the markets we are attempting to penetrate may adversely affect the price competitiveness of our products;
 
  •  fluctuations in currency exchange rates, primarily fluctuations in the Israeli New Shekel, may have an adverse effect on our operating costs;
 
  •  political and economic instability;
 
  •  unpredictable changes in foreign government regulations and telecommunications standards;
 
  •  legal, cultural and language differences in the conduct of business;
 
  •  import and export license requirements, tariffs, taxes and other trade barriers;
 
  •  potentially adverse tax consequences;
 
  •  the burden of complying with a wide variety of foreign laws, treaties and technical standards;
 
  •  acts of war or terrorism and insurrections;
 
  •  difficulty in staffing and managing foreign operations; and
 
  •  changes in economic policies by foreign governments.
 
The effects of any of the risks described above could reduce our future revenues or increase our costs from our international operations.
 
Regional instability in Israel may adversely affect business conditions and may disrupt our operations and negatively affect our operating results.
 
A substantial portion of our research and development operations and our contract manufacturing occurs in Israel. As of December 31, 2009, we had 170 full-time employees located in Israel. We also have customer service, marketing and general and administrative employees at this facility. Accordingly, we are directly influenced by the political, economic and military conditions affecting Israel, and any major hostilities, such as the hostilities in


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Lebanon in 2006 and in Gaza in 2008, involving Israel or the interruption or curtailment of trade between Israel and its trading partners could significantly harm our business. The September 2001 terrorist attacks, the ongoing U.S. war on terrorism and the history of terrorist attacks and hostilities within Israel have heightened the risks of conducting business in Israel. In addition, Israel and companies doing business with Israel have, in the past, been the subject of an economic boycott. Israel has also been and is subject to civil unrest and terrorist activity, with varying levels of severity, since September 2000. Security and political conditions may have an adverse impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and make it more difficult for us to retain or recruit qualified personnel in Israel.
 
In addition, most of our employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and several were called for active military duty in connection with the hostilities in Lebanon in 2006 and in Gaza in 2008. Should hostilities in the region escalate again, some of our employees would likely be called to active military duty, possibly resulting in interruptions in our sales and development efforts and other impacts on our business and operations, which we cannot currently assess.
 
We depend on a limited number of third parties to provide key components of, and to provide manufacturing and assembly services with respect to, our products.
 
We and our contract manufacturers obtain many components necessary for the manufacture or integration of our products from a sole supplier or a limited group of suppliers. We or our contract manufacturers do not always have long-term agreements in place with such suppliers. As an example, we do not have a long-term purchase agreement in place with PowerOne, the sole supplier of power supplies for our products. Our direct and indirect reliance on sole or limited suppliers involves several risks, including the inability to obtain an adequate supply of required components, and reduced control over pricing, quality and timely delivery of components. Our ability to deliver our products on a timely basis to our customers would be materially adversely impacted if we or our contract manufacturers needed to find alternative replacements for (as examples) the chassis, chipsets, central processing units or power supplies that we use in our products. Significant time and effort would be required to locate new vendors for these alternative components, if alternatives are even available. Moreover, the lead times required by the suppliers of some components are lengthy and preclude rapid changes in quantity requirements and delivery schedules. Even as we increase our use of standardized components, we may experience supply chain issues, particularly as a result of market volatility. Such volatility could lead suppliers to decrease inventory, which in turn would lead to increased manufacturing lead time for us. In addition, increased demand by third parties for the components we use in our products (for example, Field Programmable Gate Arrays or other semiconductor technology) may lead to decreased availability and higher prices for those components from our suppliers, since we carry little inventory of our products and product components. As a result, we may not be able to secure enough components at reasonable prices or of acceptable quality to build products in a timely manner, which would impact our ability to deliver products to our customers, and our business, operating results and financial condition would be adversely affected.
 
For manufacturing and assembly, we currently rely exclusively on a number of suppliers including Flextronics or Benchmark, depending on the product, to assemble our products, manage our supply chain and negotiate component costs for our solutions. Our reliance on these contract manufacturers reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationships with these contract manufacturers effectively, or if these contract manufacturers experience delays (including delays in their ability to purchase components, as noted above), disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. If these contract manufacturers are unable to negotiate with their suppliers for reduced component costs, our operating results would be harmed. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming. If we are required to change contract manufacturers, we may lose net revenues, incur increased costs and damage our customer relationships.


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We must manage our business effectively even if our infrastructure, management and resources might be strained due to our expense reduction efforts and recent officer departures.
 
In the past several years, we have undertaken several reductions in force, experienced a number of changes in our executive management and other cost reduction measures. Effectively managing our business with reduced headcount and expenses in some areas will likely place increased strain on our resources. For example, we may need to hire additional development and customer support personnel. In addition, we may need to expand and otherwise improve our internal systems, including our management information systems, customer relationship and support systems, and operating, administrative and financial systems and controls. These efforts may require us to make significant capital expenditures or incur significant expenses, and divert the attention of management, sales, support and finance personnel from our core business operations, which may adversely affect our financial performance in future periods. Moreover, to the extent we grow in the future, such growth will result in increased responsibilities for our management personnel. Managing any future growth will require substantial resources that we may not have or otherwise be able to obtain. In March 2010, we announced the departures of three officers, including our chief operating officer and our chief financial officer. Although we announced the appointment of a new chief financial officer, we are uncertain when or if we will replace our chief operating officer and his duties will initially be performed by other officers. We have taken actions to reduce the risk of any disruption in our business due to these departures including retaining our departing chief operating officer and chief financial officer as consultants for a period of time. However, the departure of these officers will place additional strain on our existing team and there can be no assurance that the departure of these officers will not disrupt our business operations, customer relationships or other matters.
 
Our failure to adequately protect our intellectual property and proprietary rights, or to secure such rights on reasonable terms, may adversely affect us.
 
We hold numerous issued U.S. patents and have a number of patent applications pending in the U.S. and foreign jurisdictions. Although we attempt to protect our intellectual property rights through patents, copyrights, trademarks, licensing arrangements, maintaining certain technology as trade secrets and other measures, we cannot be sure that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us or that any of our pending or future patent applications will be issued with the scope of the claims sought by us, if at all. Despite our efforts, other competitors may be able to develop technologies that are similar or superior to our technology, duplicate our technology to the extent it is not protected, or design around the patents that we own. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future.
 
The steps that we have taken may not prevent misappropriation of our technology. In addition, to prevent misappropriation we may need to take legal action to enforce our patents and other intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. For example, on June 5, 2007, we filed a lawsuit in federal court against Imagine Communications, Inc., alleging patent infringement. This and other potential intellectual property litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition.
 
In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensing agreements with third parties whether to avoid infringement or because we believe a specific functionality is necessary for a successful product launch. These third parties may be willing to enter into technology development or licensing agreements only on a costly royalty basis or on terms unacceptable to us, or not at all. Our failure to enter into technology development or licensing agreements on reasonable terms, when necessary, could limit our ability to develop and market new products and could cause our business to suffer. For example, we could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely affect our business, operating results and financial condition.


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We may face intellectual property infringement claims from third parties.
 
Our industry is characterized by the existence of an extensive number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted and may assert patent, copyright, trademark and other intellectual property rights against us or our customers. Our suppliers and customers may have similar claims asserted against them. We have agreed to indemnify some of our suppliers and customers for alleged patent infringement. The scope of this indemnity varies, but, in some instances, includes indemnification for damages and expenses including reasonable attorneys’ fees. Any future litigation, regardless of its outcome, could result in substantial expense and significant diversion of the efforts of our management and technical personnel. An adverse determination in any such proceeding could subject us to significant liabilities, temporary or permanent injunctions or require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, necessary licenses may not be available on satisfactory terms, or at all.
 
Our use of open source and third-party software could impose limitations on our ability to commercialize our products.
 
We incorporate open source software into our products, including certain open source code which is governed by the GNU General Public License, Lesser GNU General Public License and Common Development and Distribution License. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, make generally available, in source code form, proprietary code that links to certain open source modules, re-engineer our products, discontinue the sale of our products if re-engineering could not be accomplished on a cost-effective and timely basis, or become subject to other consequences, any of which could adversely affect our business, operating results and financial condition.
 
Our business is subject to the risks of warranty returns, product liability and product defects.
 
Products like ours are very complex and can frequently contain undetected errors or failures, especially when first introduced or when new versions are released. Despite testing, errors may occur. Product errors could affect the performance of our products, delay the development or release of new products or new versions of products, adversely affect our reputation and our customers’ willingness to buy products from us and adversely affect market acceptance or perception of our products. Any such errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the products, subject us to liability for damages and divert our resources from other tasks, any one of which could materially adversely affect our business, results of operations and financial condition. Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not caused by our products, could result in the delay or loss of market acceptance of our products, and therefore delay our ability to recognize revenue from sales, and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems could harm our business, operating results and financial condition.
 
Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the U.S. or other countries. The sale and support of our products also entails the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.


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We may engage in future acquisitions that dilute the ownership interests of our stockholders, cause us to use a significant portion of our cash, incur debt or assume contingent liabilities.
 
As part of our business strategy, from time to time, we review potential acquisitions of other businesses, and we may acquire businesses, products, or technologies in the future. In the event of any future acquisitions, we could:
 
  •  issue equity securities which would dilute our current stockholders’ percentage ownership;
 
  •  incur substantial debt;
 
  •  assume contingent liabilities; or
 
  •  spend significant cash.
 
These actions could harm our business, operating results and financial condition, or the price of our common stock. Moreover, even if we do obtain benefits from acquisitions in the form of increased sales and earnings, there may be a delay between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. This is particularly relevant in cases where it is necessary to integrate new types of technology into our existing portfolio and where new types of products may be targeted for potential customers with which we do not have pre-existing relationships. Acquisitions and investment activities also entail numerous risks, including:
 
  •  difficulties in the assimilation of acquired operations, technologies and/or products;
 
  •  unanticipated acquisition transaction costs;
 
  •  the diversion of management’s attention from other business;
 
  •  adverse effects on existing business relationships with suppliers and customers;
 
  •  risks associated with entering markets in which we have no or limited prior experience;
 
  •  the potential loss of key employees of acquired businesses;
 
  •  difficulties in the assimilation of different corporate cultures and practices; and
 
  •  substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.
 
We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could have a material adverse effect on our business, operating results and financial condition.
 
Negative conditions in the global credit markets may impair the value or reduce the liquidity of a portion of our investment portfolio.
 
As of December 31, 2009, we had $24.9 million in cash and cash equivalents and $147.0 million in investments in marketable debt securities. Historically, we have invested these amounts primarily in government agency debt securities, corporate debt securities, commercial paper, auction rate securities, money market funds and taxable municipal debt securities meeting certain criteria. We currently hold no mortgaged-backed or auction rate securities. However, some of our investments are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by the ongoing uncertainty in the U.S. and global credit markets that have affected various sectors of the financial markets and caused global credit and liquidity issues. In the future, these market risks associated with our investment portfolio may harm the results of our operations, liquidity and financial condition.
 
Although we believe we have chosen a more cautious portfolio designed to preserve our existing cash position, it may not adequately protect the value of our investments. Furthermore, this more cautious portfolio is unlikely to provide us with any significant interest income in the near term.


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If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our operating results and financial condition may be harmed.
 
Our ability to successfully implement our business plan and comply with regulations applicable to being a public reporting company requires an effective planning and management process. We expect that we will need to continue to improve existing, and implement new, operational and financial systems, procedures and controls to manage our business effectively in the future. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to accurately forecast sales demand, manage our supply chain and record and report financial and management information on a timely and accurate basis. In addition, the successful enhancement of our operational and financial systems, procedures and controls will result in higher general and administrative costs in future periods, and may adversely impact our operating results and financial condition.
 
While we believe that we currently have proper and effective internal control over financial reporting, we must continue to comply with laws requiring us to evaluate those internal controls.
 
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions of the act require, among other things, that we evaluate the effectiveness of our internal control over financial reporting and disclosure controls and procedures. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help produce accurate financial statements on a timely basis is a costly and time-consuming effort. For example, our accounting for income taxes requires considerable, specific knowledge of various tax acts, both foreign and domestic, and also involves several subjective judgments that could lead to fluctuations in our results of operations should some or all events not occur as anticipated. We incur significant costs and demands upon management as a result of complying with these laws and regulations affecting us as a public company. If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.
 
We are subject to import/export controls that could subject us to liability or impair our ability to compete in international markets.
 
Our products are subject to U.S. export controls and may be exported outside the U.S. only with the required level of export license or through an export license exception, in most cases because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers internationally.
 
In addition, we may be subject to customs duties and export quotas, which could have a significant impact on our revenue and profitability. While we have not yet encountered significant regulatory difficulties in connection with the sales of our products in international markets, the future imposition of significant customs duties or export quotas could have a material adverse effect on our business.
 
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as computer viruses or terrorism.
 
Our corporate headquarters is located in the San Francisco Bay area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could have a material adverse impact on our business, operating results and financial condition. In addition, our computer servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism or war or public health outbreaks could cause disruptions in our or our customers’ business or the


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economy as a whole. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our business, operating results and financial condition would be adversely affected.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
Item 2.   PROPERTIES
 
Our corporate headquarters are located at 475 Broadway Street, Redwood City, California. These offices consist of approximately 27,646 square feet and the lease on this property expires in December 2011.
 
In addition to our corporate headquarters, we lease approximately 87,319 square feet of office space in Westborough, Massachusetts under a lease that expires in March 2012 (of which approximately 32,000 square feet is currently vacant and available for sublet), approximately 70,826 square feet of office space in Tel Aviv, Israel under a lease that expires in February 2013 and approximately 10,600 square feet of office space in Shenzhen, China. Additionally, we lease sales and support offices in Hong Kong, Shanghai and Beijing, China; Seoul, Korea; and a warehouse space in Southborough, Massachusetts.
 
We believe that our existing properties are in good condition and are sufficient and suitable for the conduct of our business. As our existing leases expire or in the event we need additional space, we believe that suitable space will be available on commercially reasonable terms.
 
Item 3.   LEGAL PROCEEDINGS
 
A review of our current litigation is disclosed in the notes to our consolidated financial statements. See “Notes to Consolidated Financial Statements, Note 7 — Commitments and Contingencies — Legal Proceedings” in Part II, Item 8 of this Annual Report on Form 10-K.
 
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information for Common Stock
 
Our common stock has been quoted on the Nasdaq Global Market under the symbol “BBND” since our IPO on March 20, 2007. Prior to that time, there was no public market for our common stock.
 
For the indicated periods, the high and low sales prices of our common stock as reported by the Nasdaq Global Market were as follows:
 
                 
    Year Ended
 
    December 31, 2009  
    High     Low  
 
First quarter
  $ 7.10     $ 4.13  
Second quarter
  $ 7.18     $ 4.68  
Third quarter
  $ 5.90     $ 3.63  
Fourth quarter
  $ 4.45     $ 3.20  
 


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    Year Ended
 
    December 31, 2008  
    High     Low  
 
First quarter
  $ 6.47     $ 3.75  
Second quarter
  $ 7.96     $ 4.64  
Third quarter
  $ 5.00     $ 2.76  
Fourth quarter
  $ 6.03     $ 2.36  
 
Dividend Policy
 
We have never paid any cash dividends on our common stock. Our Board of Directors currently intends to retain any future earnings to support our operations and to finance the growth and development of our business and does not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board.
 
Stockholders
 
As of March 1, 2010, there were 63 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to provide an exact total number of stockholders represented by these record holders, however we believe there are currently approximately 6,000 beneficial owners of our common stock.
 
Recent Sales of Unregistered Securities
 
None.
 
Issuer Purchases of Equity Securities
 
None.
 
Item 6.   SELECTED FINANCIAL DATA
 
You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Selected financial data was as follows (in thousands except per share amounts):
 
                                         
    Years Ended December 31,  
    2009     2008     2007     2006     2005  
 
Consolidated Statement of Operations Data:
                                       
Net revenues:
                                       
Products
  $ 93,662     $ 148,417     $ 144,715     $ 154,013     $ 85,966  
Services
    45,852       36,876       31,795       22,611       12,013  
                                         
Total net revenues
    139,514       185,293       176,510       176,624       97,979  
Cost of net revenues:
                                       
Products
    45,961       60,207       76,260       74,152       55,933  
Services
    12,384       12,755       13,414       9,245       3,900  
                                         
Total cost of net revenues
    58,345       72,962       89,674       83,397       59,833  
Gross profit:
                                       
Products
    47,701       88,210       68,455       79,861       30,033  
Services
    33,468       24,121       18,381       13,366       8,113  
                                         
Total gross profit
    81,169       112,331       86,836       93,227       38,146  
                                         

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    Years Ended December 31,  
    2009     2008     2007     2006     2005  
 
Operating expenses:
                                       
Research and development
    46,431       54,043       51,862       37,194       30,701  
Sales and marketing
    24,201       28,935       39,868       29,523       22,729  
General and administrative
    18,862       20,884       16,286       13,176       6,984  
Restructuring charges
    1,356       2,055       2,998              
Amortization of intangible assets
          733       572       572       573  
Gain on sale of intangible assets
          (1,800 )                  
Class action litigation charges
    477       1,504                    
                                         
Total operating expenses
    91,327       106,354       111,586       80,465       60,987  
                                         
Operating (loss) income
    (10,158 )     5,977       (24,750 )     12,762       (22,841 )
Other income (expense)
    2,352       6,203       608       (1,360 )     (1,696 )
                                         
(Loss) income before (benefit from) provision for income taxes and cumulative effect of change in accounting principle
    (7,806 )     12,180       (24,142 )     11,402       (24,537 )
(Benefit from) provision for income taxes
    (1,067 )     2,400       1,225       2,525       325  
                                         
(Loss) income before cumulative effect of change in acccounting principle
    (6,739 )     9,780       (25,367 )     8,877       (24,862 )
Cumulative effect of change in accounting principle
                            (633 )
                                         
Net (loss) income
  $ (6,739 )   $ 9,780     $ (25,367 )   $ 8,877     $ (25,495 )
                                         
Basic net (loss) income per common share
  $ (0.10 )   $ 0.15     $ (0.52 )   $ 0.78     $ (2.36 )
                                         
Diluted net (loss) income per common share
  $ (0.10 )   $ 0.15     $ (0.52 )   $ 0.16     $ (2.36 )
                                         
Shares used in basic net (loss) income per common share
    65,936       63,559       49,041       11,433       10,794  
                                         
Shares used in diluted net (loss) income per common share
    65,936       67,264       49,041       57,053       10,794  
                                         
 
                                         
    As of December 31,
    2009   2008   2007   2006   2005
 
Consolidated Balance Sheet Data:
                                       
Cash, cash equivalents and marketable securities
  $ 171,908     $ 174,635     $ 154,520     $ 65,474     $ 24,287  
Working capital
    147,496       142,398       109,296       25,056       5,812  
Total assets
    223,588       234,122       218,586       129,050       76,816  
Current and long-term debt
                      14,536       11,418  
Preferred stock warrant liabilities
                      3,152       1,642  
Redeemable convertible preferred stock
                      117,307       117,307  
Common stock and additional paid-in capital
    283,771       265,241       248,201       17,075       14,990  
Total stockholders’ equity (deficit)
    150,276       138,419       111,586       (95,614 )     (107,819 )

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this Form 10-K. This discussion contains forward-looking statements, which are based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Form 10-K.
 
Overview
 
We develop, market and sell network-based platforms that enable cable multiple system operators (MSOs) and telecommunications companies (collectively, service providers) to offer video services across coaxial, fiber and copper networks. We were incorporated in Delaware in December 1998. Since that time, we have developed significant expertise in rich media processing, communications networking and bandwidth management. Our customers are using our platforms to expand high-definition television (HDTV) services, and ensure high-quality video advertising programming to subscribers. Our Broadcast Video, TelcoTV, Switched Digital Video and IPTV (Personalized Video) solutions are comprised of a combination of software and programmable hardware platforms. We have sold our solutions to more than 200 customers globally. We sell our products and services to customers in the U.S. and Canada through our direct sales force. We sell to customers internationally through a combination of direct sales and resellers. Our domestic customers include Bright House, Cablevision, Charter, Comcast, Cox, Time Warner Cable and Verizon, which are seven of the ten largest service providers in the U.S. Our largest international resellers include Guangdong Tongke, Sugys and Ssangyong.
 
Our sales cycle typically ranges from six to 18 months, but can be longer if the sale relates to new product introductions. Our sales process generally involves several stages before we can recognize revenues on the sale of our products. As a provider of advanced technologies, we seek to actively participate with our existing and potential customers in the evaluation of their technology needs and network architectures, including the development of initial designs and prototypes. Following these activities, we typically respond to a service provider’s request for proposal, configure our products to work within our customer’s network architecture, and test our products first in laboratory testing and then in field environments to ensure interoperability with existing products in the service provider’s network. Following testing, our revenue recognition generally depends on satisfying the acceptance criteria specified in our contract with the customer and our customer’s schedule for roll-out of the product. Completion of several of these stages is substantially outside of our control, which causes our revenue patterns from a given customer to vary widely from period to period. After initial deployment of our products, subsequent purchases of our products typically have a more compressed sales cycle.
 
Due to the nature of the cable and telecommunications industries, we sell our products to a limited number of large customers. For the years ended December 31, 2009, 2008 and 2007, we derived approximately 78%, 81% and 75%, respectively, of our net revenues from our top five customers. We believe that for the foreseeable future our net revenues will continue to be highly concentrated in a limited number of large customers. The loss of one or more of our large customers, or the cancellation or deferral of purchases by one or more of these customers, would have a material adverse impact on our revenues and operating results.
 
Net Revenues.  We derive our net revenues principally from sales of, and services for video solutions, with a minimal remaining contribution from our data products, which we retired in October 2007. Our product revenues are comprised of a combination of software licenses and programmable hardware platforms. Our product revenues are influenced by a variety of factors, including the level and timing of capital spending by our customers and the annual budgetary cycles of, and the timing and amount of orders from, significant customers. The selling prices of our products vary based upon the particular customer implementation, which impacts the relative mix of software, hardware and services associated with the sale. To date, our products primarily include Broadcast Video, TelcoTV and Switched Digital Video.
 
Our service revenues include ongoing customer support and maintenance, product installation and training. Our customer support and maintenance is available in a tiered offering at either a standard or an enhanced level. The majority of our customers have purchased our enhanced level of customer support and maintenance. The accounting


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for revenues is complex, and we account for revenues in accordance with applicable U.S. generally accepted accounting principles (GAAP).
 
Cost of Net Revenues.  Our cost of product revenues consists primarily of payments for components and product assembly, costs of product testing, provisions recorded for excess and obsolete inventory, provisions recorded for warranty obligations, manufacturing overhead and allocated facilities and information technology expense. Cost of service revenues is primarily comprised of personnel costs in providing technical support, costs incurred to support deployment and installation within our customers’ networks, training costs and allocated facilities and information technology expense. Headcount in these functions was 90 employees as of December 31, 2009 compared to 93 employees as of December 31, 2008. We project headcount in services and manufacturing operations will continue to remain relatively flat in the near term.
 
Gross Margin.  Our gross profit as a percentage of net revenues, or gross margin, has been and will continue to be affected by a variety of factors, including the mix of software, hardware and services sold, and the average selling prices of our products. We achieve a higher gross margin on the software content of our products compared to the hardware content. In general, we continue to experience competitive pricing pressures on our products and we expect the average selling prices of our products to decline compared to the year ended December 31, 2009. Our gross margins for products are also influenced by the specific terms of our contracts, which may vary significantly from customer to customer based on the type of products sold, the overall size of the customer’s order, and the architecture of the customer network, which can influence the amount and complexity of design, integration and installation services.
 
Operating Expenses.  Our operating expenses consist of research and development, sales and marketing, general and administrative, restructuring and other charges. Personnel related costs are the most significant component of our operating expenses. We project our headcount will grow modestly in the near term, primarily in engineering and sales, to support new product initiatives and to expand our international reseller network.
 
Research and development expense is the largest functional component of our operating expenses and consists primarily of personnel costs, independent contractor costs, prototype expenses, and other allocated facilities and information technology expense. The majority of our research and development staff is focused on software development. All research and development costs are expensed as incurred. Our development teams are located in Tel Aviv, Israel; Shenzhen, Peoples’ Republic of China; Westborough, Massachusetts and Redwood City, California. Due to the long-term opportunities that we see for our business, we are accelerating certain technology projects. Accordingly, we expect our research and development expense to increase in absolute dollars in the near term, due to new product initiatives in key strategic areas for both new and existing products.
 
Sales and marketing expense relates primarily to compensation and associated costs for marketing and sales personnel, sales commissions, promotional and other marketing expenses, travel, trade-show expenses and allocated facilities and information technology expense. Marketing programs are intended to generate revenues from new and existing customers and are expensed as incurred. We expect sales and marketing expense to grow modestly in absolute dollars in the near term, primarily to expand our international reseller network.
 
General and administrative expense consists primarily of compensation and associated costs for general and administrative personnel, professional services and allocated facilities and information technology expenses. Professional services consist of outside legal, accounting and other consulting costs. We expect that general and administrative expense will increase modestly in absolute dollars in the near term, to support a modest growth in headcount both in the U.S. and abroad as well as a modest projected increase in professional expenses.
 
Class action litigation charges are settlement fees and expenses, related to a series of purported shareholder class action lawsuits against our officers, our directors and the underwriters of our initial public offering. In accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 450 Contingencies, we recorded an expense of $1.5 million for the year ended December 31, 2008, and an additional expense of $0.5 million for the year ended December 31, 2009. These lawsuits were settled or dismissed as of December 31, 2009, and hence we have no further obligations.


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Critical Accounting Policies and Estimates
 
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of our consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.
 
The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
 
Revenue Recognition
 
Our software and hardware are sold as solutions and our software is a significant component of our solutions. We provide unspecified software updates and enhancements related to products through support contracts. With respect to certain transactions and for all transactions involving the sale of products with a significant software component, revenue is recognized when all of the following have occurred: (1) we have entered into an arrangement with a customer; (2) delivery has occurred; (3) customer payment is fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable.
 
Product revenues consist of sales of our software and hardware products. Software product sales include a perpetual license to our software. We recognize product revenues upon shipment to our customers, including channel partners, on non-cancellable contracts and purchase orders when all revenue recognition criteria are met, or, if specified in an agreement, upon receipt of final acceptance of the product, provided all other criteria are met. End users and channel partners generally have no rights of return, stock rotation rights or price protection. Shipping charges billed to customers are included in product revenues and the related shipping costs are included in cost of product revenues.
 
Substantially all of our product sales have been made in combination with support services, which consist of software updates and customer support. Our customer service agreements allow customers to select from plans offering various levels of technical support, unspecified software upgrades and enhancements on an if-and-when-available basis. Revenues for support services are recognized on a straight-line basis over the service contract term, which is typically one year but can extend to five years for our telecommunications customers. Revenues from other services, such as installation, program management and training, are recognized when the services are performed.
 
We use the residual method to recognize revenues when a customer agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence (VSOE) of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenues are deferred and recognized when delivery of those elements occur or when fair value can be established. When the undelivered element is customer support and there is no evidence of fair value for this support, revenue for the entire arrangement is bundled and revenue is recognized ratably over the service period. VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately.
 
Fees are typically considered to be fixed or determinable at the inception of an arrangement based on specific products and quantities to be delivered. In the event payment terms are greater than 180 days, the fees are deemed not to be fixed or determinable and revenues are recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.
 
Deferred revenues consist primarily of deferred service fees (including customer support and professional services such as installation, program management and training) and product revenues, net of the associated costs. Deferred product revenue generally relates to acceptance provisions that have not been met or partial shipment or


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when we do not have VSOE of fair value on the undelivered items. When deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of net revenues.
 
We assess the ability to collect from our customers based on a number of factors, including the credit worthiness of the customer and the past transaction history of the customer. If the customer is not deemed credit worthy, all revenues are deferred from the arrangement until payment is received and all other revenue recognition criteria have been met.
 
Inventories, Net
 
Inventories, net consist primarily of finished goods and are stated at the lower of standard cost or market. Standard cost approximates actual cost on the first-in, first-out method. We regularly monitor inventory quantities on-hand and record write-downs for excess and obsolete inventories based on our estimate of demand for our products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross margins. If inventory is written down, a new cost basis is established that cannot be increased in future periods.
 
Warranty Liabilities
 
We provide a warranty for our software and hardware products. In most cases, we warrant that our hardware will be free of defects in workmanship for one year and that our software media will be free of defects for 90 days. In master purchase agreements with large customers, however, we often warrant that both our hardware and software products will function in material conformance to specifications for a period ranging from one to five years from the date of shipment. In general, we accrue for warranty claims based on the Company’s historical claims experience. In addition, we accrue for warranty claims based on specific events and other factors when we believes an exposure is probable and can be reasonably estimated. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available.
 
Stock-Based Compensation
 
We apply the fair value recognition and measurement provisions of ASC 718 Compensation — Stock Compensation (ASC 718). Stock-based compensation is recorded at fair value as of the grant date and recognized as an expense over the employee’s requisite service period (generally the vesting period), which we have elected to amortize on a straight-line basis.
 
Under ASC 718, we estimate the fair value of stock option awards using a Black-Scholes option-pricing formula and a single option award approach. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, we use the expected term of the option, the expected volatility of the price of our common stock, risk free interest rates and expected dividend yield of our common stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Options typically vest with respect to 25% of the shares one year after the options’ vesting commencement date and the remainder ratably on a monthly basis over the following three years. In valuing share-based awards under ASC 718, significant judgment is required in determining the expected volatility of our common stock and the expected term individuals will hold their share-based awards prior to exercising. The computation of expected volatility is derived primarily from the weighted historical volatilities of several comparable companies within the cable and telecommunications equipment industry and to a lesser extent, our weighted historical volatility following our IPO in March 2007. The expected term of options granted represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method permitted by SEC Staff Accounting Bulletin (SAB) 107 as revised by SAB 110. In the future, as we gain historical data for volatility in our own stock and the actual term employees hold our options, expected volatility and expected term may change which could substantially change the grant-date fair value of future awards of stock options and ultimately the expense we record.


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Restricted stock units (RSU) grants under the 2007 Plan generally vest in increments over two to four years from the date of grant. The RSUs are classified as equity awards because the RSUs are paid only in shares upon vesting. RSU awards are measured at the fair value at the date of grant, which corresponds to the closing stock price of the Company’s common stock on the date of grant. This fair value is then amortized on a straight-line basis over the requisite service periods of the RSUs, which is generally the vesting period.
 
Impairment of Long-lived Assets
 
We assess impairment of long-lived assets for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
 
Recoverability is assessed based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized in the consolidated statements of operations when the carrying amount is not recoverable and exceeds fair value, which is determined on a discounted cash flow basis.
 
We make estimates and judgments about future undiscounted cash flows and fair value. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant exercise of judgment involved in determining the cash flows attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated future cash flows could be reduced significantly in the future. As a result, the carrying amount of our long-lived assets could be reduced through impairment charges in the future.
 
Accounting for Income Taxes
 
We are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included on our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be realized when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or credit and net loss carry-forwards are utilized. Accordingly, realization of our deferred tax assets depends on future taxable income against which these deductions, losses and credits can be utilized. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance, thereby reducing the carrying value of deferred tax assets.
 
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. As of December 31, 2009, we recorded a full valuation allowance against all of our deferred tax assets arising from U.S. operations. Based on the available evidence, we believed it is more likely than not that we will not be able to utilize all of these deferred tax assets in the future. We intend to maintain the full valuation allowance against our U.S. deferred tax assets until sufficient evidence exists to support its reversal. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.
 
The U.S. Congress enacted “The Worker, Homeownership, and Business Assistance Act of 2009” (the Act) on November 6, 2009 creating an opportunity for us to elect to carry back either a 2008 or 2009 federal net operating loss (NOL) for three, four, or five years. The Act also suspended the ninety percent limitation on the utilization of alternative minimum tax (AMT) losses, effectively permitting us to elect to carry back our entire applicable NOL. This Act favorably impacted our 2009 effective tax rate.


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Results of Operations
 
The percentage relationships of the listed items from our consolidated statements of operations as a percentage of total net revenues were as follows:
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Total net revenues
    100.0 %     100.0 %     100.0 %
Total cost of net revenues
    41.8       39.4       50.8  
                         
Total gross profit
    58.2       60.6       49.2  
                         
Operating expenses:
                       
Research and development
    33.3       29.2       29.4  
Sales and marketing
    17.3       15.6       22.6  
General and administrative
    13.6       11.3       9.2  
Restructuring charges
    1.0       1.1       1.7  
Amortization of intangible assets
          0.4       0.3  
Gain on sale of intangible assets
          (1.0 )      
Class action litigation charges
    0.3       0.8        
                         
Total operating expenses
    65.5       57.4       63.2  
                         
Operating (loss) income
    (7.3 )     3.2       (14.0 )
Interest income
    1.8       2.8       3.9  
Interest expense
                (0.4 )
Other (expense) income, net
    (0.1 )     0.6       (3.2 )
                         
(Loss) income before (benefit from) provision for income taxes
    (5.6 )     6.6       (13.7 )
(Benefit from) provision for income taxes
    (0.8 )     1.3       0.7  
                         
Net (loss) income
    (4.8 )%     5.3 %     (14.4 )%
                         
 
Years Ended December 31, 2009 and 2008
 
Net Revenues
 
Total net revenues decreased 24.7% to $139.5 million for 2009 from $185.3 million for 2008. The $45.8 million decrease was primarily due to a $53.5 million decrease in Video product revenues and a $1.3 million decrease in Data product revenues, partially offset by a $9.0 million increase in service revenues. A majority of the reduction in our Video product revenues was attributable to a slowdown in the deployment schedule of our largest Telco TV customer. Additionally, Broadcast Video revenues declined $17.7 million as a result of reduced bookings related to what we believe to be a reduction in advertising spending.
 
Our deferred revenues decreased by $15.7 million to $44.9 million as of December 31, 2009 from $60.6 million as of December, 31 2008. Our visibility remains limited during these challenging economic times, and pricing pressure from our competitors continues to delay sales cycles.
 
Revenues from our top five customers comprised 78% and 81% of net revenues for 2009 and 2008, respectively. For 2009, Charter Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues. For 2008, Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues. For 2009, Verizon represented slightly less than 20% of our net revenues compared to slightly less than 30% in 2008. Verizon’s percentage revenue contribution declined for 2009 from the prior year due to a decline in order volume associated with a slower deployment schedule in Verizon’s video network. Time Warner Cable represented slightly more than 30% of our net revenues in 2009 compared to slightly less than 30% in 2008, due to Time Warner Cable’s deployment schedule of large Switched Digital Video projects.


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Net revenues by geographical region based on the shipping destination of customer orders as a percentage of total net revenues were as follows:
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
United States
    88.7 %     91.4 %     83.2 %
Asia
    7.0       3.6       7.7  
Europe
    3.0       2.9       8.3  
Americas, excluding United States
    1.3       2.1       0.8  
                         
Total net revenues
    100.0 %     100.0 %     100.0 %
                         
 
Product Revenues.  Product revenues for 2009 were $93.7 million compared to $148.4 million for 2008. Video product revenues decreased $53.5 million in 2009 compared to 2008, due to a $35.1 million decrease in TelcoTV revenues, a $17.7 million decrease in Broadcast Video revenues and a $0.7 million decrease in Switched Digital Video revenues. Data revenues decreased $1.3 million related to the retirement of our CMTS platform products in October 2007.
 
Service Revenues.  Service revenues for 2009 were $45.9 million compared to $36.9 million for 2008, an increase of $9.0 million, or 24.3%. The increase was primarily due to a $5.6 million recognition of service revenues from decommissioned analog technology as described below, a $5.8 million increase in Video customer support and maintenance revenues from our new and installed base of customers and a $2.0 million increase in Video installation and training revenues. These increases were partially offset by a $4.4 million decrease in customer support and maintenance revenues from our retired CMTS platform products.
 
In an effort to switch to all-digital broadcasting, the U.S. federal government set June 12, 2009 as the final date for full power television stations that broadcasted in analog to convert to digital only. Previously, we sold analog products to a large TelcoTV customer that allowed analog transmission of video over fiber-optic lines. As part of its compliance with the move to all-digital, this customer completed the decommissioning of the analog technology products from its network and migrated to an all-digital format. We recognized $5.6 million of the remaining deferred service revenues and a $0.5 million benefit from the reversal of warranty reserves related to these decommissioned analog technology products in 2009.
 
Gross Profit and Gross Margin
 
Gross profit.  Gross profit for 2009 was $81.2 million compared to $112.3 million for 2008. Gross margin decreased to 58.2% for 2009 compared to 60.6% in 2008.
 
Product gross margin.  Product gross margin for 2009 was 50.9% compared to 59.4% for 2008. Product gross margin decreased due to a lower absorption of fixed manufacturing costs, a higher concentration of revenues being generated from lower margin hardware products and continued downward pricing pressure. These factors were partially offset by a $2.5 million decrease in manufacturing overhead expenses, primarily due to a $1.2 million decrease in salary and related benefits due to decreased headcount and a $0.7 million decrease in bonus. We gained operational efficiencies by centralizing our manufacturing operations in Massachusetts and reduced our overhead expenses, travel and other discretionary expenses by $0.8 million. Warranty expense decreased $0.7 million, primarily related to a $0.5 million benefit from the reversal of warranty reserves related to decommissioned analog products. Product gross margin for 2009 and 2008 included stock-based compensation of $1.2 million and $1.0 million, respectively.
 
Services gross margin.  Services gross margin for 2009 was 73.0% compared to 65.4% for 2008. This increase was primarily attributable to $5.6 million recognition of deferred service revenues from decommissioned analog products with no related cost of service. Additionally, cost of services decreased $0.4 million primarily from lower compensation expense and travel, due to a lower average headcount. Services gross margin for 2009 and 2008 included stock-based compensation of $0.9 million and $0.7 million, respectively.


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Operating Expenses
 
Research and Development.  Research and development expense was $46.4 million for 2009, or 33.3% of net revenues compared to $54.0 million for 2008, or 29.2% of net revenues. Our research and development expense decreased $7.6 million primarily due to a $4.4 million decrease in salary and related benefits as a result of a reduction in force in the first quarter of 2009, and a shift of headcount to a more cost effective location in Shenzhen, China. Additionally, bonus expense decreased by $2.8 million as a result of a decline in our financial performance and facility and other allocated overhead expenses decreased $1.3 million due to cost containment efforts. These factors were partially offset by a $1.0 million increase in stock-based compensation, which was $4.9 million and $3.9 million for 2009 and 2008, respectively.
 
Sales and Marketing.  Sales and marketing expense was $24.2 million for 2009, or 17.3% of net revenues compared to $28.9 million for 2008, or 15.6% of net revenues. The $4.7 million decrease was primarily due to a $3.9 million decrease in compensation expenses, a $0.5 million decrease in travel expenses and a $0.2 million decrease in marketing programs. These decreases related to both a decrease in headcount and cost containment efforts. Sales and marketing expense included stock-based compensation of $2.4 million and $2.6 million for 2009 and 2008, respectively.
 
General and Administrative.  General and administrative expense was $18.9 million for 2009, or 13.6% of net revenues compared to $20.9 million for 2008, or 11.3% of net revenues. The $2.0 million decrease was primarily due to a $1.4 million decrease in salary and related benefits as a result of a reduction in headcount, a $1.0 million decrease in bonus expense as a result of a decline in our financial performance and a $0.9 million decrease in Sarbanes-Oxley 404 compliance work and audit fees. These factors were partially offset by an increase in stock-based compensation, which was $4.8 million and $3.7 million for 2009 and 2008, respectively.
 
Restructuring Charges.  On February 9, 2009, the Board of Directors authorized a restructuring plan pursuant to which employees were terminated. This plan was made in response to market and economic conditions, through which we reduced our operating expenses to increase our flexibility. On April 29, 2008, the Board of Directors authorized a restructuring plan in connection with the redeployment of resources pursuant to which employees were terminated and facilities were vacated. On October 29, 2007, the Board of Directors authorized a restructuring plan in connection with the retirement of the CMTS pursuant to which employees were terminated and facilities were vacated. Charges incurred with these restructuring plans were as follows (in thousands):
 
                                 
    February
    April
    October
       
    2009 Plan     2008 Plan     2007 Plan     Total  
 
Restructuring charges:
                               
Year Ended December 31, 2009
                               
Vacated facilities costs
  $     $     $ 699     $ 699  
Severance and related expenses
    657                   657  
                                 
Total restructuring charges
  $ 657     $     $ 699     $ 1,356  
                                 
Year Ended December 31, 2008
                               
Vacated facilities costs
  $     $ 1,094     $ 400     $ 1,494  
Severance and related expenses
          272       270       542  
Other charges
                19       19  
                                 
Total restructuring charges
  $     $ 1,366     $ 689     $      2,055  
                                 
Expiration date of facilities lease obligations:
    Not applicable       January 2013       March 2012          
 
Gain on sale of intangible assets.  In October 2008, we sold certain intangible assets related to our FastFlow provisioning software technology for consideration of $1.8 million in cash and assumption of certain of our customer obligations.
 
Class action lawsuit charges.  The Company was a defendant in various class action lawsuits, all of which were settled or dismissed as of December 31, 2009. In accordance with the provisions of ASC 450, Contingencies,


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we recorded an expense, which represented the amount we have agreed to pay for $0.5 million and $1.5 million for 2009 and 2008, respectively.
 
Interest Income
 
Interest income was $2.6 million for 2009 compared to $5.2 million for 2008. The decrease in interest income was primarily attributable to lower interest rates. Additionally, our cash, cash equivalents and marketable securities decreased by $2.7 million to $171.9 million as of December 31, 2009 from $174.6 million as of December 31, 2008.
 
Other (expense) income, net
 
Other (expense) income, net consists primarily of foreign exchange (losses) gains. Other (expense) income, net for 2009 was an expense of $0.2 million, compared to income of $1.0 million for 2008. During 2008, we reduced our forecasted cash flows in Israeli New Shekels and reduced the notional value of our outstanding derivatives with maturity dates of June through December 2008. As a result, our derivative instruments were no longer deemed effective from an accounting perspective, resulting in a $1.0 million gain for 2008, compared to zero in 2009.
 
Provision for Income Taxes
 
Income tax benefit for 2009 was $1.1 million on pre-tax loss of $7.8 million, compared to $2.4 million of tax expense on pre-tax income of $12.2 million for 2008. Our effective tax rate differed from the U.S. federal statutory rate for 2009 primarily due to the distribution and mixture of taxable profits in various jurisdictions carrying foreign income taxes and certain U.S. losses not benefitted due to our valuation allowance, partially offset by beneficial enterprise tax status in Israel of $1.3 million, a federal operating loss carryback which provided a tax benefit of $0.7 million, and federal refundable credits of $0.1 million. Our effective tax rate differed from the U.S. federal statutory rate for 2008 primarily due to the distribution and mixture of taxable profits in various tax jurisdictions, some of which carry adequate loss carry-forwards.
 
As of December 31, 2009, we had net operating loss carry-forwards for federal and state income tax purposes of $61.3 million and $20.2 million, respectively. We use the with-and-without approach described in guidance which has been incorporated into ASC 740 Income Taxes (ASC 740) to determine the recognition and measurement of excess tax benefits. Accordingly, we have elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital, once realized. In addition, we have elected to account for the indirect benefits of stock-based compensation awards or other tax attributes, such as research and development credits and alternative minimum tax credits, in our consolidated statement of operations. As of December 31, 2009, the portion of the federal and state operating loss carry-forwards, which related to stock option benefits, was approximately $15.3 million.
 
We also had federal research and development tax credit carry-forwards of approximately $2.8 million and state research and development tax credit carry-forwards of approximately $1.0 million. If not utilized, the federal net operating loss and tax credit carry-forwards will expire between 2020 and 2029, and the state net operating loss and tax credit carry-forwards will expire in different years depending on the specific state, ranging from 2010 to indefinite. Net operating loss carry-forwards and credit carry-forwards reflected above may be limited due to ownership changes as provided in Section 382 of the Internal Revenue Code and similar state provisions.
 
Years Ended December 31, 2008 and 2007
 
Net Revenues
 
Total net revenues increased 5.0% to $185.3 million for 2008 from $176.5 million for 2007. The $8.8 million increase was due to a $24.5 million increase in Video product revenues and a $5.1 million increase in service revenues, partially offset by a $20.8 million decrease in Data product revenues following the retirement of our CMTS platform products.
 
Revenues from our top five customers comprised 81% and 75% of net revenues for 2008 and 2007, respectively. For both 2008 and 2007, Cox Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues. For 2008, Verizon represented slightly less than 30% of our net revenues


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compared to approximately 40% in 2007. Verizon’s percentage revenue contribution declined for 2008 from the prior year due to an increase in our overall total revenues, a contractual price reduction and a decline in order volume, due to their deployment schedule. Time Warner Cable represented less than 30% of our net revenues in 2008 compared to less than 20% in 2007. The increase in their revenues was primarily driven by incremental orders for our Switched Digital Video solution in 2008.
 
During 2008, revenues from customers in the U.S. comprised 91% of net revenues compared to 83% for 2007. The percentage increase in domestic revenues in 2008 was primarily attributable to a decline in revenues from our Data products from international customers, as we retired our CMTS platform products.
 
Product Revenues.  Product revenues for 2008 were $148.4 million compared to $144.7 million for 2007. Video product revenues increased $24.5 million for 2008 compared to 2007 due to a $39.6 million increase in Switched Digital Video revenues and a $3.8 million increase in Broadcast Video revenues, partially offset by an $18.9 million decrease in TelcoTV revenues primarily due to decreased orders from our largest telecommunications customer. The increase in Switched Digital Video and Broadcast Video revenues was primarily due to an increase in volume from our customers, which was slightly offset by downward pressure on our product pricing from both our customers and our competitors. Data product revenues decreased by $20.8 million to $2.9 million in 2008, compared to $23.7 million in 2007, due to the retirement of our CMTS platform products.
 
Service Revenues.  Service revenues for 2008 were $36.9 million compared to $31.8 million for 2007, an increase of $5.1 million, or 16.0%. Video service revenues increased $7.8 million in 2008 compared to 2007, which was comprised of a $4.0 million increase in Video customer support and maintenance revenues from our new and installed base of customers as well as a $3.8 million increase in Video installation and training revenues. This was partially offset by a $2.7 million decrease in Data service revenues due to the retirement of our CMTS platform products.
 
Gross Profit and Gross Margin
 
Gross profit.  Gross profit for 2008 was $112.3 million compared to $86.8 million for 2007, an increase of $25.5 million, or 29.4%. Gross margin increased to 60.6% for 2008 compared to 49.2% in 2007.
 
Product gross margin.  Product gross margin for 2008 was 59.4% compared to 47.3% for 2007. Product gross margin increased due to a higher concentration of software orders, which have a higher gross margin and a $1.2 million decrease in warranty expense, which was comprised of a $0.6 million reversal of a warranty reserve primarily related to our retired CMTS platform products and $0.6 million of lower warranty expense on our Video products. In 2008, we also benefited from $0.8 million in revenues from the sale of previously reserved inventories of our retired CMTS platform products. In 2007 product gross margin was negatively impacted by a $5.0 million inventory charge related to our Data product line, and there was no such charge for 2008. Product gross margin for 2008 and 2007 included stock-based compensation of $1.0 million and $0.9 million, respectively.
 
Services gross margin.  Services gross margin for 2008 was 65.4% compared to 57.8% for 2007. This increase was primarily related to a $5.1 million increase in service revenues as well as a $0.7 million reduction in cost of services, primarily attributable to lower compensation expense and travel following a reduction in headcount. Services gross margin for 2008 and 2007 included stock-based compensation of $0.7 million and $0.6 million, respectively.
 
Operating Expenses
 
Research and Development.  Research and development expense was $54.0 million for 2008, or 29.2% of net revenues compared to $51.9 million for 2007, or 29.4% of net revenues. The $2.2 million increase was primarily due to an increase in bonus expense and depreciation expense. These increases were slightly offset in part by decreased expenditures following our restructuring plans, which resulted in lower base salaries, travel, facility costs and lab and prototype expenditures. Research and development expense included stock-based compensation of $3.9 million and $3.8 million for 2008 and 2007, respectively.
 
Sales and Marketing.  Sales and marketing expense was $28.9 million for 2008, or 15.6% of net revenues, compared to $39.9 million for 2007, or 22.6% of net revenues. The $10.9 million decrease was primarily due to a


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$5.2 million decrease in compensation expense related to a reduction in headcount, a $1.3 million decrease in overhead expenses, a $1.6 million decrease in travel, and a $1.2 million decrease in marketing related activities, such as trade shows and public relations. We significantly reduced our headcount that sold our retired CMTS products. Sales and marketing expense included stock-based compensation of $2.6 million and $4.2 million for 2008 and 2007, respectively.
 
General and Administrative.  General and administrative expense was $20.9 million for 2008, or 11.3% of net revenues, compared to $16.3 million for 2007, or 9.2% of net revenues. The $4.6 million increase was primarily due to a $1.6 million increase in stock-based compensation, a $1.2 million increase in costs associated with audit activities and Sarbanes-Oxley 404 compliance and a $0.8 million increase in legal fees primarily attributable to litigation-related costs. The remaining $1.0 million increase relates to increased bonus expense, which was earned as result of our favorable financial results in 2008, and increased subcontractor expenses. General and administrative expense included stock-based compensation of $3.7 million and $2.1 million for 2008 and 2007, respectively.
 
Restructuring Charges.  On October 29, 2007, the Audit Committee of our Board of Directors authorized a restructuring plan in connection with the retirement of our CMTS platform along with an approximate 15% company-wide reduction in force. This resulted in net charges of $0.7 million and $3.0 million for the years ended December 31, 2008 and 2007, respectively. Severance, comprised primarily of salary, payroll taxes and medical benefits, was approximately $0.3 million and $2.2 million for the years ended December 31, 2008 and 2007, respectively. Our plan also included vacating several leased facilities throughout the world, with lease terms expiring through March 2012 resulting in vacated facility charges, net of sublease income of approximately $0.4 million and $0.7 million for the years ended December 31, 2008 and 2007, respectively.
 
On April 29, 2008, the Audit Committee of our Board of Directors authorized an additional restructuring plan. This resulted in net charges of $1.4 million for the year ended December 31, 2008, including charges of $1.1 million for vacated facility charges and $0.3 million for severance costs.
 
Gain on sale of intangible assets.  In October 2008, consistent with our previously announced intent to focus on our Video solutions, we sold certain intangible assets related to our FastFlow provisioning software technology for consideration of $1.8 million in cash and assumption of certain of our customer obligations.
 
Class action lawsuit charges.  On January 27, 2009, the defendants reached an agreement in principle with the lead plaintiff to settle our main purported shareholder class action lawsuit pending in federal court. The agreement provides a full release for all potential claims arising from the securities laws alleged in the initial and consolidated complaints, including claims for alleged violations of the Securities Act of 1933 and the Exchange Act of 1934. We recorded an expense for $1.5 million for the year ended December 31, 2008, which represented the estimated amount we agreed to pay as of December 31, 2008.
 
Interest Income
 
Interest income was $5.2 million for 2008 compared to $6.9 million for 2007. While cash and cash equivalents increased for 2008, interest income decreased due to lower interest rates for 2008 compared to 2007.
 
Interest expense
 
We incurred no interest expense for 2008 and $0.6 million for 2007. A portion of proceeds from our initial public offering was used to repay outstanding borrowings, which resulted in the elimination of interest expense for 2008.
 
Other Income (Expense), Net
 
Other income expense, net consists primarily of foreign exchange gains (losses) and in 2007 a charge from fair value adjustments of preferred stock warrants. Other income (expense), net for 2008 was an income of $1.0 million, compared to an expense of $5.6 million for 2007. In May 2008, we reduced our forecasted cash flows in Israeli New Shekels and therefore reduced the notional value of our outstanding derivatives with maturity dates from June through December 2008. As a result of this change in forecasted cash flow, the derivative instruments were no


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longer deemed to be highly effective, resulting in the ineffective portion of the gain on these derivatives of $0.8 million being recognized in other income (expense), net in 2008. Other income (expense), net included a $5.0 million charge from fair value adjustments of preferred stock warrants in 2007. Upon the completion of our initial public offering on March 27, 2007, the warrants to purchase redeemable convertible preferred stock became warrants to purchase our common stock and accordingly we ceased adjusting these warrants for changes in fair value and reclassified their respective liabilities to stockholders’ equity.
 
Provision for Income Taxes
 
The provision for income taxes of $2.4 million and $1.2 million for 2008 and 2007, respectively, were related to provisions for both domestic and foreign income taxes. As of December 31, 2008, we had net operating loss carry-forwards for federal and state income tax purposes of $77.3 million and $37.8 million, respectively. We use the with-and-without approach described in guidance which has been incorporated into ASC 740 to determine the recognition and measurement of excess tax benefits. Accordingly, we elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital, once realized. In addition, we elected to account for the indirect benefits of stock-based compensation awards or other tax attributes, such as research and development credits and alternative minimum tax credits, in our consolidated statement of operations. As of December 31, 2008, the portion of the federal and state operating loss carry-forwards, which related to stock option benefits, was $13.1 million.
 
We also had federal research and development tax credit carry-forwards of $2.7 million and state research and development tax credit carry-forwards of $1.1 million. If not utilized, the federal net operating loss and tax credit carry-forwards will expire between 2021 and 2028, and the state net operating loss and tax credit carry-forwards will expire in different years depending on the specific state, ranging from 2010 to indefinite. Utilization of these net operating losses and credit carry-forwards are subject to an annual limitation due to the provisions of Section 382 of the Internal Revenue Code.
 
Liquidity and Capital Resources
 
Since inception, we have financed our operations primarily through private and public sales of equity securities and from cash provided by operations. As of December 31, 2009, we had no long-term debt outstanding.
 
Cash Flow
 
Cash, cash equivalents and marketable securities.  We had approximately $171.9 million of cash, cash equivalents, and marketable securities as of December 31, 2009. Marketable securities consist principally of corporate debt securities, commercial paper and securities of U.S. agencies with remaining time to maturity of two years or less. Restricted cash of $0.6 million as of December 31, 2009 was not included in cash and cash equivalents.
 
Operating activities
 
The key line items affecting cash from operating activities were as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Net (loss) income
  $ (6,739 )   $ 9,780     $ (25,367 )
Add back non-cash charges
    23,458       20,494       27,076  
                         
Net income before non-cash charges(1)
    16,719       30,274       1,709  
Decrease in accounts receivable
    7,866       1,494       6,133  
Decrease in inventories, net
    1,190       709       321  
(Decrease) increase in deferred revenues
    (15,696 )     (6,726 )     16,686  
Decrease in accounts payable and accrued and other liabilities
    (6,925 )     (2,332 )     (2,063 )
Other, net
    (2,831 )     115       (1,924 )
                         
Net cash provided by operating activities
  $ 323     $ 23,534     $ 20,862  
                         


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(1) Non-cash charges primarily related to stock-based compensation and depreciation of property and equipment, and for 2007 revaluation of warrant liabilities.
 
Net cash provided by operating activities decreased in 2009 compared to 2008 primarily due to the net loss in 2009 compared to net income in 2008. This net cash provided from operating activities was offset in 2009 primarily due to decreased deferred revenues in 2009 and 2008. Net cash provided from operating activities increased in 2008 compared to 2007 primarily due to net income in 2008 compared to a net loss in 2007. This net cash provided from operating activities was offset in 2008 primarily due to decreased deferred revenues in 2008 compared to increased deferred revenues in 2007.
 
We expect cash from operating activities to fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the rate at which products are shipped during the quarter, accounts receivable collections, inventory and supply chain management and the timing and amount of taxes and other payments.
 
Investing Activities
 
Our investing activities used cash of $30.7 million for 2009, primarily from net purchases of marketable securities of $23.8 million, the purchase of property and equipment, primarily computer and engineering equipment of $4.6 million, and the purchase of a software license for $2.5 million.
 
Our investing activities used cash of $33.1 million for 2008, primarily from net purchases of marketable securities of $23.8 million and the purchase of property and equipment of $11.1 million primarily to support our new product offerings. These capital expenditures consisted primarily of computer and test equipment and software purchases, offset in part by $1.8 million in proceeds from the sale of intangible assets for our Fast Flow technology.
 
Our investing activities used cash of $85.0 million for 2007, primarily from net purchases of marketable securities of $72.2 million and the purchase of property and equipment of $12.3 million primarily to support our new product offerings. These capital expenditures consisted primarily of computer and test equipment and software purchases.
 
Financing Activities
 
Our financing activities provided cash from the issuance of common stock (through the exercise of stock options under our equity incentive plans and sale of stock under our employee stock purchase plan) of $4.3 million for 2009.
 
Our financing activities provided cash of $5.4 million for 2008, primarily from the issuance of common stock from the exercise of options under our equity incentive plans and sales of stock under our employee stock purchase plan.
 
Our financing activities provided cash of $80.7 million for 2007, primarily from our IPO, which provided us with aggregate net proceeds of $87.8 million and proceeds of $5.7 million, primarily from the issuance of common stock from the exercise of options under our equity incentive plans and sales under our employee stock purchase plan. These increases were partially offset by the repayment of loans and capital leases of $14.5 million.
 
Liquidity and Capital Resource Requirements
 
We believe that our existing sources of liquidity combined with cash generated from operations will be sufficient to meet our currently anticipated cash requirements for at least the next 12 months. However, the networking industry is capital intensive. In order to remain competitive, we must constantly evaluate the need to make significant investments in products and in research and development. We may seek additional equity or debt financing from time to time to maintain or expand our product lines or research and development efforts, or for other strategic purposes such as significant acquisitions. The timing and amount of any such financing requirements will depend on a number of factors, including demand for our products, changes in industry conditions, product mix, competitive factors and the timing of any strategic acquisitions. There can be no assurance that such financing will be available on acceptable terms, and any additional equity financing would result in incremental ownership dilution to our existing stockholders.


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Contractual Obligations and Commitments
 
Our contractual obligations as of December 31, 2009 were as follows (in thousands):
 
                                         
    Payments Due by Period:  
          Less Than
                More Than
 
    Total     One Year     1-3 Years     3-5 Years     5 Years  
 
Operating lease obligations(1)
  $ 6,949     $ 2,767     $ 4,108     $ 74     $  
Purchase obligations(2)
    2,972       2,972                    
                                         
Total obligations
  $ 9,921     $ 5,739     $ 4,108     $ 74     $  
                                         
 
 
(1) Operating lease obligations are net of sublease rentals from a portion of our Tel Aviv facility.
 
(2) Purchase obligations comprise firm non-cancelable agreements to purchase inventory.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2009, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of the Securities and Exchange Commission’s Regulation S-K.
 
Effects of Inflation
 
Our monetary assets, consisting primarily of cash, marketable securities and receivables, are not significantly affected by inflation because they are short-term in duration. Our non-monetary assets, consisting primarily of inventory, intangible assets, goodwill and prepaid expenses and other assets, are not affected significantly by inflation. We believe that the impact of inflation on replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our cost of goods sold and operating expenses, such as those for employee compensation, which may not be readily recoverable in the price of the products and services offered by us.
 
Recent Accounting Pronouncements
 
See Note 2 of the Notes to Consolidated Financial Statements included in this Form 10-K for recent accounting pronouncements that could have an effect on us.
 
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Interest Rate Sensitivity
 
The primary objectives of our investment activities are to preserve principal, provide liquidity and maximize income without exposing us to significant risk of loss. The securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of our investment to fluctuate. To control this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is not limited to our investment portfolio. As of December 31, 2009, our investments were primarily in commercial paper, corporate notes and bonds, money market funds and U.S. government and agency securities. If overall interest rates fell 10% for the year ended December 31, 2009, our interest income would have decreased by an immaterial amount, assuming consistent investment levels.
 
Foreign Currency Risk
 
Our sales contracts are primarily denominated in U.S. dollars, and therefore the majority of our revenues are not subject to foreign currency risk. However, if we extend credit to international customers and the U.S. dollar appreciates against our customers’ local currency there is an increased collection risk as it will require more local currency to settle our U.S. dollar based invoice. Our operating expense and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Israeli New Shekel, and to a lesser extent the Chinese Yuan and Euro. To protect against significant fluctuations in value and the volatility of future cash flows


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caused by changes in currency exchange rates, we have foreign currency risk management programs to hedge both balance sheet items and future forecasted expenses denominated in Israeli New Shekels. An adverse change in exchange rates of 10% for the Israeli New Shekel, Chinese Yuan and Euro, without any hedging, would have resulted in an increase in our loss before taxes of approximately $3.0 million for the year ended December 31, 2009.
 
We continue to hedge our projected exposure to exchange rate fluctuations between the U.S. dollar and the Israeli New Shekel, and accordingly we do not anticipate that fluctuations will have a material impact on our financial results for the year ending December 31, 2010. Currency forward contracts and currency options are generally utilized in these hedging programs. Our hedging programs are intended to reduce, but not eliminate, the impact of currency exchange rate movements. As our hedging program is relatively short-term in nature, a long-term material change in the value of the U.S. dollar versus the Israeli New Shekel could adversely impact our operating expenses in the future.


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Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Index to Consolidated Financial Statements
 
         
The following financial statements are filed as part of this Annual Report:
       
    48  
    49  
    50  
    51  
    53  
    54  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
BigBand Networks, Inc.
 
We have audited the accompanying consolidated balance sheets of BigBand Networks, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BigBand Networks, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BigBand Networks, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2010 expressed an unqualified opinion thereon.
 
/s/  ERNST AND YOUNG LLP
 
San Jose, California
March 5, 2010


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BigBand Networks, Inc.
 
 
                 
    As of December 31,  
    2009     2008  
    (In thousands, except per share data)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 24,894     $ 50,981  
Marketable securities
    147,014       123,654  
Accounts receivable, net of allowance for doubtful accounts of $56 and $39 as of December 31, 2009 and 2008, respectively
    18,495       26,361  
Inventories, net
    4,933       6,123  
Prepaid expenses and other current assets
    6,177       3,716  
                 
Total current assets
    201,513       210,835  
Property and equipment, net
    11,417       15,358  
Goodwill
    1,656       1,656  
Other non-current assets
    9,002       6,273  
                 
Total assets
  $ 223,588     $ 234,122  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 9,483     $ 8,350  
Accrued compensation and related benefits
    5,023       11,433  
Current portion of deferred revenues, net
    32,428       39,433  
Current portion of other liabilities
    7,083       9,221  
                 
Total current liabilities
    54,017       68,437  
Deferred revenues, net, less current portion
    12,438       21,129  
Other liabilities, less current portion
    2,642       2,392  
Accrued long-term Israeli severance pay
    4,215       3,745  
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, $0.001 par value, 250,000 shares authorized as of December 31, 2009 and 2008; 67,138 and 64,639 shares issued and outstanding as of December 31, 2009 and 2008, respectively
    67       65  
Additional paid-in capital
    283,704       265,176  
Accumulated other comprehensive income
    124       58  
Accumulated deficit
    (133,619 )     (126,880 )
                 
Total stockholders’ equity
    150,276       138,419  
                 
Total liabilities and stockholders’ equity
  $ 223,588     $ 234,122  
                 
 
See accompanying notes.


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BigBand Networks, Inc.
 
 
                         
    Years Ended December 31,  
    2009     2008     2007  
    (In thousands, except per share amounts)  
 
Net revenues:
                       
Products
  $ 93,662     $ 148,417     $ 144,715  
Services
    45,852       36,876       31,795  
                         
Total net revenues
    139,514       185,293       176,510  
                         
Cost of net revenues:
                       
Products
    45,961       60,207       76,260  
Services
    12,384       12,755       13,414  
                         
Total cost of net revenues
    58,345       72,962       89,674  
                         
Gross profit
    81,169       112,331       86,836  
                         
Operating expenses:
                       
Research and development
    46,431       54,043       51,862  
Sales and marketing
    24,201       28,935       39,868  
General and administrative
    18,862       20,884       16,286  
Restructuring charges
    1,356       2,055       2,998  
Amortization of intangible assets
          733       572  
Gain on sale of intangible assets
          (1,800 )      
Class action litigation charges
    477       1,504        
                         
Total operating expenses
    91,327       106,354       111,586  
                         
Operating (loss) income
    (10,158 )     5,977       (24,750 )
Interest income
    2,570       5,174       6,863  
Interest expense
                (648 )
Other (expense) income, net
    (218 )     1,029       (5,607 )
                         
(Loss) income before (benefit from) provision for income taxes
    (7,806 )     12,180       (24,142 )
(Benefit from) provision for income taxes
    (1,067 )     2,400       1,225  
                         
Net (loss) income
  $ (6,739 )   $ 9,780     $ (25,367 )
                         
Basic net (loss) income per common share
  $ (0.10 )   $ 0.15     $ (0.52 )
                         
Diluted net (loss) income per common share
  $ (0.10 )   $ 0.15     $ (0.52 )
                         
Shares used in basic net (loss) income per common share
    65,936       63,559       49,041  
                         
Shares used in diluted net (loss) income per common share
    65,936       67,264       49,041  
                         
 
See accompanying notes.


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BigBand Networks, Inc.
 
 
                                                                                                   
    Redeemable
                                          Accumulated
                   
    Convertible
      Common Stock     Additional
    Deferred
    Other
                   
    Preferred Stock       Class A     Class B     Paid-in
    Stock-Based
    Comprehensive
    Accumulated
    Stockholders’
       
    Shares     Amount       Shares     Amount     Shares     Amount     Capital     Compensation     Income (Loss)     Deficit     Equity (Deficit)        
    (In thousands)  
Balance as of December 31, 2006
    29,439     $ 117,307         8,241     $ 8       3,619     $ 4     $ 17,063     $ (1,405 )   $ 9     $ (111,293 )   $ (95,614 )        
Conversion of class B common stock into class A common Stock
                  3,619       4       (3,619 )     (4 )                                      
Conversion of preferred stock into class A common stock
    (29,439 )     (117,307 )       37,762       38                   117,269                         117,307          
Proceeds from initial public offering, net of expenses
                  7,500       8                   87,761                         87,769          
Reclassification of preferred stock warrant liabilities to APIC upon IPO
                                          8,125                         8,125          
Proceeds from exercise of class A common stock options
                  4,056       4                   4,684                         4,688          
Proceeds from issuance of common stock under employee stock purchase plan
                  213                         1,089                         1,089          
Tax benefit from stock options
                                          25                         25          
Stock-based compensation
                  12                         10,408                         10,408          
Net exercise for payment of tax liability for employee
                                                      (113 )                       (113 )        
Amortization of deferred stock-based compensation, net of reversals
                                          (335 )     1,202                   867          
Stock-based compensation related to non-employees in exchange for services
                  2                         341                         341          
Exercise of warrants
                  502                         1,822                         1,822          
Comprehensive loss:
                                                                                                 
Net unrealized gains on cash flow hedges
                                                      42             42          
Net unrealized gains on marketable securities
                                                      194             194          
Net settled unrealized gains on cash flow hedges
                                                          3             3          
Net loss
                                                            (25,367 )     (25,367 )        
                                                                                                   
Total comprehensive loss
                                                                                      (25,128 )        
                                                                                                   


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    Redeemable
                                          Accumulated
                   
    Convertible
      Common Stock     Additional
    Deferred
    Other
                   
    Preferred Stock       Class A     Class B     Paid-in
    Stock-Based
    Comprehensive
    Accumulated
    Stockholders’
       
    Shares     Amount       Shares     Amount     Shares     Amount     Capital     Compensation     Income (Loss)     Deficit     Equity (Deficit)        
    (In thousands)  
Balance as of December 31, 2007
                  61,907       62                   248,139       (203 )     248       (136,660 )     111,586          
Proceeds from exercise of common stock options
                  2,275       2                   3,753                         3,755          
Proceeds from issuance of common stock under employee stock purchase plan
                  362       1                   1,483                         1,484          
Vesting of restricted stock units, net
                  27                                                          
Tax benefit from stock options
                                              158                         158          
Stock-based compensation
                                          11,695                         11,695          
Net exercise for payment of tax liability for employee
                                          (29 )                       (29 )        
Amortization of deferred stock-based compensation, net of reversals
                                          (23 )     203                   180          
Exercise of warrants — cashless
                  68                                                          
Comprehensive income:
                                                                                                 
Net unrealized losses on cash flow hedges
                                                      (340 )           (340 )        
Net unrealized gains on marketable securities
                                                      476             476          
Net settled unrealized losses on cash flow hedges
                                                      (326 )           (326 )        
Net income
                                                            9,780       9,780          
                                                                                                   
Total comprehensive income
                                                                                      9,590          
                                                                                                   
Balance as of December 31, 2008
                  64,639       65                   265,176             58       (126,880 )     138,419          
Proceeds from exercise of common stock options
                  1,444       1                   2,711                         2,712          
Proceeds from issuance of common stock under employee stock purchase plan
                  478                         1,593                         1,593          
Vesting of restricted stock units, net
                  577       1                   (1 )                                
Tax benefit from stock options
                                              17                         17          
Stock-based compensation
                                          14,219                         14,219          
Net exercise for payment of tax liability for employee
                                          (11 )                       (11 )        
Comprehensive loss:
                                                                                                 
Net unrealized gains on cash flow hedges
                                                      191             191          
Net unrealized losses on marketable securities
                                                      (404 )           (404 )        
Net settled unrealized gains on cash flow hedges
                                                      279             279          
Net loss
                                                            (6,739 )     (6,739 )        
                                                                                                   
Total comprehensive loss
                                                                                      (6,673 )        
                                                                                                   
Balance as of December 31, 2009
        $         67,138     $ 67           $     $ 283,704     $     $ 124     $ (133,619 )   $ 150,276          
                                                                                                   
 
See accompanying notes.

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BigBand Networks, Inc.
 
 
                         
    Years Ended December 31,  
    2009     2008     2007  
    (In thousands, except per share amounts)  
 
Cash Flows from Operating activities
                       
Net (loss) income
  $ (6,739 )   $ 9,780     $ (25,367 )
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                       
Depreciation of property and equipment
    8,457       9,833       9,771  
Amortization of software license
    417              
Amortization of intangible assets
          733       572  
Gain on sale of intangible assets — Fast Flow technology
          (1,800 )      
Loss on disposal of property and equipment
    103       337       165  
Revaluation of warrant liabilities
                4,974  
Stock-based compensation
    14,219       11,695       10,749  
Amortization of deferred stock-based compensation
          180       867  
Tax benefit from stock options
    (17 )     (158 )     (25 )
Net settled unrealized gains (losses) on cash flow hedges
    279       (326 )     3  
Change in operating assets and liabilities:
                       
Decrease in accounts receivable, net
    7,866       1,494       6,133  
Decrease in inventories, net
    1,190       709       321  
(Increase) decrease in prepaid expenses and other current assets
    (2,493 )     292       (1,501 )
Increase in other non-current assets
    (808 )     (734 )     (867 )
Increase (decrease) in accounts payable
    1,133       (3,161 )     (1,286 )
Increase in long-term Israeli severance pay
    470       557       444  
(Decrease) increase in accrued and other liabilities
    (8,058 )     829       (777 )
(Decrease) increase in deferred revenues
    (15,696 )     (6,726 )     16,686  
                         
Net cash provided by operating activities
    323       23,534       20,862  
                         
Cash Flows from Investing activities
                       
Purchase of marketable securities
    (168,539 )     (202,829 )     (170,460 )
Proceeds from maturities of marketable securities
    130,271       151,154       78,445  
Proceeds from sale of marketable securities
    14,504       27,854       19,800  
Purchase of property and equipment
    (4,619 )     (11,077 )     (12,320 )
Purchase of software license
    (2,500 )            
Proceeds from sale of intangible assets — Fast Flow technology
          1,800        
Proceeds from sale of property and equipment
          9       40  
Decrease (increase) in restricted cash
    162       6       (505 )
                         
Net cash used in investing activities
    (30,721 )     (33,083 )     (85,000 )
                         
Cash Flows from Financing activities
                       
Proceeds from exercise of common stock options, net of tax liability
    2,701       3,726       4,575  
Proceeds from issuance of common stock under employee stock plans
    1,593       1,484       1,089  
Proceeds from initial public offering, net of expenses
                87,769  
Principal payments on loans and capital leases
                (14,550 )
Proceeds from exercise of warrants to purchase common stock
                1,822  
Tax benefit from stock options
    17       158       25  
                         
Net cash provided by financing activities
    4,311       5,368       80,730  
                         
Net (decrease) increase in cash and cash equivalents
    (26,087 )     (4,181 )     16,592  
Cash and cash equivalents as of beginning of year
    50,981       55,162       38,570  
                         
Cash and cash equivalents as of end of year
  $ 24,894     $ 50,981     $ 55,162  
                         
Schedule of non-cash transactions
                       
Accrued leasehold improvements
  $     $     $ 2,300  
                         
Supplemental disclosure of cash flow information
                       
Interest paid
  $     $     $ 514  
                         
Income taxes paid
  $ 1,239     $ 2,874     $ 3,945  
                         
 
See accompanying notes.


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Table of Contents

 
BIGBAND NETWORKS, INC.
 
 
1.   Description of Business
 
BigBand Networks, Inc. (BigBand or the Company), headquartered in Redwood City, California, was incorporated on December 3, 1998, under the laws of the state of Delaware and commenced operations in January 1999. BigBand develops, markets and sells network-based solutions that enable cable Multiple System Operators and telecommunications companies to offer video services across coaxial, fiber and copper networks.
 
2.   Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management uses estimates and judgments in determining recognition of revenues, valuation of inventories, valuation of stock-based awards, provision for warranty claims, the allowance for doubtful accounts, restructuring costs, valuation of goodwill and long-lived assets, and income tax amounts. Management bases its estimates and assumptions on methodologies it believes to be reasonable. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.
 
Revenue Recognition
 
The Company’s software and hardware product applications are sold as solutions and its software is a significant component of these solutions. The Company provides unspecified software updates and enhancements related to products through support contracts. As a result, the Company accounts for revenues in accordance with ASC 985 Software, for each transaction, all of which involve the sale of products with a significant software component. Revenue is recognized when all of the following have occurred: (1) the Company has entered into an arrangement with a customer; (2) delivery has occurred; (3) customer payment is fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable.
 
Product revenues consist of sales of the Company’s software and hardware products. Software product sales include a perpetual license to the Company’s software. The Company recognizes product revenues upon shipment to its customers, including channel partners, on non-cancellable contracts and purchase orders when all revenue recognition criteria are met, or, if specified in an agreement, upon receipt of final acceptance of the product, provided all other criteria are met. End users and channel partners generally have no rights of return, stock rotation rights, or price protection. Shipping charges billed to customers are included in product revenues and the related shipping costs are included in cost of product revenues.
 
Substantially all of the Company’s product sales have been made in combination with support services, which consist of software updates and customer support. The Company’s customer service agreements allow customers to select from plans offering various levels of technical support, unspecified software upgrades and enhancements on an if-and-when-available basis. Revenues for support services are recognized on a straight-line basis over the service contract term, which is typically one year but can extend to five years for the Company’s telecommunications customers. Revenues from other services, such as installation, program management and training, are recognized when the services are performed.
 
The Company uses the residual method to recognize revenues when a customer agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence (VSOE) of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
the remaining portion of the contract fee is recognized as product revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenues are deferred and recognized when delivery of those elements occur or when fair value can be established. When the undelivered element is customer support and there is no evidence of fair value for this support, revenue for the entire arrangement is bundled and revenue is recognized ratably over the service period. VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately.
 
Fees are typically considered to be fixed or determinable at the inception of an arrangement based on specific products and quantities to be delivered. In the event payment terms are greater than 180 days, the fees are deemed not to be fixed or determinable and revenues are recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.
 
Deferred revenues consist primarily of deferred service fees (including customer support and professional services such as installation, program management and training) and product revenues, net of the associated costs. Deferred product revenue generally relates to acceptance provisions that have not been met or partial shipment or when the Company does not have VSOE of fair value on the undelivered items. When deferred revenues are recognized as revenues, the associated deferred costs are also recognized as cost of net revenues.
 
The Company assesses the ability to collect from its customers based on a number of factors, including the credit worthiness of the customer and the past transaction history of the customer. If the customer is not deemed credit worthy, all revenues are deferred from the arrangement until payment is received and all other revenue recognition criteria have been met.
 
Cash, Cash Equivalents and Marketable Securities
 
The Company holds its cash and cash equivalents in checking, money market and investment accounts with high credit quality financial institutions. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
 
Marketable securities consist principally of corporate debt securities, commercial paper, securities of U.S. agencies and certificates of deposit, with remaining time to maturity of two years or less. If applicable, the Company considers marketable securities with remaining time to maturity greater than one year and in a consistent loss position for at least nine months to be classified as long-term as it expects to hold them to maturity. As of December 31, 2009, the Company did not have any such securities. The Company considers all other marketable securities with remaining time to maturity of less than two years to be short-term marketable securities. The short-term marketable securities are classified as current assets because they can be readily converted into securities with a shorter remaining time to maturity or into cash. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date. All marketable securities and cash equivalents in the portfolio are classified as available-for-sale and are stated at fair value, with all the associated unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). Fair value is based on quoted market rates or direct and indirect observable markets for these investments. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. The cost of securities sold and any gains and losses on sales are based on the specific identification method.
 
The Company reviews its investment portfolio periodically to assess for other-than-temporary impairment in order to determine the classification of the impairment as temporary or other-than-temporary, which involves considerable judgment regarding such factors as the length of the time and the extent to which the market value has been less than amortized cost, the nature of underlying assets, the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. In April 2009, the Financial Accounting Standards Board (FASB) issued new guidance which was incorporated into FASB Accounting Standards Codification (ASC) 320 Investments — Debt and Equity Securities, which established a new method of recognizing and reporting


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
other-than-temporary impairments of debt securities. If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If the Company considers it more likely than not that it will sell the security before it will recover its amortized cost basis, an other-than-temporary impairment will be considered to have occurred. An other-than temporary impairment will also be considered to have occurred if the Company does not expect to recover the entire amortized cost basis of the security, even if it does not intend to sell the security. The Company has recognized no other-than-temporary impairments for its marketable securities for the years ended December 31, 2009, 2008 and 2007.
 
Fair Value of Financial Instruments
 
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, marketable securities, derivatives used in the Company’s hedging program, accounts payable and other accrued liabilities approximate their fair value. The carrying values of the Company’s other long-term liabilities and the Israeli severance pay fund assets approximate their fair value.
 
Credit Risk and Concentrations of Significant Customers
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, marketable securities, accounts receivable and restricted cash. Cash equivalents, restricted cash and marketable securities are invested through major banks and financial institutions in the U.S. and Israel. Such deposits in the U.S. may be in excess of insured limits and are not insured in Israel. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
 
Customers with accounts receivable balances of 10% or greater of the total accounts receivable balances as of December 31, 2009 and 2008, and customers representing 10% or greater of net revenues for the years ended December 31, 2009, 2008 and 2007 were as follows:
 
                                         
    Percentage of Total Accounts Receivable as of
    Percentage of Net Revenues For
 
    December 31,     The Years Ended December 31,  
Customers
  2009     2008     2009     2008     2007  
 
A
    24       64       33       27       13  
B
    *       16       18       29       40  
C
    15       *       10       *       *  
D
    43       *       *       14       11  
 
 
* Represents less than 10%
 
The Company’s customers are impacted by several factors, including an industry downturn and tightening of access to capital. The market that the Company serves is characterized by a limited number of large customers creating a concentration of risk. To date, the Company has not incurred any significant charges related to uncollectible accounts. Management makes judgments as to the Company’s ability to collect outstanding


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
receivables when collection becomes doubtful. Provisions are made based upon specific review of the outstanding invoices. Activity related to allowance for doubtful accounts was as follows (in thousands):
 
                                 
    Balance as of
    Charged to
             
    Beginning of
    Costs and
    Additions
    Balance as of
 
    Year     Expenses     (Deductions)     End of Year  
 
Year ended:
                               
December 31, 2009
  $ 39     $ (38 )   $ 55     $ 56  
December 31, 2008
  $ 142     $ 64     $ (167 )   $ 39  
December 31, 2007
  $ 152     $ 99     $ (109 )   $ 142  
 
Inventories, Net
 
Inventories, net consist primarily of finished goods and are stated at the lower of standard cost or market. Standard cost approximates actual cost on the first-in, first-out method. The Company regularly monitors inventory quantities on-hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes, and new product introductions and require estimates that may include factors that are uncertain. If inventory is written down, a new cost basis is established that cannot be increased in future periods.
 
Property and Equipment, Net
 
Property and equipment, net are stated at cost, less accumulated depreciation. Repair and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method and recorded over the estimated useful lives as follows:
 
     
   
Useful Life
 
Computers, software and related equipment
  3 years
Engineering and other equipment
  5 years
Office furniture and fixtures
  5 years
Leasehold improvements
  Shorter of lease term or estimated
useful life of the asset
 
Software licenses purchased
 
The Company capitalizes the costs of software licenses purchased from external parties if the technological feasibility of the product as a whole (that is, the product that will be ultimately marketed) has been established at the time of purchase. Amortization of the software license is based on the straight-line method over the remaining estimated economic life of the product.
 
Impairment of Long-Lived Assets
 
The Company periodically evaluates whether changes have occurred that require revision of the remaining useful life of long-lived assets or would render them not recoverable. If such circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. Through December 31, 2009, no material impairment losses have been recognized.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Goodwill
 
Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. The Company considered several factors including management structure and the nature of operations and concluded that it has only one reporting unit. Consistent with this determination, it reviewed the carrying amount of this unit compared to its fair value based on quoted market prices of the Company’s common stock. Following this approach, through December 31, 2009, no impairment losses have been recognized.
 
Warranty Liabilities
 
The Company provides a warranty for its software and hardware products. In most cases, the Company warrants that its hardware will be free of defects in workmanship for one year, and that its software media will be free of defects for 90 days. In master purchase agreements with large customers, however, the Company often warrants that its products (hardware and software) will function in material conformance to specification for a period ranging from one to five years from the date of shipment. In general, the Company accrues for warranty claims based on the Company’s historical claims experience. In addition, the Company accrues for warranty claims based on specific events and other factors when the Company believes an exposure is probable and can be reasonably estimated. The adequacy of the accrual is reviewed on a periodic basis and adjusted, if necessary, based on additional information as it becomes available.
 
Software Development Costs
 
Software development costs are capitalized beginning when technological feasibility has been established and ending when a product is available for sale to customers. To date, the period between achieving technological feasibility and when the software is made available for sale to customers has been relatively short and software development costs qualifying for capitalization have not been significant. As such, all software development costs have been expensed as incurred in research and development expense.
 
Income Taxes
 
As part of the process of preparing its consolidated financial statements the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included on the Company’s consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carry-forwards are utilized. Accordingly, realization of the Company’s deferred tax assets depends on future taxable income against which these deductions, losses, and credits can be utilized. The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent management believe that recovery is not likely, it must establish a valuation allowance.
 
Management judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities, and any valuation allowance recorded against its net deferred tax assets. As of December 31, 2009, the Company recorded a full valuation allowance against its deferred tax assets arising from U.S. operations since, based on the available evidence, management believed at that time it was more likely than not that the Company would not be able to utilize all of these deferred tax assets in the future. The Company intends to maintain the full valuation allowance against its U.S. deferred tax assets until sufficient evidence exists to support its reversal. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with its plans and estimates. Should the actual amounts differ from the Company’s estimates, the amount of its valuation allowance could be materially impacted.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Foreign Currency Derivative Instruments
 
The Company has revenues, expenses, assets and liabilities denominated in currencies other than the U.S. dollar that are subject to foreign currency risks, primarily related to expenses and liabilities denominated in the Israeli New Shekel. A foreign currency risk management program was established by the Company to help protect against the impact of foreign currency exchange rate movements on the Company’s operating results. The Company does not enter into derivatives for speculative or trading purposes. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
 
The Company selectively hedges future expenses denominated in Israeli New Shekels by purchasing foreign currency forward contracts or combinations of purchased and sold foreign currency option contracts. When the U.S. dollar strengthens against the Israeli New Shekel, the decrease in the value of future foreign currency expenses is offset by losses in the fair value of the contracts designated as hedges. Conversely, when the U.S. dollar weakens significantly against the Israeli New Shekel, the increase in the value of future foreign currency expenses is offset by gains in the fair value of the contracts designated as hedges. The exposures are hedged using derivatives designated as cash flow hedges under ASC 815 Derivatives and Hedging. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and, upon occurrence of the forecasted transaction, is subsequently reclassified to the consolidated statement of operations, primarily in research and development expenses. The ineffective portion of the gain or loss is recognized immediately in other income (expense), net. For the year ended December 31, 2009, the loss was $2,000 compared to a gain of $0.8 million for the year ended December 31, 2008. These derivative instruments generally have maturities of 180 days or less, and hence all unrealized amounts as of December 31, 2009 will have settled as of June 30, 2010.
 
The Company enters into foreign currency forward contracts to reduce the impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than its functional currency, which is the U.S. dollar. The Company recognizes these derivative instruments as either assets or liabilities on the consolidated balance sheet at fair value. These forward exchange contracts are not accounted for as hedges; therefore, changes in the fair value of these instruments are recorded as other income (expense), net in the consolidated statement of operations. These derivative instruments generally have maturities of 90 days. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated assets and liabilities, primarily liabilities denominated in Israeli New Shekels, and therefore, do not subject the Company to material balance sheet risk.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
All of the derivative instruments are with high quality financial institutions and the Company monitors the creditworthiness of these parties. Amounts relating to these derivative instruments were as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Derivatives designated as hedging instruments:
               
Notional amount of currency option contracts: Israeli New Shekels
    ILS 27,000       ILS 42,000  
                 
Notional amount of currency option contracts: U.S. dollars
  $ 7,454     $ 11,926  
                 
Unrealized losses included in other comprehensive income on condensed consolidated balance sheets:
               
Settled — underlying derivative was settled but forecasted transaction has not occurred
  $ (4 )   $ (285 )
Unsettled — primarily included as other current liabilities
    (147 )     (336 )
                 
Total unrealized losses included in other comprehensive income
  $ (151 )   $ (621 )
                 
Derivatives not designated as hedging instruments:
               
Notional amount of foreign currency forward contracts: Israeli New Shekels
    ILS 5,000       ILS 7,500  
                 
Notional amount of foreign currency forward contracts: U.S. dollars
  $ 1,323     $ 1,923  
                 
Unrealized (losses) gains included in other income (expense) in condensed consolidated statements of operations:
               
Fair value included in other current (liabilities) assets on condensed consolidated balance sheets
  $ (3 )   $ 55  
                 
 
The change in accumulated other comprehensive income (loss) from cash flow hedges included on the Company’s consolidated balance sheets was as follows (in thousands):
 
                 
    Years Ended December 31,  
    2009     2008  
 
Accumulated other comprehensive (loss) income related to cash flow hedges as of beginning of year
  $ (621 )   $ 45  
Changes in settled and unsettled portion of cash flow hedges
    (393 )     (892 )
                 
      (1,014 )     (847 )
Less:
               
Changes in cash flow hedges: Loss reflected in condensed consolidated statement of operations
    (863 )     (226 )
                 
Accumulated other comprehensive loss related to cash flow hedges as of end of year
  $ (151 )   $ (621 )
                 
 
Israeli Severance Pay
 
The Company’s wholly-owned subsidiary located in Israel is required to fund future severance liabilities determined in accordance with Israeli severance pay laws. Under these laws, employees are entitled upon termination to one month’s salary for each year of employment or portion thereof. The Company records compensation expense to accrue for these costs over the employment period, based on the assumption that the benefits to which the employee is entitled, if the employee separates immediately. The Company funds the liability


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
by monthly deposits in insurance policies and severance funds. The provision for Israeli severance expenses included in the Company’s consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007, amounted to approximately $0.9 million, $1.2 million, and $1.3 million, respectively. The value of the severance fund assets are recorded in other non-current assets on the Company’s consolidated balance sheets, which was $3.6 million and $2.7 million as of December 31, 2009 and 2008, respectively. The liability for long-term severance accrued on the Company’s consolidated balance sheets was $4.2 million and $3.7 million as of December 31, 2009 and 2008, respectively.
 
Stock-based Compensation
 
The Company applies the fair value recognition and measurement provisions of ASC 718 Compensation — Stock Compensation. Stock-based compensation is recorded at fair value as of the grant date and recognized as an expense over the employee’s requisite service period (generally the vesting period), which the Company has elected to amortize on a straight-line basis.
 
Under ASC 718, the Company estimates the fair value of stock options granted using a Black-Scholes option-pricing formula and a single option award approach. This model utilizes the estimated fair value of common stock and requires that, at the date of grant, the Company uses the expected term of the option, the expected volatility of the price of its common stock, risk free interest rates and expected dividend yield of the Company’s common stock. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Options typically vest with respect to 25% of the shares one year after the options’ vesting commencement date and the remainder ratably on a monthly basis over the following three years. In valuing share-based awards under ASC 718, significant judgment is required in determining the expected volatility of the Company’s common stock and the expected term individuals will hold their share-based awards prior to exercising. The computation of expected volatility is derived primarily from the weighted historical volatilities of several comparable companies within the cable and telecommunications equipment industry and to a lesser extent, the Company’s weighted historical volatility following its IPO in March 2007. The expected term of options granted represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method permitted by SEC Staff Accounting Bulletin (SAB) 107 as revised by SAB 110. In the future, as the Company gains historical data for volatility in its stock and the actual term employees hold their options, expected volatility and expected term may change which could substantially change the grant-date fair value of future awards of stock options and ultimately the expense the Company records.
 
Restricted stock units (RSU) grants under the 2007 Plan generally vest in increments over two to four years from the date of grant. The RSUs are classified as equity awards because the RSUs are paid only in shares upon vesting. RSU awards are measured at the fair value at the date of grant, which corresponds to the closing stock price of the Company’s common stock on the date of grant. This fair value is then amortized on a straight-line basis over the requisite service periods of the RSUs, which is generally the vesting period.
 
Foreign Currency Translation
 
The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Translation adjustments resulting from remeasuring the foreign currency denominated financial statements of subsidiaries into U.S. dollars are included in the Company’s consolidated statements of operations. Translation gains and losses have not been significant to date.
 
Research and Development
 
Research and development costs consist primarily of compensation and related costs for personnel, as well as costs related to materials, supplies, and equipment depreciation. All research and development costs are expensed as incurred.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Advertising Costs
 
All advertising costs are expensed as incurred. Advertising costs, which are included in sales and marketing expenses, were not significant for all periods presented.
 
Other Income (Expense), Net
 
For the years ended December 31, 2009, 2008 and 2007, other income (expense), net, primarily included foreign currency gains and losses. Additionally for the year ended December 31, 2007, other income (expense), net included the expense resulting from fair value adjustments of redeemable convertible preferred stock warrants.
 
Preferred Stock Warrants
 
Upon the completion of its initial public offering on March 27, 2007, the warrants to purchase redeemable convertible preferred stock became warrants to purchase the Company’s common stock and accordingly the Company ceased adjusting these warrants for changes in fair value and reclassified their respective liabilities to stockholders’ equity. Pursuant to ASC 480 Distinguishing Liabilities from Equity, freestanding warrants for shares that were either exercisable or warrants for shares that were redeemable were classified as liabilities on the consolidated balance sheet at fair value. At the end of each reporting period, changes in fair value during the period were recorded as a component of other expense, net.
 
For the years ended December 31, 2009, 2008 and 2007, the Company recorded approximately zero, zero, and $5.0 million of charges to other (expense) income, net to reflect the increase in fair value of preferred stock warrants.
 
Recently Adopted Accounting Standards
 
In December 2008, the FASB issued guidance which was included in ASC 715 Compensation — Retirement Benefits, and was effective for fiscal years ending after December 15, 2009. This guidance requires an employer to disclose investment policies and strategies, categories, fair value measurements, and significant concentration of risk among its postretirement benefit plan assets. The adoption of this guidance had no impact on the Company’s consolidated financial condition, results of operations or cash flows.
 
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. ASU 2009-05 was effective in the three months ended December 31, 2009. The adoption of ASU 2009-05 had no impact on the Company’s consolidated financial condition, results of operations or cash flows.
 
Recently Issued Accounting Standards
 
In October 2009, the FASB issued ASU 2009-13 Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force (ASU 2009-13) and ASU 2009-14 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB Emerging Issues Task Force (ASU 2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of ASU 2009-13 and ASU 2009-14 on its consolidated financial position, results of operations or cash flows.
 
3.   Basic and Diluted Net (Loss) Income per Common Share
 
The computation of basic and diluted net (loss) income per common share was as follows (in thousands, except per share data):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Numerator:
                       
Net (loss) income
  $ (6,739 )   $ 9,780     $ (25,367 )
Denominator:
                       
Weighted average shares used in basic net (loss) income per common share
    65,936       63,559       49,041  
Stock options
          3,506        
Warrants
          188        
Restricted stock units
                 
Employee stock purchase plan shares
          11        
                         
Weighted average shares used in diluted net (loss) income per common share
    65,936       67,264       49,041  
                         
Basic net (loss) income per common share
  $ (0.10 )   $ 0.15     $ (0.52 )
                         
Diluted net (loss) income per common share
  $ (0.10 )   $ 0.15     $ (0.52 )
                         
 
As of December 31, 2009, 2008 and 2007, the Company had securities outstanding that could potentially dilute basic net income (loss) per common share in the future, but were excluded from the computation of diluted net (loss) income per common share in the periods presented as their effect would have been anti-dilutive. Potentially dilutive outstanding securities were as follows (shares in thousands):
 
                         
    As of December 31,
    2009   2008   2007
 
Stock options outstanding
    12,115       8,572       13,851  
Restricted stock units
    2,497       215       356  
Employee stock purchase plan shares
    302       243        
Warrants to purchase common stock
    268             428  
 
4.   Restructuring Charges
 
February 2009 Restructuring Plan
 
On February 9, 2009, the Board of Directors authorized a restructuring plan in order to respond to market and economic conditions pursuant to which employees were terminated. This resulted in severance costs of $0.7 million for the year ended December 31, 2009.
 
April 2008 Restructuring Plan
 
On April 29, 2008, the Board of Directors authorized a restructuring plan in connection with the redeployment of resources pursuant to which employees were terminated under a plan of termination. This resulted in net charges


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
of zero and $1.4 million for the years ended December 31, 2009 and 2008, respectively including charges of $1.1 million for vacated facility charges and $0.3 million for severance costs. The costs associated with facility lease obligations are expected to be paid over the remaining term of the related obligations which extend to January 2013.
 
October 2007 Restructuring Plan
 
On October 29, 2007, the Board of Directors authorized a restructuring plan in connection with the retirement of the Company’s cable modem termination system platform (CMTS) under a plan of termination. This resulted in net charges of $0.7 million, $0.7 million and $3.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. Severance and related charges of zero, $0.3 million and $2.2 million for the years ended December 31, 2009, 2008 and 2007, respectively consisted primarily of salary and payroll taxes and medical benefits. The Company’s plan also involved vacating several leased facilities throughout the world, with lease terms expiring through March 2012 resulting in vacated facility charges, net of sublease income of approximately $0.7 million, $0.4 million and $0.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. The costs associated with facility lease obligations are expected to be paid over the remaining term of the related obligations which extend to March 2012.
 
Restructuring summary
 
All of the restructuring plans discussed above were essentially complete as of December 31, 2009, including one previously exited facility approved under the October 2007 restructuring plan which is expected to be subleased in 2010. Total restructuring activity for the plans discussed above was as follows (in thousands):
 
                                 
                      Total
 
    Vacated Facilities
    Severance and
          Restructuring
 
    Costs     Related Expenses     Other Costs     Liabilities  
 
Balance, December 31, 2006
  $     $     $     $  
Charges
    665       2,193       140       2,998  
Adjustments
    62                   62  
Cash Payments
    (101 )     (1,462 )     (34 )     (1,597 )
                                 
Balance, December 31, 2007
    626       731       106       1,463  
Charges
    1,494       542       19       2,055  
Adjustments(1)
    (601 )                 (601 )
Cash Payments
    (823 )     (1,273 )     (125 )     (2,221 )
                                 
Balance, December 31, 2008
    696                   696  
Charges(2)
    699       657             1,356  
Adjustments
    41       (22 )           19  
Cash Payments
    (542 )     (635 )           (1,177 )
                                 
Balance, December 31, 2009
  $ 894     $     $     $ 894  
                                 
Less restructuring liability, current portion
                            (739 )
                                 
Restructuring liability, less current portion
                          $ 155  
                                 
 
 
(1) Adjustments for the year ended December 31, 2008 related to the leasehold improvements which were originally charged to restructuring expense as part of the subleasing of a vacated facility.
 
(2) Charges for vacated facilities costs for the year ended December 31, 2009 were due to the restructuring plan approved by the Company’s Board of Directors on October 29, 2007.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
5.   Fair Value
 
The fair value of the Company’s cash equivalents and marketable securities is determined in accordance with ASC 820 Fair Value Measurements and Disclosures (ASC 820), which the Company adopted in 2008. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1), inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2) and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company measures certain financial assets, mainly comprised of marketable securities, at fair value.
 
The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) as of December 31, 2009 were as follows (in thousands):
 
                                 
    Level 1     Level 2     Level 3     Total  
 
Marketable securities:
                               
U.S. Agency debt securities
  $ 1,265     $ 63,014     $     $ 64,279  
Corporate debt securities
          70,819             70,819  
Commercial paper
          7,393             7,393  
Certificates of deposit
    4,523                   4,523  
                                 
      5,788       141,226             147,014  
Cash equivalents:
                               
Money market funds
    12,527                   12,527  
Corporate debt securities
          181             181  
Commercial paper
          1,000             1,000  
                                 
      12,527       1,181             13,708  
                                 
Total cash equivalents and marketable securities
  $ 18,315     $ 142,407     $     $ 160,722  
                                 
Cash balances
                            11,186  
                                 
Total cash, cash equivalents and marketable securities
                          $ 171,908  
                                 


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s fair value measurements of its financial assets (cash, cash equivalents and marketable securities) as of December 31, 2008 were as follows (in thousands):
 
                                 
    Level 1     Level 2     Level 3     Total  
 
Marketable securities:
                               
U.S. Agency debt securities
  $     $ 55,296     $     $ 55,296  
Corporate debt securities
          44,378             44,378  
Commercial paper
          22,986             22,986  
Municipal debt securities (taxable)
          994             994  
                                 
            123,654             123,654  
Cash equivalents:
                               
Money market funds
    30,092                   30,092  
U.S. Agency debt securities
          4,004             4,004  
Corporate debt securities
          999             999  
Commercial paper
          9,937             9,937  
                                 
      30,092       14,940             45,032  
                                 
Total cash equivalents and marketable securities
  $ 30,092     $ 138,594     $     $ 168,686  
                                 
Cash balances
                            5,949  
                                 
Total cash, cash equivalents and marketable securities
                          $ 174,635  
                                 
 
In addition to the amounts disclosed in the above table, the fair value of the Company’s Israeli severance pay assets, which are fully comprised of Level 2 assets, was $3.6 million and $2.7 million as of December 31, 2009 and 2008, respectively.
 
6.   Balance Sheet Data
 
Marketable Securities
 
Marketable securities, which included available-for-sale securities as of December 31, 2009 and December 31, 2008 were as follows (in thousands):
 
                                 
    As of December 31, 2009  
    Amortized
    Unrealized
    Unrealized
    Estimated Fair
 
    Cost     Gain     Loss     Value  
 
U.S. Agency debt securities
  $ 64,256     $ 70     $ (47 )   $ 64,279  
Corporate debt securities
    70,569       288       (38 )     70,819  
Commercial paper
    7,394             (1 )     7,393  
Certificates of deposit
    4,520       4       (1 )     4,523  
                                 
Total marketable securities
  $ 146,739     $ 362     $ (87 )   $ 147,014  
                                 
 


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    As of December 31, 2008  
    Amortized
    Unrealized
    Unrealized
    Estimated Fair
 
    Cost     Gain     Loss     Value  
 
U.S. Agency debt securities
  $ 54,852     $ 444     $     $ 55,296  
Corporate debt securities
    44,247       239       (108 )     44,378  
Commercial paper
    22,885       101             22,986  
Municipal debt securities (taxable)
    1,000             (6 )     994  
                                 
Total marketable securities
  $ 122,984     $ 784     $ (114 )   $ 123,654  
                                 
 
The fair value and unrealized loss of investments showing unrealized loss (primarily corporate debt securities, none of which had been in a continuous loss position for more than nine months) was $54.0 million and $87,000, respectively, as of December 31, 2009, and $18.2 million and $114,000 as of December 31, 2008, respectively. As of December 31, 2009, the Company did not hold any marketable securities with remaining time to maturity of greater than one year and in a consistent loss position for at least nine months. Gross realized losses or gains on the sale of marketable securities were not significant during the years ended December 31, 2009, 2008 and 2007.
 
Through December 31, 2009, the Company had no marketable securities that were considered other-than-temporarily impaired. The Company periodically reviews other-than-temporary impairments for available-for-sale debt instruments when it intends to sell or it is more likely than not that it will be required to sell an available-for-sale debt instrument before recovery of its amortized cost basis. If this assessment had identified available-for-sale debt instruments that were considered other-than-temporarily impaired and that the Company did not intend to sell and would not be required to sell prior to recovery of the amortized cost basis, the Company would separate the amount of the impairment into the amount that was credit related and the amount due to all other factors. The credit loss component would be recognized in earnings and would be the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument’s fair value and the present value of future expected cash flows due to factors that were not credit related would be recognized in other comprehensive income (loss).
 
The contractual maturity date of the marketable securities was as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Due within one year
  $ 107,449     $ 88,118  
Due within one to two years
    39,565       35,536  
                 
Total marketable securities
  $ 147,014     $ 123,654  
                 
 
Inventories, Net
 
Inventories, net were comprised as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Finished products
  $ 4,933     $ 6,085  
Raw materials, parts and supplies
          38  
                 
Total inventories, net
  $ 4,933     $ 6,123  
                 

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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets were comprised as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Taxes receivable
  $ 2,969     $ 424  
Interest receivable
    1,070       965  
Prepaid maintenance
    981       667  
Other
    1,157       1,660  
                 
Total prepaid expenses and other current assets
  $ 6,177     $ 3,716  
                 
 
Property and Equipment, Net
 
Property and equipment, net was comprised as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Engineering and other equipment
  $ 30,129     $ 29,463  
Computers, software and related equipment
    19,942       18,973  
Leasehold improvements
    5,897       5,745  
Office furniture and fixtures
    1,132       1,192  
                 
      57,100       55,373  
Less: accumulated depreciation
    (45,683 )     (40,015 )
                 
Total property, plant and equipment
  $ 11,417     $ 15,358  
                 
 
The Company reviews the estimated useful lives of its fixed assets on a periodic basis. In 2007, this review resulted in an additional $0.8 million charge to depreciation expense. The Company recorded no similar charges in 2008 and 2009.
 
Goodwill
 
The carrying value of goodwill was approximately $1.7 million as of both December 31, 2009 and 2008. There were no additions or adjustments to goodwill during the years ended December 31, 2009 and 2008.
 
Other Non-current Assets
 
Other non-current assets were as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Israeli severance pay
  $ 3,648     $ 2,661  
Software license
    2,083        
Security deposit
    1,962       2,125  
Restricted cash
    583       745  
Deferred tax assets
    449       644  
Other
    277       98  
                 
Total other non-current assets
  $ 9,002     $ 6,273  
                 


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Software license represents the Company’s purchase of a quadrature amplitude modulation (QAM) edge resource management technology license for $2.5 million in 2009. The Company amortizes the amounts paid for the software license fee using the straight-line method over the estimated useful life of three years. Restricted cash consists of a certificate of deposit that is used to secure a standby letter of credit required in connection with an operating lease of the Company and cash used as credit card collateral.
 
Deferred Revenues, Net
 
Deferred revenues, net were as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Deferred service revenues, net
  $ 27,252     $ 39,675  
Deferred product revenues, net
    17,614       20,887  
                 
Total deferred revenues, net
    44,866       60,562  
Less current portion of deferred revenues, net
    (32,428 )     (39,433 )
                 
Deferred revenues, net, less current portion
  $ 12,438     $ 21,129  
                 
 
Other Liabilities
 
Other liabilities were as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Rent and restructuring liabilities
  $ 1,581     $ 1,602  
Foreign, franchise and other income tax liabilities
    2,198       2,071  
Accrued warranty
    2,068       3,381  
Sales and use tax payable
    1,310       831  
Accrued professional fees
    462       721  
Customer prepayments
    816       155  
Accrued class action litigation charges
          1,504  
Other
    1,290       1,348  
                 
Total other liabilities
    9,725       11,613  
Less current portion of other liabilities
    (7,083 )     (9,221 )
                 
Other liabilities, less current portion
  $ 2,642     $ 2,392  
                 


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Accrued Warranty
 
Activity related to the product warranty was as follows (in thousands):
 
                 
    Years Ended December 31,  
    2009     2008  
 
Balance as of beginning of year
  $ 3,381     $ 4,359  
Warranty charged to cost of sales
    412       1,275  
Utilization of warranty
    (1,003 )     (1,554 )
Other adjustments
    (722 )     (699 )
                 
Balance as of end of year
    2,068       3,381  
Less accrued warranty, current portion
    (1,047 )     (1,669 )
                 
Accrued warranty, less current portion
  $ 1,021     $ 1,712  
                 
 
As part of the transition to switch to all digital broadcasting from analog transmission, the Company recorded a $0.5 million benefit from the reversal of warranty reserves related to the decommissioned analog products in 2009. The reversal of this warranty reserve was recorded as a reduction of the Company’s cost of net product revenues, and is included in the above table in other adjustments.
 
7.   Commitments and Contingencies
 
Commitments
 
The Company and its subsidiaries operate from leased premises in the U.S., Israel and Asia. The Company is committed to pay a portion of the buildings’ operating expenses as determined under the lease agreements. Future minimum lease payments due under the related operating leases with an initial or remaining non-cancellable lease term in excess of one year as of December 31, 2009 were as follows (in thousands):
 
         
Years ending December 31,
       
2010
  $ 3,188  
2011
    3,069  
2012
    1,881  
2013
    100  
2014
     
         
Total minimum lease payments
  $ 8,238  
         
 
The terms of certain lease arrangements have free or escalating rent payment provisions, and when significant, the rent expense is recognized on a straight-line basis over the lease period resulting in a deferred rent liability. Leasehold improvements are amortized over the shorter of their useful life or the contractual lease term. Rent expense under operating leases was approximately $3.2 million, $3.6 million and $4.0 million, for the years ended December 31, 2009, 2008 and 2007, respectively. The Company entered into a non-cancellable sublease of a portion of its Tel Aviv facility in December 2008, which expires in January 2013. Sublease rentals received were $0.4 million for the year ended December 31, 2009, and were not material for the years ended December 31, 2008 and 2007.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Legal Proceedings
 
BigBand Networks, Inc. v. Imagine Communications, Inc., Case No. 07-351
 
On June 5, 2007, the Company filed suit against Imagine Communications, Inc. in the U.S. District Court, District of Delaware, alleging infringement of certain U.S. Patents covering advanced video processing and bandwidth management techniques. The lawsuit seeks injunctive relief, along with monetary damages for willful infringement. The Company is subject to certain counterclaims by which Imagine Communications, Inc. has challenged the validity and enforceability of the Company’s asserted patents. The Company intends to defend itself vigorously against such counterclaims. No trial date has been set. At this stage of the proceeding, it is not possible for the Company to quantify the extent of potential liabilities, if any, resulting from the alleged counterclaims.
 
Securities Litigation
 
In connection with the settlement of the Company’s federal securities litigation (In re BigBand Networks, Inc. Securities Litigation, Case No. C 07-5101-SBA) as ordered by the U.S. District Court for the Northern District of California on September 22, 2009, the related shareholder derivative lawsuit (Ifrah v. Bassan-Eskenazi, et. al., Case No. 468401) was dismissed by the Superior Court for the County of San Mateo, California on September 23, 2009, and the state securities litigation (Wiltjer v. Bassan-Eskenazi, et. al., Case No. CGC-07-469661) was dismissed by the Superior Court for the City and County of San Francisco on October 27, 2009. As of December 31, 2009, the Company had no further significant obligations under these lawsuits.
 
Indemnities
 
From time to time, in its normal course of business, the Company may indemnify other parties with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company. The Company may agree to hold other parties harmless against specific losses such as those that could arise from a breach of representation or breach of covenant, or third-party infringement claims. It may not be possible to determine the maximum potential amount of liability under such indemnification obligations due to the unique facts and circumstances that are likely to be involved in each particular claim and indemnification provision. Historically, there have been no such indemnification claims.
 
8.   Stockholders’ Equity
 
The Company allocated stock-based compensation expense as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Cost of net revenues
  $ 2,084     $ 1,733     $ 1,534  
Research and development
    4,887       3,901       3,837  
Sales and marketing
    2,432       2,566       4,184  
General and administrative
    4,816       3,675       2,061  
                         
Total expense
  $ 14,219     $ 11,875     $ 11,616  
                         
 
Equity Incentive Plans
 
On January 31, 2007, the Board of Directors approved the 2007 Equity Incentive Plan (2007 Plan), which became effective on March 15, 2007. The Company has options outstanding under its 1999, 2001 and 2003 share option and incentive plans (the Prior Plans), but no longer grants stock options or restricted stock units (RSUs) under any of the Prior Plans. Cancelled or forfeited stock option grants under the Prior Plans will be added to the total amount of shares available for grant under the 2007 Plan. In addition, shares authorized but unissued as of


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
March 15, 2007 under the Prior Plans were added to shares available for grant under the 2007 Plan up to a maximum of 20,005,559 shares. The 2007 Plan contains an “evergreen” provision, pursuant to which the number of shares available for issuance under the 2007 Plan shall be increased on the first day of the fiscal year, in an amount equal to the least of (a) 6,000,000 shares, (b) 5% of the outstanding Shares on the last day of the immediately preceding fiscal year or (c) such number of shares determined by the Board of Directors. The Board of Directors increased the amount of shares reserved under the 2007 Plan by 3,356,892 on February 25, 2010, which was equal to 5% of the outstanding shares as of January 1, 2010.
 
The 2007 Plan allows the Company to award stock options (incentive and non-qualified), restricted stock, RSUs, and stock appreciation rights to employees, officers, directors and consultants of the Company. The exercise price of incentive stock options granted under the 2007 Plan to participants with 10% or more voting power of all classes of stock of the Company or any parent or subsidiary company may not be less than 110% of the fair market value of the Company’s common stock on the date of the grant. Options granted under the 2007 Plan are generally exercisable in installments vesting over a four-year period and have a maximum term of ten years from the date of grant. The Company creates newly issued shares for all share transaction with employees.
 
Shares available for future issuance under the 2007 Plan were as follows (in thousands):
 
                 
    Years Ended December 31,  
    2009     2008  
 
Available as of start of year
    7,298       5,906  
Authorized shares added
    3,232       3,095  
Options and RSUs cancelled
    904       2,121  
                 
      11,434       11,122  
Options and RSUs granted
    (3,939 )     (3,824 )
                 
Available as of end of year
    7,495       7,298  
                 
 
Data pertaining to stock option activity under the plans was as follows (in thousands, except per share data):
 
                                 
          Weighted
    Weighted Average
       
    Number
    Average
    Remaining
    Aggregate
 
    of
    Exercise
    Contractual Life
    Intrinsic
 
    Options     Price     (Years)     Value  
 
Outstanding at December 31, 2006
    16,020     $ 2.31       8.09     $ 55,194  
Granted
    3,846       7.58                  
Exercised
    (4,055 )     1.15                  
Cancelled
    (1,960 )     4.14                  
                                 
Outstanding as of December 31, 2007
    13,851     $ 3.85       7.33     $ 26,651  
Granted
    3,505       4.86                  
Exercised
    (2,275 )     1.65                  
Cancelled
    (2,051 )     5.97                  
                                 
Outstanding as of December 31, 2008
    13,030     $ 4.17       7.58     $ 22,978  
Granted
    1,316       4.02                  
Exercised
    (1,444 )     1.87                  
Cancelled
    (787 )     5.77                  
                                 
Outstanding as of December 31, 2009
    12,115     $ 4.33       6.99     $ 7,621  
                                 
Vested and expected to vest, net of forfeitures
    11,853     $ 4.32       6.95     $ 7,619  
                                 


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $4.9 million, $9.0 million, and $28.0 million, respectively. The intrinsic value of an outstanding option is calculated based on the difference between its exercise price and the closing price of the Company’s common stock on the last trading date in the year, or in the case of an exercised option, it is based on the difference between its exercise price and the actual fair market value of the Company’s common stock on the date of exercise. Stock options with exercise prices greater than the closing price of the Company’s common stock on the last trading day of the year have an intrinsic value of zero. The aggregate intrinsic values for options outstanding in the preceding table are based on the Company’s closing stock prices of $3.44, $5.52 and $5.14 per share as of December 31, 2009, 2008 and 2007 respectively.
 
Stock options outstanding and exercisable as of December 31, 2009 were as follows (shares in thousands):
 
                                         
    Options Outstanding              
          Weighted Average
                   
          Remaining
          Options Exercisable  
          Contractual Life
    Weighted Average
    No. Shares
    Weighted Average
 
Exercise Price ($)
  Number     (Years)     Exercise Price     Exercisable     Exercise Price  
 
 0.20 - 1.00
    2,444       4.08     $ 0.79       2,444     $ 0.79  
 1.32 - 2.60
    856       5.32       2.11       786       2.09  
 3.08 - 5.28
    5,139       8.16       4.61       2,053       4.98  
 5.29 - 7.34
    3,307       7.73       5.97       1,852       6.05  
 9.33 - 13.12
    196       7.26       11.14       139       11.15  
14.85 - 18.95
    173       7.18       17.35       119       17.41  
                                         
      12,115       6.99     $ 4.33       7,393     $ 3.87  
                                         
 
The weighted-average grant-date fair value of options granted for the years ended December 31, 2009, 2008 and 2007 on a per-share basis was approximately $2.69, $3.01 and $6.63, respectively.
 
Stock-Based Compensation
 
The fair value of each new option awarded and Employee Stock Purchase Plan shares are estimated on the grant date using the Black-Scholes valuation model using the assumptions noted as follows:
 
             
    Years Ended December 31,
    2009   2008   2007
 
Stock Options
           
Expected volatility
  73-75%   63-71%   75-91%
Expected term
  6 years   6 years   6 years
Risk-free interest
  2.00-2.80%   2.40-3.31%   3.89-4.75%
Expected dividends
  0.0%   0.0%   0.0%
Stock Purchase Plan
           
Expected volatility
  61-104%   59-102%   55-90%
Expected term
  0.5 years   0.5 years   0.5-0.6 years
Risk-free interest
  0.16-0.74%   0.74-1.87%   3.71-5.12%
Expected dividends
  0.0%   0.0%   0.0%
 
The computation of expected volatility is derived primarily from the weighted historical volatilities of several comparable companies within the cable and telecommunications equipment industry and to a lesser extent, the Company’s weighted historical volatility following its IPO in March 2007. The risk-free interest factor is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
approximately equal to each grant’s expected term. For all periods presented, the Company has elected to use the simplified method of determining the expected term as permitted by SEC Staff Accounting Bulletin (SAB) 107 as revised by SAB 110. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. Estimates are evaluated each reporting period and adjusted, if necessary, by recognizing the cumulative effect of the change in estimate on compensation costs recognized in prior year periods.
 
As of December 31, 2009, total unrecognized stock compensation expense relating to unvested stock options, adjusted for estimated forfeitures, was $19.3 million. This amount is expected to be recognized over a weighted-average period of 2.4 years.
 
Restricted Stock Units
 
The 2007 Plan provides for grants of restricted stock units (RSUs) that vest between two and four years from the date of grant. The RSUs are classified as equity awards because the RSUs are paid only in shares upon vesting. RSU awards are measured at the fair value at the date of grant, which corresponds to the closing stock price of the Company’s common stock on the date of grant. The total intrinsic value of RSUs vesting during the years ended December 31, 2009, 2008 and 2007 was $2.4 million, $0.2 million and zero, respectively. The Company recorded RSU stock-based compensation expense of $3.7 million, $1.0 million and $0.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
 
The Company’s RSU activity was as follows (units in thousands):
 
                                 
          Weighted
    Weighted Average
       
          Average
    Remaining
    Aggregate
 
    Restricted
    Grant-Date
    Contractual
    Intrinsic
 
    Stock Units     Fair Value     Life (Years)     Value  
 
Unvested as of December 31, 2006
        $                  
Granted
    406       15.14                  
Cancelled
    (50 )     18.95                  
                                 
Unvested as of December 31, 2007
    356     $ 14.61       2.23     $ 1,832  
Granted
    319       5.35                  
Vested
    (27 )     5.56                  
Cancelled
    (80 )     18.95                  
                                 
Unvested as of December 31, 2008
    568     $ 9.38       1.24     $ 3,138  
Granted
    2,623       5.25                  
Vested
    (577 )     7.07                  
Cancelled
    (117 )     9.17                  
                                 
Unvested as of December 31, 2009
    2,497     $ 5.58       1.77     $ 8,590  
                                 
Expected to vest after December 31, 2009(1)
    2,300               1.72     $ 7,911  
                                 
 
 
(1) RSUs expected to vest reflect an estimated forfeiture rate.
 
As of December 31, 2009, total unrecognized stock compensation expense relating to unvested RSUs, adjusted for estimated forfeitures, was $11.6 million. This amount is expected to be recognized over a weighted-average period of 3.0 years.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Employee Stock Purchase Plan
 
On January 31, 2007, the Board of Directors approved the 2007 Employee Stock Purchase Plan (ESPP), which became effective on March 15, 2007. Under the ESPP, employees may purchase shares of common stock at a price per share that is 85% of the fair market value of the Company’s common stock as of the beginning or the end of each six month offering period, whichever is lower. The ESPP contains an evergreen provision, pursuant to which an annual increase may be added on the first day of each fiscal year, equal to the least of (i) 3,000,000 shares of the Company’s common stock, (ii) 2% of the outstanding shares of the Company’s common stock on the first day of the fiscal year or (iii) an amount determined by the Board of Directors. The Board of Directors increased the amount of shares reserved under the ESPP by 1,342,756 on February 25, 2010, which was equal to 2% of the outstanding shares as of January 1, 2010. The ESPP is compensatory in nature, and therefore results in compensation expense. The Company recorded stock-based compensation expense associated with its ESPP of $0.8 million, $0.9 million and $0.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.
 
Shares available for future issuance under the ESPP were as follows (in thousands):
 
                 
    Years Ended December 31,  
    2009     2008  
 
Available as of start of year
    1,662       786  
Authorized shares added
    1,293       1,238  
Common shares issued
    (478 )     (362 )
                 
Available as of end of year
    2,477       1,662  
                 
 
Shares Reserved
 
Common stock available for future issuance was as follows (in thousands):
 
                 
    December 31,  
    2009     2008  
 
ESPP shares reserved for future issuance
    2,477       1,662  
Restricted stock units
    2,497       568  
Warrants to purchase common stock
    268       268  
Stock options:
               
Outstanding
    12,115       13,030  
Reserved for future grants
    7,497       7,298  
                 
      24,854       22,826  
                 
 
Common Stock Warrants
 
As of December 31, 2009, a warrant holder had unexercised warrants outstanding to purchase 267,858 shares of the Company’s common stock for an exercise price of $1.79 per share. These warrants will expire on March 20, 2010. In 2008, a warrant holder exercised its common stock warrants for 160,300 shares, and under the cashless exercise provisions of the warrant agreement received 67,663 shares in full settlement of the warrant. In 2007, warrants to purchase 502,000 shares of common stock were exercised with total proceeds of approximately $1.8 million paid to the Company.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
9.   Segment Reporting
 
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis for evaluating financial performance and allocating resources. There are no segment managers who are held accountable for operations below the consolidated financial statement level. Accordingly, the Company reports as a single reporting segment.
 
Net revenues by geographical region were allocated based on the shipping destination of customer orders, and were as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
United States
  $ 123,819     $ 169,397     $ 146,835  
Asia
    9,734       6,648       13,670  
Europe
    4,198       5,343       14,612  
Americas, excluding United States
    1,763       3,905       1,393  
                         
Total net revenues
  $ 139,514     $ 185,293     $ 176,510  
                         
 
Product net revenues were as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Video
  $ 92,042     $ 145,517     $ 121,046  
Data
    1,620       2,900       23,669  
                         
Total product net revenues
  $ 93,662     $ 148,417     $ 144,715  
                         
 
Service net revenues were as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Video
  $ 44,140     $ 30,811     $ 23,009  
Data
    1,712       6,065       8,786  
                         
Total service net revenues
  $ 45,852     $ 36,876     $ 31,795  
                         
 
Long-lived assets by geographical regions were as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
United States
  $ 6,286     $ 8,859  
Israel
    4,728       6,305  
Rest of World
    403       194  
                 
Total long-lived assets
  $ 11,417     $ 15,358  
                 


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
10.   Income Taxes
 
The Company’s (loss) income before (benefit from) provision for income taxes was comprised as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Domestic
  $ (10,276 )   $ 8,833     $ (25,755 )
Foreign
    2,470       3,347       1,613  
                         
(Loss) income before (benefit from) provision for income taxes
  $ (7,806 )   $ 12,180     $ (24,142 )
                         
 
(Benefit from) provision for income taxes was as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Current
                       
Federal
  $ (687 )   $ 199     $  
State
    108       669       (48 )
Foreign
    (642 )     1,578       1,228  
                         
      (1,221 )     2,446       1,180  
Deferred
                       
Federal
    (39 )     40       38  
State
    (5 )     7       6  
Foreign
    198       (93 )     1  
                         
      154       (46 )     45  
                         
Total (benefit from) provision for income taxes
  $ (1,067 )   $ 2,400     $ 1,225  
                         
 
Reconciliations of the tax (benefit) provision at federal statutory rate to the Company’s (benefit from) provision for income taxes were as follows (in thousands):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Tax (benefit) provision at federal statutory rate
  $ (2,732 )   $ 4,263     $ (8,450 )
U.S. losses not benefited (net operating loss carryforward utilized)
    2,063       (2,668 )     7,113  
Foreign operations
    (1,411 )     1,523       618  
State taxes
    68       441       (27 )
Research and development tax credits
    (200 )     (510 )     (1,037 )
Stock-based compensation
    1,074       (797 )     1,127  
Warrant amortization
                1,741  
Permanent items
    71       148       140  
                         
(Benefit from) provision for income taxes
  $ (1,067 )   $ 2,400     $ 1,225  
                         


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Significant components of the Company’s net deferred tax assets were as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Deferred tax assets:
               
Net operating loss carryforwards
  $ 22,902     $ 23,810  
Reserves and accruals
    12,474       13,615  
Stock compensation
    4,262       2,883  
Depreciation and amortization
    1,869       1,652  
Tax credit carryforwards
    3,413       4,091  
                 
Total deferred tax assets
    44,920       46,051  
Deferred tax liabilities:
               
Goodwill
    (239 )     (202 )
                 
Gross deferred taxes
    44,681       45,849  
Valuation allowance
    (44,471 )     (45,407 )
                 
Net deferred taxes
  $ 210     $ 442  
                 
 
Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded U.S. cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets. The Company’s valuation allowance decreased by $0.9 million, $4.1 million, and increased by $3.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, the Company had U.S. federal and state net operating losses of approximately $61.3 million and $20.2 million, respectively. The U.S. federal net operating loss carry-forwards will expire at various dates beginning in 2021 through 2029 if not utilized. Most state net operating loss carry-forwards will expire at various dates beginning in 2010 through indefinite.
 
As of December 31, 2009, the Company had U.S. tax credit carry-forwards, primarily from research and development credits, of approximately $2.8 million for federal and $1.0 million for state. The federal credit will expire at various dates beginning in 2020 through 2029 if unused. The California state research and development credits can be carried forward indefinitely. Massachusetts state research and developmental credits can be carried forward for 15 years.
 
Net operating loss carry-forwards and credit carry-forwards reflected above may be limited due to ownership changes as provided in Section 382 of the Internal Revenue Code and similar state provisions. The Company has not provided for U.S. federal income taxes on all of the non-U.S. subsidiaries’ undistributed earnings as of December 31, 2009, because such earnings are intended to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to applicable U.S. federal and state income taxes.
 
The Company uses the with-and-without approach described in ASC 740 Income Taxes (ASC 740) to determine the recognition and measurement of excess tax benefits. Accordingly, the Company has elected to recognize excess income tax benefits from stock option exercises in additional paid in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company. As of December 31, 2009, the amount of such excess tax benefits from stock options included in net operating losses was $15.3 million. In addition, the Company has elected to account for the indirect effects of stock-based awards on other tax attributes, such as the research and alternative minimum tax credits, through the consolidated statement of operations.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Effective January 1, 2007, the Company adopted guidance related to accounting for uncertainties in income taxes, which has been incorporated into ASC 740. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within its provision for income taxes. The Company’s only major tax jurisdictions are the U.S. and Israel. The tax years 1999 through 2009 remain open and subject to examination by the appropriate governmental agencies in the U.S. The Company is currently under audit in Israel for the tax years 2004 through 2007. The Company’s results of operations are expected to be impacted by these assessments and may result in a tax benefit of up to $0.5 million. The Company’s total amount of unrecognized tax benefits as of December 31, 2009 was $3.4 million, of which $1.5 million if recognized, would affect the Company’s effective tax rate. Changes to the amount of unrecognized tax benefits from U.S. federal and state research and development credits and other tax positions were as follows (in thousands):
 
                 
    Years Ended December 31,  
    2009     2008  
 
Balance as of beginning of year
  $ 2,304     $ 1,405  
Tax positions related to current year
    388       531  
Tax positions related to prior years
    700       368  
                 
Balance as of end of year
  $ 3,392     $ 2,304  
                 
 
Income derived by BigBand Networks Ltd., the Company’s Israeli subsidiary, is generally subject to the regular Israeli corporate tax rate of 26% for the tax year 2009. However, per an application initiated December 21, 2008 and approved November 15, 2009, the Company now enjoys the status of a Beneficial Enterprise, as stipulated in rules and procedures from the Israeli tax authority. According to the provisions of the law, the tax benefits to which the Company is entitled shall be determined in accordance with the development region in which the Company’s plant is located during the selected year and in accordance with the provisions of section 51(a) of the law.
 
The U.S Congress enacted “The Worker, Homeownership, and Business Assistance Act of 2009” (the Act) on November 6, 2009 creating an opportunity for the Company to elect to carry back a 2008 federal net operating loss (NOL) for three, four, or five years. The Act also suspends the ninety percent limit on the utilization of alternative minimum tax (AMT) losses, effectively permitting the Company to elect to carry back its entire applicable NOL. The Company has elected to carry back the 2009 federal NOL for three years resulting in a tax benefit of $0.7 million for the year ended December 31, 2009.
 
11.   401(k) Savings and Retirement Plan
 
The Company sponsors a 401(k) Savings and Retirement Plan (Plan) for all employees who meet certain eligibility requirements. Participants may contribute, on a pre-tax basis, between 1 percent and 90 percent of their annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company is not required to contribute, nor has it contributed, to the Plan for any of the periods presented.


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BIGBAND NETWORKS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
12.   Accumulated Other Comprehensive Income
 
Accumulated other comprehensive income includes unrealized gains (losses) on cash flow hedges and marketable securities, net of taxes. Accumulated other comprehensive income was as follows (in thousands):
 
                 
    As of December 31,  
    2009     2008  
 
Net unrealized loss on cash flow hedges
  $ (151 )   $ (621 )
Net unrealized gain on marketable securities
    275       679  
                 
Total accumulated other comprehensive income
  $ 124     $ 58  
                 
 
13.   Selected Quarterly Financial Information (Unaudited)
 
Unaudited quarterly financial data for the last two years was as follows (in thousands except per share data):
 
                                 
    Year Ended December 31, 2009
    Fourth Quarter   Third Quarter   Second Quarter   First Quarter
 
Total net revenues
  $ 34,398     $ 22,202     $ 39,026     $ 43,888  
Gross profit
    19,415       11,106       24,995       25,653  
Net (loss) income
    (1,238 )     (10,858 )     3,075       2,282  
Basic net (loss) income per common share
  $ (0.02 )   $ (0.16 )   $ 0.05     $ 0.04  
Diluted net (loss) income per common share
  $ (0.02 )   $ (0.16 )   $ 0.04     $ 0.03  
 
                                 
    Year Ended December 31, 2008  
    Fourth Quarter     Third Quarter     Second Quarter     First Quarter  
 
Total net revenues
  $ 54,093     $ 48,283     $ 43,011     $ 39,906  
Gross profit
    34,030       28,561       25,373       24,367  
Net income (loss)
    7,322       3,131       1,247       (1,920 )
Basic net income (loss) per common share
  $ 0.11     $ 0.05     $ 0.02     $ (0.03 )
Diluted net income (loss) per common share
  $ 0.11     $ 0.05     $ 0.02     $ (0.03 )


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Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None
 
Item 9A.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Annual Report on Form 10-K, as required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934, as amended, we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
 
Management assessed our internal control over financial reporting as of December 31, 2009, the end of our fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our finance organization.
 
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
 
Ernst & Young LLP, independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2009 and its report is included below.
 
Changes in Internal Control over Financial Reporting
 
During the three months ended December 31, 2009, there was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
BigBand Networks, Inc.
 
We have audited BigBand Networks Inc.’s internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). BigBand Networks, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, BigBand Networks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009 based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BigBand Networks, Inc as of December 31, 2009 and 2008, and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 1, 2010 expressed an unqualified opinion thereon.
 
/s/  ERNST AND YOUNG LLP
 
San Jose, California
March 5, 2010


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Item 9B.   OTHER INFORMATION
 
Annual Meeting
 
Our annual meeting of stockholders is currently scheduled to be held on May 24, 2010.
 
Management Compensation
 
We achieved neither the pre-determined company revenue nor operating contribution targets for funding 90% of the Incentive Compensation Plan (ICP) for the second half of the year (which funds 30% of the annual ICP payment) and for the full year (which funds the remaining 40% of the annual ICP payment). However, our Board used its authority to fund the discretionary 10% of the ICP to the following extent: 5.5% for the second half of the year, and 7.0% for the full year (based on an average of 8.5% discretionary funding for the first half of the year and 5.5% for the second half of the year).
 
2009 Incentive Compensation Program
Amir Bassan-Eskenazi, President and Chief Executive Officer
 
         
Base Salary (annual):
  $ 325,000  
Bonus Potential at 100% funding
       
First Half:
    97,500  
Second Half:
    97,500  
Annual:
    130,000  
         
Total:
  $ 325,000  
 
                 
    Second Half
    Second Half
 
    % Goal
    % Actual
 
2009 Officer Bonus Goal
  Weighting     Achievement  
 
1)  Achieve revenues goal
    22 %     19 %
2)  Achieve earnings goal
    15 %     0 %
3)  Achieve bookings goal
    20 %     13 %
4)  Achieve cash and investments goal
    4 %     2 %
5)  Achieve financial analyst and investor relations goal
    4 %     1 %
6)  Achieve new product development and release schedule goals
    14 %     14 %
7)  Achieve specified product plan goal
    4 %     0 %
8)  Achieve specified customer satisfaction goal
    7 %     7 %
9)  Achieve global channels goal
    3 %     0 %
10) Achieve employee satisfaction and retention goal
    7 %     6 %
                 
Total
    100 %     62 %


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2009 Incentive Compensation Program
Maurice Castonguay, Senior Vice President and Chief Financial Officer
 
         
Base Salary (annual):
  $ 280,000  
Bonus Potential at 100% funding
       
First Half:
    42,000  
Second Half:
    42,000  
Annual:
    56,000  
         
Total:
  $ 140,000  
 
                         
    Second Half
    Second Half
       
    % Goal
    % Actual
       
2009 Officer Bonus Goal
  Weighting     Achievement        
 
1)  Achieve earnings goal
    5 %     0 %        
2)  Achieve departmental budgeting goal
    10 %     10 %        
3)  Achieve cash and investments goal
    15 %     7 %        
4)  Achieve expense hedging goal
    10 %     10 %        
5)  Achieve investor relations, financial analyst relations, and operating results goals
    15 %     4 %        
6)  Achieve financial controls goal
    15 %     15 %        
7)  Achieve corporate governance goal
    10 %     10 %        
8)  Achieve internal communication goal
    12 %     11 %        
9)  Achieve employee satisfaction and retention goal
    8 %     8 %        
                         
Total
    100 %     75 %        


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2009 Incentive Compensation Program
David Heard, Chief Operating Officer
 
         
Base Salary (annual):
  $ 325,000  
Bonus Potential at 100% funding
       
First Half:
    68,250  
Second Half:
    68,250  
Annual:
    91,000  
         
Total:
  $ 227,500  
 
                 
    Second Half
    Second Half
 
    % Goal
    % Actual
 
2009 Officer Bonus Goal
  Weighting     Achievement  
 
1)  Achieve specified bookings goal
    25 %     16 %
2)  Achieve specified margins goal
    5 %     5 %
3)  Achieve specified revenues goal
    10 %     8 %
4)  Achieve specified earnings goal
    5 %     0 %
5)  Achieve product footprint and market share goals
    22 %     5 %
6)  Achieve product delivery goals
    10 %     3 %
7)  Achieve specified new product development goal
    5 %     1 %
8) Achieve development process goals
    9 %     9 %
9) Achieve customer satisfaction goal
    5 %     5 %
10) Achieve employee satisfaction, retention and development goals
    4 %     4 %
                 
Total
    100 %     56 %
 
2009 Incentive Compensation Program
Rob Horton, Senior Vice President and General Counsel
 
         
Base Salary (annual):
  $ 250,000  
Bonus Potential:
       
First Half:
    37,500  
Second Half:
    37,500  
Annual:
    50,000  
         
Total:
  $ 125,000  
 
                 
    Second Half
    Second Half
 
    % Goal
    % Goal
 
2009 Officer Bonus Goal
  Weighting     Weighting  
 
1)  Achieve departmental budgeting goal
    15 %     15 %
2)  Achieve corporate governance and securities compliance goals
    20 %     15 %
3)  Achieve business development goals
    15 %     15 %
4)  Achieve internal customer satisfaction goal
    20 %     20 %
5)  Achieve employee satisfaction, retention and development goals
    5 %     5 %
6)  Achieve specified litigation management goals
    10 %     10 %
7)  Achieve sales support goals
    15 %     15 %
                 
Total
    100 %     95 %


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2009 Incentive Compensation Program
Ran Oz, Executive Vice President and Chief Technology Officer
 
         
Base Salary (annual):
  $ 225,000  
Bonus Potential at 100% funding
       
First Half:
    33,750  
Second Half:
    33,750  
Annual:
    45,000  
         
Total:
  $ 112,500  
 
                 
    Second Half
    Second Half
 
    % Goal
    % Goal
 
2009 Officer Bonus Goal
  Weighting     Weighting  
 
1)  Achieve specified product roadmap and planning goals
    10 %     8 %
3)  Achieve specified product demonstration and development goal
    25 %     23 %
4)  Achieve product market share goal
    20 %     17 %
5)  Achieve specified on-demand product strategy goal
    5 %     3 %
6)  Achieve customer relations and positioning goal
    20 %     15 %
7)  Achieve specified innovation-related sales goal
    10 %     0 %
8)  Achieve employee satisfaction and retention goal
    10 %     7 %
                 
Total
    100 %     73 %
 
PART III
 
Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Information regarding our directors and officers is incorporated herein by reference from the information to be contained in the Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders (2010 Proxy Statement) set forth under the caption entitled “Election of Directors”.
 
Information regarding our compliance with Section 16 of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the information to be contained in the 2010 Proxy Statement set forth under the caption entitled “Section 16(a) Beneficial Ownership Reporting Compliance”.
 
Information regarding our Audit Committee is incorporated herein by reference from the information to be contained in the 2010 Proxy Statement set forth under the caption entitled “Corporate Governance Principles and Board Matters — Committees of the Board of Directors — Audit Committee”.
 
We have adopted a Code of Business Conduct and Ethics that applies to all employees including our principal executive officer and principal financial and accounting officer. This code is available on our website at http://www.bigbandnet.com under About Us — Investor Relations — Corporate Governance. We will disclose on our website whether there have been any amendments or waivers to the Code of Business Conduct and Ethics. We will provide copies of these documents, in electronic or paper form, upon request, free of charge.
 
In the year ended December 31, 2009, there were no changes in the procedures by which shareholders may recommend nominees to our Board of Directors.
 
Item 11.   EXECUTIVE COMPENSATION
 
Information regarding compensation of our officers and directors is incorporated herein by reference from the information to be contained in our 2010 Proxy Statement set forth under the captions entitled “Executive Compensation” and “Director Compensation”.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Information regarding ownership of our common stock is incorporated herein by reference from the information to be contained in our 2010 Proxy Statement set forth under the captions entitled “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.


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Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Information regarding certain relationships and related transactions is incorporated herein by reference from the information to be contained in our 2010 Proxy Statement set forth under the captions entitled “Certain Relationships and Related Transactions” and “Corporate Governance Principles and Board Matters — Board Independence”.
 
Item 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Information regarding principal accountant fees and services is incorporated herein by reference from the information to be contained in our 2010 Proxy Statement set forth under the caption entitled “Principal Accountant Fees and Services”.
 
PART IV
 
Item 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a)(1) The financial statements filed as part of this report are listed in Part II, Item 8 of this Form 10-K.
 
(a)(2) Except for the allowance for doubtful accounts schedule shown below, no financial statement schedules are required to be filed as part of this report on the basis that any required information is provided in the financial statements, or in the related notes thereto, in Part II, Item 8 of this Form 10-K or is not required to be filed as the information is not applicable.
 
The change in our allowance for doubtful accounts was as follows (in thousands):
 
                                 
    Balance as of
  Charged to
       
    Beginning of
  Costs and
  Additions
  Balance as of
    Year   Expenses   (Deductions)   End of Year
 
Year ended:
                               
December 31, 2009
  $ 39     $ (38 )   $ 55     $ 56  
December 31, 2008
  $ 142     $ 64     $ (167 )   $ 39  
December 31, 2007
  $ 152     $ 99     $ (109 )   $ 142  
 
(a)(3) Exhibits.
 
EXHIBIT INDEX
 
                             
        Incorporated by Reference    
Exhibit
          File
  Exhibit
      Filed With
Number
 
Description
  Form   Number   Number  
Filing Date
  This 10-K
 
  3 .1   Form of Amended and Restated Certificate of Incorporation of the Registrant   S-1   333-139652   3.1B   December 22, 2006    
  3 .2   Form of Amended and Restated Bylaws of the Registrant   S-1   333-139652   3.2B   December 22, 2006    
  10 .1*   Form of Indemnification Agreement   S-1   333-   10.1   December 22, 2006    
  10 .2*   2001 Share Option and Incentive Plan   S-1   333-   10.3   December 22, 2006    
  10 .3*   2003 Share Option and Incentive Plan   S-1   333-   10.4   December 22, 2006    
  10 .4*   2004 Share Option and Incentive Plan Sub-Plan for Israeli Employees   S-1   333-   10.5   December 22, 2006    


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        Incorporated by Reference    
Exhibit
          File
  Exhibit
      Filed With
Number
 
Description
  Form   Number   Number  
Filing Date
  This 10-K
 
  10 .5*   2007 Equity Incentive Plan   S-1/A   333-139652   10.6   March 8, 2007    
  10 .5A*   Form of Option Agreement (U.S.)   10-Q   001-33355   10.6A   August 8, 2007    
  10 .5B*   Form of Option Agreement (Non-U.S.)   10-Q   001-33355   10.6B   August 8, 2007    
  10 .5C*   Form of Restricted Stock Unit Agreement (U.S.)   10-Q   001-33355   10.6C   August 8, 2007    
  10 .5D*   Form of Restricted Stock Unit Agreement (Non-U.S.)   10-Q   001-33355   10.6D   August 8, 2007    
  10 .5E*   2007 Equity Incentive Plan Sub-Plan for Israeli Employees   10-Q   001-33355   10.6E   August 8, 2007    
  10 .5F*   Form of Israeli Sub-Plan Option Agreement   10-Q   001-33355   10.6F   August 8, 2007    
  10 .6*   Employee Stock Purchase Plan   S-1/A   333-139652   10.23   February 26, 2007    
  10 .7*   Employment Agreement — Amir Bassan-Eskenazi   S-1   333-139652   10.8   December 22, 2006    
  10 .7A*   Amendment to Employment Agreement — Amir Bassan-Eskenazi   8-K   001-33355   10.8A   January 5, 2009    
  10 .8*   Employment Agreement — Ran Oz   S-1   333-139652   10.9   December 22, 2006    
  10 .8A*   Amendment to Employment Agreement — Ran Oz   10-Q   001-33355   10.9A   May 15, 2008    
  10 .9*   Offer Letter Agreement — Maurice Castonguay   10-K   001-33355   10.10   March 12, 2008    
  10 .9A*   Transition Services Agreement — Maurice Castonguay   8-K   001-33355   10.9A   March 5, 2010    
  10 .10*   Offer Letter Agreement — David Heard   S-1/A   333-139652   10.7   February 26, 2007    
  10 .10A   Amendment to Offer Letter Agreement — David Heard   10-K   001-33355   10.11A   March 12, 2008    
  10 .10B*   Amendment to Offer Letter Agreement — David Heard   8-K   001-33355   10.11B   January 5, 2009    
  10 .10C*   Transition Services Agreement — David Heard   8-K   001-33355   10.10C   March 4, 2010    
  10 .11*   Offer Letter Agreement — Robert Horton   S-1/A   333-139652   10.12   January 26, 2007    
  10 .11A*   Amendment to Offer Letter Agreement — Robert Horton   10-K   001-33355   10.12A   March 12, 2008    
  10 .11B*   Amendment to Offer Letter Agreement — Robert Horton   8-K   001-33355   10.12B   January 5, 2009    
  10 .12*   Offer Letter Agreement — Sean Rooney   10-Q   001-33355   10.28   November 6, 2009    
  10 .13*   Letter Agreement — Harald Braun   10-Q   001-33355   10.26   May 7, 2009    
  10 .14*   Letter Agreement — Ken Goldman   S-1   333-139652   10.15   December 22, 2006    
  10 .15*   Letter Agreement — Robert Sachs   S-1   333-139652   10.16   December 22, 2006    
  10 .16*   Letter Agreement — Michael J. Pohl   10-Q   001-33355   10.27   May 7, 2009    

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        Incorporated by Reference    
Exhibit
          File
  Exhibit
      Filed With
Number
 
Description
  Form   Number   Number  
Filing Date
  This 10-K
 
  10 .17*   Letter Agreement — Dennis Wolf   10-Q   001-33355   10.29   November 6, 2009    
  10 .18A   Lease (475 Broadway, Redwood City, California)   S-1   333-139652   10.17A   December 22, 2006    
  10 .18B   First Amendment to Lease (475 Broadway, Redwood City, California)   S-1   333-139652   10.17B   December 22, 2006    
  10 .18C   Second Amendment to Lease (475 Broadway, Redwood City, California)   S-1   333-139652   10.17C   December 22, 2006    
  10 .18D   Third Amendment to Lease (475 Broadway, Redwood City, California)   10-Q   001-33355   99.1   August 10, 2009    
  10 .19   Lease (8 Technology Drive, Westborough, Massachusetts)   S-1   333-139652   10.20   December 22, 2006    
  10 .20   Lease Agreement (Tel Aviv, Israel)   8-K   001-33355   99.1   July 30, 2007    
  10 .20A   Amendment to Lease Agreement (Tel Aviv, Israel)   10-K   001-33355   10.24A   March 12, 2008    
  10 .20B   Sublease Agreement (Tel Aviv, Israel)   10-K   001-33355   10.24B   March 10, 2009    
  21 .1   Subsidiaries of the Registrant                   X
  23 .1   Consent of Independent Registered Public Accounting Firm                   X
  24 .1   Power of Attorney (included on signature page to Form 10-K)                   X
  31 .1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
  31 .2   Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
  32 .1+   Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   X
 
 
+ This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent this exhibit is specifically incorporated by reference.
 
Management compensatory plan or arrangement

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
BIGBAND NETWORKS, INC.
 
  By: 
/s/  Amir Bassan-Eskenazi
Amir Bassan-Eskenazi
President and Chief Executive Officer
 
Date: March 5, 2010
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Amir Bassan-Eskenazi, Maurice L. Castonguay and Robert Horton, and each of them, as his true and lawful attorney in fact and agent with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney in fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney in fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Amir Bassan-Eskenazi

Amir Bassan-Eskenazi
  President and Chief Executive Officer (Principal Executive Officer)   March 5, 2010
         
/s/  Maurice L Castonguay

Maurice L Castonguay
  Chief Financial Officer)
(Principal Financial and Accounting Officer)
  March 5, 2010
         
/s/  Michael Pohl

Michael Pohl
  Chairman of the Board of Directors   March 5, 2010
         
/s/  Harald Braun

Harald Braun
  Director   March 5, 2010
         
/s/  Ken Goldman

Ken Goldman
  Director   March 5, 2010
         
/s/  Ran Oz

Ran Oz
  Director   March 5, 2010
         
/s/  Robert Sachs

Robert Sachs
  Director   March 5, 2010
         
/s/  Dennis Wolf

Dennis Wolf
  Director   March 5, 2010
         
/s/  Geoffrey Yang

Geoffrey Yang
  Director   March 5, 2010


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EXHIBIT INDEX
 
                             
            Incorporated by Reference    
Exhibit
          File
  Exhibit
      Filed with
Number
 
Description
  Form   Number   Number  
Filing Date
  this 10-K
 
  3 .1   Form of Amended and Restated Certificate of Incorporation of the Registrant   S-1   333-139652   3.1B   December 22, 2006    
  3 .2   Form of Amended and Restated Bylaws of the Registrant   S-1   333-139652   3.2B   December 22, 2006    
  10 .1*   Form of Indemnification Agreement   S-1   333-   10.1   December 22, 2006    
  10 .2*   2001 Share Option and Incentive Plan   S-1   333-   10.3   December 22, 2006    
  10 .3*   2003 Share Option and Incentive Plan   S-1   333-   10.4   December 22, 2006    
  10 .4*   2004 Share Option and Incentive Plan Sub-Plan for Israeli Employees   S-1   333-   10.5   December 22, 2006    
  10 .5*   2007 Equity Incentive Plan   S-1/A   333-139652   10.6   March 8, 2007    
  10 .5 A*   Form of Option Agreement (U.S.)   10-Q   001-33355   10.6A   August 8, 2007    
  10 .5B*   Form of Option Agreement (Non-U.S.)   10-Q   001-33355   10.6B   August 8, 2007    
  10 .5C*   Form of Restricted Stock Unit Agreement (U.S.)   10-Q   001-33355   10.6C   August 8, 2007    
  10 .5D*   Form of Restricted Stock Unit Agreement (Non-U.S.)   10-Q   001-33355   10.6D   August 8, 2007    
  10 .5E*   2007 Equity Incentive Plan Sub-Plan for Israeli Employees   10-Q   001-33355   10.6E   August 8, 2007    
  10 .5F*   Form of Israeli Sub-Plan Option Agreement   10-Q   001-33355   10.6F   August 8, 2007    
  10 .6*   Employee Stock Purchase Plan   S-1/A   333-139652   10.23   February 26, 2007    
  10 .7*   Employment Agreement — Amir Bassan-Eskenazi   S-1   333-139652   10.8   December 22, 2006    
  10 .7A*   Amendment to Employment Agreement — Amir Bassan-Eskenazi   8-K   001-33355   10.8A   January 5, 2009    
  10 .8*   Employment Agreement — Ran Oz   S-1   333-139652   10.9   December 22, 2006    
  10 .8A*   Amendment to Employment Agreement — Ran Oz   10-Q   001-33355   10.9A   May 15, 2008    
  10 .9*   Offer Letter Agreement — Maurice Castonguay   10-K   001-33355   10.10   March 12, 2008    
  10 .9A*   Transition Services Agreement — Maurice Castonguay   8-K   001-33355   10.9A   March 5, 2010    
  10 .10*   Offer Letter Agreement — David Heard   S-1/A   333-139652   10.7   February 26, 2007    
  10 .10A   Amendment to Offer Letter Agreement — David Heard   10-K   001-33355   10.11A   March 12, 2008    
  10 .10B*   Amendment to Offer Letter Agreement — David Heard   8-K   001-33355   10.11B   January 5, 2009    
  10 .10C*   Transition Services Agreement — David Heard   8-K   001-33355   10.10C   March 4, 2010    
  10 .11*   Offer Letter Agreement — Robert Horton   S-1/A   333-139652   10.12   January 26, 2007    
  10 .11A*   Amendment to Offer Letter Agreement — Robert Horton   10-K   001-33355   10.12A   March 12, 2008    


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Table of Contents

                             
            Incorporated by Reference    
Exhibit
          File
  Exhibit
      Filed with
Number
 
Description
  Form   Number   Number  
Filing Date
  this 10-K
 
  10 .11B*   Amendment to Offer Letter Agreement — Robert Horton   8-K   001-33355   10.12B   January 5, 2009    
  10 .12*   Offer Letter Agreement — Sean Rooney   10-Q   001-33355   10.28   November 6, 2009    
  10 .13*   Letter Agreement — Harald Braun   10-Q   001-33355   10.26   May 7, 2009    
  10 .14*   Letter Agreement — Ken Goldman   S-1   333-139652   10.15   December 22, 2006    
  10 .15*   Letter Agreement — Robert Sachs   S-1   333-139652   10.16   December 22, 2006    
  10 .16*   Letter Agreement — Michael J. Pohl   10-Q   001-33355   10.27   May 7, 2009    
  10 .17*   Letter Agreement — Dennis Wolf   10-Q   001-33355   10.29   November 6, 2009    
  10 .18A   Lease (475 Broadway, Redwood City, California)   S-1   333-139652   10.17A   December 22, 2006    
  10 .18B   First Amendment to Lease (475 Broadway, Redwood City, California)   S-1   333-139652   10.17B   December 22, 2006    
  10 .18C   Second Amendment to Lease (475 Broadway, Redwood City, California)   S-1   333-139652   10.17C   December 22, 2006    
  10 .18D   Third Amendment to Lease (475 Broadway, Redwood City, California)   10-Q   001-33355   99.1   August 10, 2009    
  10 .19   Lease (8 Technology Drive, Westborough, Massachusetts)   S-1   333-139652   10.20   December 22, 2006    
  10 .20   Lease Agreement (Tel Aviv, Israel)   8-K   001-33355   99.1   July 30, 2007    
  10 .20A   Amendment to Lease Agreement (Tel Aviv, Israel)   10-K   001-33355   10.24A   March 12, 2008    
  10 .20B   Sublease Agreement (Tel Aviv, Israel)   10-K   001-33355   10.24B   March 10, 2009    
  21 .1   Subsidiaries of the Registrant                   X
  23 .1   Consent of Independent Registered Public Accounting Firm                   X
  24 .1   Power of Attorney (included on signature page to Form 10-K)                   X
  31 .1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
  31 .2   Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                   X
  32 .1+   Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                   X
 
 
+ This exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, whether made before or after the date hereof, except to the extent this exhibit is specifically incorporated by reference.
 
Management compensatory plan or arrangement


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