UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 001-33355
BigBand Networks, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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04-3444278
(I.R.S. Employer
Identification Number)
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475 Broadway Street
Redwood City, California 94063
(Address of principal executive offices and zip code)
(650) 995-5000
(Registrants telephone number, including area code)
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
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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
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No
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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.
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Large Accelerated filer
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Accelerated filer
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Non-Accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
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No
þ
As of May 1, 2010, 67,628,662 shares of the registrants common stock, par value $0.001 per
share, were outstanding.
BigBand Networks, Inc.
FORM 10-Q
FOR THE QUARTER ENDED
March 31, 2010
INDEX
2
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BigBand Networks, Inc.
Condensed Consolidated Balance Sheets
(Unaudited in thousands, except per share data)
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As of
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As of
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March 31,
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December 31,
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2010
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2009
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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20,657
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$
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24,894
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Marketable securities
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144,886
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147,014
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Accounts receivable, net of allowance
for doubtful accounts of $24 and $56 as
of March 31, 2010 and December 31, 2009,
respectively
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7,847
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18,495
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Inventories, net
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8,699
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4,933
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Prepaid expenses and other current assets
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5,271
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6,177
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Total current assets
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187,360
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201,513
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Property and equipment, net
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10,641
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11,417
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Goodwill
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1,656
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1,656
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Other non-current assets
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9,146
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9,002
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Total assets
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$
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208,803
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$
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223,588
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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8,215
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$
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9,483
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Accrued compensation and related benefits
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5,887
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5,023
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Current portion of deferred revenues, net
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26,221
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32,428
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Current portion of other liabilities
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4,564
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7,083
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Total current liabilities
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44,887
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54,017
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Deferred revenues, net, less current portion
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11,176
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12,438
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Other liabilities, less current portion
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2,529
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2,642
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Accrued long-term Israeli severance pay
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4,575
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4,215
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Commitments and contingencies
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Stockholders equity:
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Common stock, $0.001 par value, 250,000
shares authorized as of March 31, 2010
and December 31, 2009; 67,579 and 67,138
shares issued and outstanding as of
March 31, 2010 and December 31, 2009,
respectively
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68
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67
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Additional paid-in capital
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287,884
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283,704
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Accumulated other comprehensive income
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72
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124
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Accumulated deficit
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(142,388
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(133,619
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Total stockholders equity
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145,636
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150,276
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Total liabilities and stockholders equity
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$
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208,803
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$
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223,588
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See accompanying notes.
3
BigBand Networks, Inc.
Condensed Consolidated Statements of Operations
(Unaudited in thousands, except per share amounts)
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Three Months Ended March 31,
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2010
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2009
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Net revenues:
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Products
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$
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24,881
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$
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33,927
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Services
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7,354
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9,961
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Total net revenues
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32,235
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43,888
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Cost of net revenues:
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Products
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13,924
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15,064
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Services
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3,277
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3,171
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Total cost of net revenues
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17,201
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18,235
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Gross profit
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15,034
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25,653
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Operating expenses:
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Research and development
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13,492
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11,483
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Sales and marketing
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6,050
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6,449
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General and administrative
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4,526
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4,535
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Restructuring charges
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1,356
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Total operating expenses
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24,068
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23,823
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Operating (loss) income
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(9,034
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1,830
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Interest income
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515
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903
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Other expense, net
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(88
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(223
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(Loss) income before provision for income taxes
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(8,607
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2,510
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Provision for income taxes
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162
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228
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Net (loss) income
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$
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(8,769
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$
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2,282
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Basic net (loss) income per common share
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$
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(0.13
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$
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0.04
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Diluted net (loss) income per common share
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$
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(0.13
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$
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0.03
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Shares used in basic net (loss) income per common share
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67,313
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64,862
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Shares used in diluted net (loss) income per common share
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67,313
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68,265
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See accompanying notes.
4
BigBand Networks, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands, except per share amounts)
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Three Months ended March 31,
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2010
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2009
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Cash Flows from Operating activities
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Net (loss) income
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$
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(8,769
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$
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2,282
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Adjustments to reconcile net (loss) income to net cash used in operating activities:
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Depreciation of property and equipment
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1,846
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2,125
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Amortization of software license
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208
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(Gain) loss on disposal of property and equipment
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(11
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111
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Stock-based compensation
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3,758
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3,014
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Net settled unrealized (losses) gains on cash flow hedges
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(23
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58
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Change in operating assets and liabilities:
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Decrease (increase) in accounts receivable
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10,648
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(2,043
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Increase in inventories, net
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(3,766
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(990
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Decrease in prepaid expenses and other current assets
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906
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408
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(Increase) decrease in other non-current assets
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(353
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407
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Decrease in accounts payable
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(1,268
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(3,094
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Increase (decrease) in long-term Israeli severance pay
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360
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(310
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Decrease in accrued and other liabilities
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(1,669
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(4,238
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)
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Decrease in deferred revenues
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(7,469
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(4,905
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Net cash used in operating activities
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(5,602
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(7,175
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Cash Flows from Investing activities
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Purchase of marketable securities
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(51,397
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(46,570
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Proceeds from maturities of marketable securities
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44,897
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32,350
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Proceeds from sale of marketable securities
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8,500
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Purchase of property and equipment
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(1,105
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(868
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Proceeds from sale of property and equipment
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47
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Net cash provided by (used in) investing activities
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942
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(15,088
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Cash Flows from Financing activities
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Proceeds from exercise of stock options
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423
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1,396
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Net cash provided by financing activities
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423
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1,396
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Net decrease in cash and cash equivalents
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(4,237
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(20,867
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Cash and cash equivalents as of beginning of period
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24,894
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50,981
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Cash and cash equivalents as of end of period
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$
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20,657
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$
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30,114
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See accompanying notes.
5
BigBand Networks, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 platforms that enable
cable multiple system operators and telecommunications companies to offer video services across
coaxial, fiber and copper networks.
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include accounts of the Company and its wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The accompanying condensed consolidated balance sheet as of March 31, 2010, and the condensed
consolidated statements of operations for the three months ended March 31, 2010 and 2009, and the
condensed consolidated statements of cash flows for the three months ended March 31, 2010 and 2009
are unaudited. The condensed consolidated balance sheet as of December 31, 2009 was derived from
the audited consolidated financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009 filed with the U.S. Securities and Exchange Commission
(SEC) on March 5, 2010 (Form 10-K). The accompanying condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and related notes
contained in the Companys Form 10-K.
The accompanying condensed consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) and pursuant to the rules and regulations
of the SEC as permitted by such rules. Not all of the financial information and footnotes required
for complete financial statements have been presented. Management believes the unaudited condensed
consolidated financial statements have been prepared on a basis consistent with the audited
consolidated financial statements and include all adjustments necessary of a normal and recurring
nature for a fair presentation of the Companys condensed consolidated balance sheet as of
March 31, 2010, the condensed consolidated statements of operations for the three months ended
March 31, 2010 and 2009, and the condensed consolidated statements of cash flows for the three
months ended March 31, 2010 and 2009. The results for the three months ended March 31, 2010 are not
necessarily indicative of the results to be expected for the year ending December 31, 2010 or for
any other interim period or for any future period.
There have been no significant changes in the Companys accounting policies during the three
months ended March 31, 2010 compared to the significant accounting policies described in the
Companys Form 10-K.
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 Companys 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 Accounting Standards Codification (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 Companys software and hardware products.
Software product sales include a perpetual license to the Companys 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 Companys product sales have been made in combination with
support services, which consist of software updates and customer support. The Companys 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
6
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 Companys 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 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 on 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 March 31, 2010, 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
320
Investments Debt and Equity Securities
, which established a new method of recognizing and
reporting 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.
7
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, restricted cash, accounts receivable,
marketable securities, derivatives used in the Companys hedging program, accounts payable and
other accrued liabilities approximate their fair value. The carrying values of the Companys 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 Companys investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
The Companys 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 related to large customers. The
Company had three customers which individually had an accounts receivable balance of greater than
10% of the Companys total accounts receivable balance as of both March 31, 2010 and December 31,
2009.
The Company recognized revenues from three customers that were 10% or greater of the Companys
total net revenues for both the three months ended March 31, 2010 and 2009.
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 Companys 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.
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 March 31, 2010, 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 Companys
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.
Income Taxes
The Company follows ASC 740
Income Taxes
, which requires the use of the liability method of
accounting for income taxes. The liability method computes income taxes based on a projected
effective tax rate for the full calendar year. For example, the effective tax rate for the three months
ended March 31, 2010 will be based on the projected effective tax rate for the year ending
December 31, 2010. The liability method includes the effects of deferred tax assets or liabilities.
Deferred tax assets or liabilities are recognized for the expected tax consequences of temporary
differences between the financial statement and tax basis of assets and liabilities using the
enacted tax rates that will be in effect when these differences reverse. The Company provides a
valuation allowance to reduce deferred tax assets to the amount that is expected, based on whether
such assets are more likely than not to be realized.
8
Foreign Currency Derivatives
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 Companys 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 derivatives gain or loss is initially reported as a component of
accumulated other comprehensive income (loss) and, on 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 three months ended March 31, 2010 and 2009, this amount was
not material. These derivative instruments generally have maturities of 180 days or less, and hence
all unrealized amounts as of March 31, 2010 will have settled as of September 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.
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 March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Notional amount of currency option contracts: Israeli New Shekels
|
|
ILS
|
27,000
|
|
|
ILS
|
27,000
|
|
|
|
|
|
|
|
|
Notional amount of currency option contracts: U.S. dollars
|
|
$
|
7,454
|
|
|
$
|
7,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses included in other comprehensive income on condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Settled underlying derivative was settled but forecasted transaction has not occurred
|
|
$
|
(27
|
)
|
|
$
|
(4
|
)
|
Unsettled primarily included as other current liabilities
|
|
|
(48
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
Total unrealized losses included in other comprehensive income
|
|
$
|
(75
|
)
|
|
$
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Notional amount of foreign currency forward contracts: Israeli New Shekels
|
|
ILS
|
5,000
|
|
|
ILS
|
5,000
|
|
|
|
|
|
|
|
|
Notional amount of foreign currency forward contracts: U.S. dollars
|
|
$
|
1,351
|
|
|
$
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) included in other income (expense) in condensed consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
Fair value included in other current assets (liabilities) on condensed consolidated balance sheets
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
9
The change in accumulated other comprehensive income (loss) from cash flow hedges included on
the Companys condensed consolidated balance sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Accumulated other comprehensive loss related to cash flow hedges as of
beginning of period
|
|
$
|
(151
|
)
|
|
$
|
(621
|
)
|
Changes in settled and unsettled portion of cash flow hedges
|
|
|
17
|
|
|
|
(752
|
)
|
|
|
|
|
|
|
|
|
|
|
(134
|
)
|
|
|
(1,373
|
)
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Changes in cash flow hedges: Loss reflected in condensed consolidated statement of
operations
|
|
|
(59
|
)
|
|
|
(631
|
)
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss related to cash flow hedges as of end of period
|
|
$
|
(75
|
)
|
|
$
|
(742
|
)
|
|
|
|
|
|
|
|
Stock-based Compensation
The Company applies 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 employees requisite service period
(generally the vesting period), which the Company has elected to amortize on a straight-line basis.
Recently Adopted Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06 regarding ASC Topic
820
Fair Value Measurements and Disclosures
(ASU 2009-06). ASU 2009-06 requires additional
disclosure regarding significant transfers in and out of Levels 1 and 2 fair value measurements and
the reasons for the transfers. In addition, ASU 2009-06 requires the Company to present separately
information about purchases, sales, issuances, and settlements, (on a gross basis rather than as
one net number), in the reconciliation for fair value measurements using significant unobservable
inputs (level 3). ASU 2010-06 clarifies existing disclosures regarding fair value measurement for
each class of assets and liabilities and the valuation techniques and inputs used to measure fair
value for recurring and nonrecurring fair value measurements that fall in either Level 2 or Level
3. This update also includes conforming amendments to the guidance on employers disclosures about
postretirement benefit plan assets (ASC 715). The changes under ASU 2010-06 were effective for the
Companys fiscal year beginning January 1, 2010, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which
will be effective for the Companys fiscal year beginning January 1, 2011. The adoption of
ASU 2009-06 had no impact on the Companys 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 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.
10
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):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(8,769
|
)
|
|
$
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic net (loss) income per common share
|
|
|
67,313
|
|
|
|
64,862
|
|
Stock options
|
|
|
|
|
|
|
3,039
|
|
Warrants
|
|
|
|
|
|
|
182
|
|
Restricted stock units
|
|
|
|
|
|
|
107
|
|
Employee stock purchase plan shares
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
Weighted average shares used in diluted net (loss) income per common
share
|
|
|
67,313
|
|
|
|
68,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common share
|
|
$
|
(0.13
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
As of March 31, 2010 and 2009, 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 net (loss) income per common share for the periods presented as their effect
would have been anti-dilutive as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Stock options outstanding
|
|
|
11,893
|
|
|
|
8,132
|
|
Restricted stock units
|
|
|
3,582
|
|
|
|
162
|
|
Employee stock purchase plan shares
|
|
|
295
|
|
|
|
|
|
4. Fair Value
The fair value of the Companys cash equivalents and marketable securities is determined
in accordance with ASC 820
Fair Value Measurements and Disclosures
(ASC 820). 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. For the Companys Level 2 investments, fair value was derived
from non-binding market consensus prices that were corroborated by observable market data, quoted
market prices for similar instruments, or pricing models, such as discounted cash flow techniques,
with all significant inputs derived from or corroborated by observable market data. The Companys
discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves.
11
The Companys fair value measurements of its financial assets (cash, cash equivalents and
marketable securities) were as follows as of March 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
|
|
|
$
|
68,472
|
|
|
$
|
|
|
|
$
|
68,472
|
|
U.S. Agency debt securities
|
|
|
2,017
|
|
|
|
63,143
|
|
|
|
|
|
|
|
65,160
|
|
Commercial paper
|
|
|
|
|
|
|
7,211
|
|
|
|
|
|
|
|
7,211
|
|
Certificates of deposit
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,060
|
|
|
|
138,826
|
|
|
|
|
|
|
|
144,886
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
6,684
|
|
|
|
|
|
|
|
|
|
|
|
6,684
|
|
Commercial paper
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,684
|
|
|
|
4,500
|
|
|
|
|
|
|
|
11,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and marketable securities
|
|
$
|
12,744
|
|
|
$
|
143,326
|
|
|
$
|
|
|
|
$
|
156,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
165,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys fair value measurements of its financial assets (cash, cash equivalents and
marketable securities) were as follows as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
|
|
|
$
|
70,819
|
|
|
$
|
|
|
|
$
|
70,819
|
|
U.S. Agency debt securities
|
|
|
1,265
|
|
|
|
63,014
|
|
|
|
|
|
|
|
64,279
|
|
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 fair value
|
|
$
|
18,315
|
|
|
$
|
142,407
|
|
|
$
|
|
|
|
$
|
160,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the amounts disclosed in the above table, the fair value of the Companys
Israeli severance pay assets, which were almost fully comprised of Level 2 assets, was $4.0 million
and $3.6 million as of March 31, 2010 and December 31, 2009, respectively.
12
5. Balance Sheet Data
Marketable Securities
Marketable securities included available-for-sale securities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
Corporate debt securities
|
|
$
|
68,310
|
|
|
$
|
212
|
|
|
$
|
(50
|
)
|
|
$
|
68,472
|
|
U.S. Agency debt securities
|
|
|
65,178
|
|
|
|
28
|
|
|
|
(46
|
)
|
|
|
65,160
|
|
Commercial paper
|
|
|
7,211
|
|
|
|
|
|
|
|
|
|
|
|
7,211
|
|
Certificates of deposit
|
|
|
4,040
|
|
|
|
3
|
|
|
|
|
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
144,739
|
|
|
$
|
243
|
|
|
$
|
(96
|
)
|
|
$
|
144,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
Corporate debt securities
|
|
$
|
70,569
|
|
|
$
|
288
|
|
|
$
|
(38
|
)
|
|
$
|
70,819
|
|
U.S. Agency debt securities
|
|
|
64,256
|
|
|
|
70
|
|
|
|
(47
|
)
|
|
|
64,279
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of investments showing unrealized loss (none of which had been in a continuous
loss position for more than nine months) was $73.7 million and $54.0 million as of March 31, 2010 and
December 31, 2009, respectively. The contractual maturity date of the available-for-sale securities
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Due within one year
|
|
$
|
100,492
|
|
|
$
|
107,449
|
|
Due within one to two years
|
|
|
44,394
|
|
|
|
39,565
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
144,886
|
|
|
$
|
147,014
|
|
|
|
|
|
|
|
|
Inventories, Net
Inventories, net were comprised entirely of finished goods as of March 31, 2010 and December
31, 2009.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Taxes receivable
|
|
$
|
2,178
|
|
|
$
|
2,969
|
|
Prepaid maintenance
|
|
|
965
|
|
|
|
981
|
|
Interest receivable
|
|
|
920
|
|
|
|
1,070
|
|
Other
|
|
|
1,208
|
|
|
|
1,157
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
5,271
|
|
|
$
|
6,177
|
|
|
|
|
|
|
|
|
13
Property and Equipment, Net
Property and equipment, net is stated at cost, less accumulated depreciation. Depreciation is
calculated using the straight-line method and recorded over the assets estimated useful lives of
18 months to seven years. Property and equipment, net was comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Engineering and other equipment
|
|
$
|
28,222
|
|
|
$
|
30,129
|
|
Computers, software and related equipment
|
|
|
19,055
|
|
|
|
19,942
|
|
Leasehold improvements
|
|
|
5,868
|
|
|
|
5,897
|
|
Office furniture and fixtures
|
|
|
1,110
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
54,255
|
|
|
|
57,100
|
|
Less: accumulated depreciation
|
|
|
(43,614
|
)
|
|
|
(45,683
|
)
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
10,641
|
|
|
$
|
11,417
|
|
|
|
|
|
|
|
|
Goodwill
Goodwill is carried at cost and is not amortized. The carrying value of goodwill was
approximately $1.7 million as of March 31, 2010 and December 31, 2009.
Other Non-current Assets
Other non-current assets were comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Israeli severance pay
|
|
$
|
3,987
|
|
|
$
|
3,648
|
|
Security deposit
|
|
|
1,994
|
|
|
|
1,962
|
|
Software license
|
|
|
1,875
|
|
|
|
2,083
|
|
Restricted cash
|
|
|
582
|
|
|
|
583
|
|
Deferred tax assets
|
|
|
438
|
|
|
|
449
|
|
Other
|
|
|
270
|
|
|
|
277
|
|
|
|
|
|
|
|
|
Total other non-current assets
|
|
$
|
9,146
|
|
|
$
|
9,002
|
|
|
|
|
|
|
|
|
Deferred Revenues, Net
Deferred revenues, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Deferred service revenues, net
|
|
$
|
28,118
|
|
|
$
|
27,252
|
|
Deferred product revenues, net
|
|
|
9,279
|
|
|
|
17,614
|
|
|
|
|
|
|
|
|
Total deferred revenues, net
|
|
|
37,397
|
|
|
|
44,866
|
|
Less current portion of deferred revenues, net
|
|
|
(26,221
|
)
|
|
|
(32,428
|
)
|
|
|
|
|
|
|
|
Deferred revenues, net, less current portion
|
|
$
|
11,176
|
|
|
$
|
12,438
|
|
|
|
|
|
|
|
|
14
Other Liabilities
Other liabilities were comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Foreign, franchise and other income tax liabilities
|
|
$
|
2,121
|
|
|
$
|
2,198
|
|
Accrued warranty
|
|
|
1,722
|
|
|
|
2,068
|
|
Rent and restructuring liabilities
|
|
|
1,408
|
|
|
|
1,581
|
|
Sales and use tax payable
|
|
|
567
|
|
|
|
1,310
|
|
Accrued professional fees
|
|
|
330
|
|
|
|
462
|
|
Customer prepayments
|
|
|
39
|
|
|
|
816
|
|
Other
|
|
|
906
|
|
|
|
1,290
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
7,093
|
|
|
|
9,725
|
|
Less current portion of other liabilities
|
|
|
(4,564
|
)
|
|
|
(7,083
|
)
|
|
|
|
|
|
|
|
Other liabilities, less current portion
|
|
$
|
2,529
|
|
|
$
|
2,642
|
|
|
|
|
|
|
|
|
Accrued Warranty
Activity related to product warranty was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Balance as of beginning of period
|
|
$
|
2,068
|
|
|
$
|
3,381
|
|
Warranty charged to cost of sales
|
|
|
58
|
|
|
|
111
|
|
Utilization of warranty
|
|
|
(118
|
)
|
|
|
(198
|
)
|
Other adjustments
|
|
|
(286
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
|
1,722
|
|
|
|
3,275
|
|
Less current portion of accrued warranty
|
|
|
(880
|
)
|
|
|
(1,765
|
)
|
|
|
|
|
|
|
|
Accrued warranty, less current portion
|
|
$
|
842
|
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
6. Restructuring Charges
On February 9, 2009, the Audit Committee under authority of 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 the Company reduced its operating expenses. On
October 29, 2007, the Audit Committee under authority of the Board of Directors authorized a
restructuring plan in connection with the retirement of the Companys CMTS product line pursuant to
which employees were terminated and facilities were vacated. Charges incurred with these
restructuring plans were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2009
|
|
|
October 2007
|
|
|
|
|
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
Charges incurred in the three months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacated facilities
|
|
$
|
|
|
|
$
|
699
|
|
|
$
|
699
|
|
Severance
|
|
|
657
|
|
|
|
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
657
|
|
|
$
|
699
|
|
|
$
|
1,356
|
|
|
|
|
|
|
|
|
|
|
|
Total cumulative charges through March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
657
|
|
|
$
|
2,463
|
|
|
$
|
3,120
|
|
Vacated facilities
|
|
|
|
|
|
|
1,764
|
|
|
|
1,764
|
|
Other
|
|
|
|
|
|
$
|
159
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
657
|
|
|
$
|
4,386
|
|
|
$
|
5,043
|
|
|
|
|
|
|
|
|
|
|
|
Date through which Company will pay facilities through
|
|
Not applicable
|
|
March 2012
|
|
March 2012
|
No restructuring charges were incurred for the three months ended March 31, 2010.
All of the restructuring plans were essentially complete as of March 31, 2010, including
one previously exited facility approved under the October 2007 restructuring plan which is expected
to be subleased before March 31, 2011. In addition, as of March 31, 2010 total restructuring
liabilities included $91,000 for a vacated facility lease which expires in January 2013, which was
part of the
15
Companys previously completed April 2008 restructuring plan. Total restructuring activity,
consisting entirely of vacated facilities costs, for the plans discussed above for the three months
ended March 31, 2010 was as follows (in thousands):
|
|
|
|
|
|
|
Total
|
|
|
|
Restructuring
|
|
|
|
Liabilities
|
|
Balance as of December 31, 2009
|
|
$
|
894
|
|
Cash payments
|
|
|
(117
|
)
|
|
|
|
|
Balance as of March 31, 2010
|
|
$
|
777
|
|
|
|
|
|
|
Less restructuring liability, current portion
|
|
|
(496
|
)
|
|
|
|
|
Restructuring liability, less current portion
|
|
$
|
281
|
|
|
|
|
|
On May 4, 2010, the Audit Committee under authority of the Board of Directors authorized a
restructuring plan as further described in note 12.
7. 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 Companys 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 Companys federal securities litigation (In re
BigBand Networks, Inc. Securities Litigation, Case No. C07-5101-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 March 31,
2010 and December 31, 2009, the Company had no further significant obligations under these
lawsuits.
8. Stockholders Equity
The Company allocated stock-based compensation expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cost of net revenues
|
|
$
|
566
|
|
|
$
|
439
|
|
Research and development
|
|
|
1,322
|
|
|
|
1,029
|
|
Sales and marketing
|
|
|
669
|
|
|
|
484
|
|
General and administrative
|
|
|
1,201
|
|
|
|
1,062
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
3,758
|
|
|
$
|
3,014
|
|
|
|
|
|
|
|
|
Equity Incentive Plans
Since March 15, 2007, the Company has granted all options and restricted stock units (RSUs)
under its 2007 Equity Incentive Plan (2007 Plan). The 2007 Plan allows the Company to award
incentive and non-qualified stock options, restricted stock, RSUs and stock appreciation rights to
employees, officers, directors and consultants of the Company. Options granted under the 2007 Plan
are generally granted at an exercise price that equals the closing value of the Companys common
stock on the date of grant, are
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 transactions
with employees.
The Company has options outstanding under its 1999, 2001 and 2003 share option and incentive
plans (collectively the Prior Plans). Cancelled or forfeited stock option grants under the Prior
Plans are added to the total amount of shares available for grant under the 2007 Plan.
16
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. Shares available for future issuance under the 2007 Plan were as follows (in
thousands):
|
|
|
|
|
|
|
Shares
|
|
Available as of December 31, 2009
|
|
|
7,495
|
|
Authorized shares added
|
|
|
3,357
|
|
Options and RSU cancelled
|
|
|
355
|
|
Options and RSU granted
|
|
|
(1,537
|
)
|
|
|
|
|
Available as of March 31, 2010
|
|
|
9,670
|
|
|
|
|
|
Stock Options
Data pertaining to stock option activity under the plans was as follows (in thousands, except
per share and period data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding as of December 31, 2009
|
|
|
12,115
|
|
|
$
|
4.33
|
|
|
|
6.99
|
|
|
$
|
7,621
|
|
Granted
|
|
|
360
|
|
|
|
3.09
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(313
|
)
|
|
|
1.35
|
|
|
|
|
|
|
$
|
1,005
|
|
Cancelled
|
|
|
(269
|
)
|
|
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2010
|
|
|
11,893
|
|
|
$
|
4.35
|
|
|
|
6.19
|
|
|
$
|
7,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest, net of forfeitures
|
|
|
11,648
|
|
|
$
|
4.34
|
|
|
|
6.16
|
|
|
$
|
7,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of an outstanding option is calculated based on the difference between its
exercise price and the closing price of the Companys 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 Companys common stock on the date of exercise. Stock
options with exercise prices greater than the closing price of the Companys 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 Companys closing stock prices of $3.51
and $3.44 per share as of March 31, 2010 and December 31, 2009, respectively. As of March 31,
2010, total unrecognized stock compensation expense relating to unvested stock options, adjusted
for estimated forfeitures, was $15.8 million. This amount is expected to be recognized over a
weighted-average period of 2.4 years.
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 Companys common stock on the date of grant. The Companys RSU
activity was as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Restricted
|
|
|
Grant-Date
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
(Years)
|
|
|
Value
|
|
Unvested as of December 31, 2009
|
|
|
2,497
|
|
|
$
|
5.58
|
|
|
|
1.77
|
|
|
$
|
8,590
|
|
Granted
|
|
|
1,177
|
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(6
|
)
|
|
|
5.82
|
|
|
|
|
|
|
$
|
19
|
|
Cancelled
|
|
|
(86
|
)
|
|
|
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of March 31, 2010
|
|
|
3,582
|
|
|
$
|
4.69
|
|
|
|
1.56
|
|
|
$
|
12,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest,
net of forfeitures
|
|
|
3,321
|
|
|
$
|
4.69
|
|
|
|
1.51
|
|
|
$
|
11,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
RSUs expected to vest reflect an estimated forfeiture rate.
|
As of March 31, 2010, total unrecognized stock compensation expense relating to unvested
RSUs, adjusted for estimated forfeitures, was $12.5 million. This amount is expected to
be recognized over a weighted-average period of 2.8 years.
17
Employee Stock Purchase Plan
Under the Companys 2007 Employee Stock Purchase Plan (ESPP), employees may purchase shares of
common stock at a price per share that is 85% of the fair market value of the Companys 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 Companys common
stock, (ii) 2% of the outstanding shares of the Companys common stock on the first day of the
fiscal year or (iii) an amount determined by the Board of Directors. The ESPP is compensatory in
nature, and therefore results in compensation expense. The Company recorded stock-based
compensation expense associated with its ESPP of $0.2 million for both the three months ended
March 31, 2010 and 2009. Shares available for future issuance under the ESPP were as follows (in
thousands):
|
|
|
|
|
|
|
Shares
|
|
Available as of December 31, 2009
|
|
|
2,477
|
|
Authorized shares added
|
|
|
1,343
|
|
|
|
|
|
Available as of March 31, 2010
|
|
|
3,820
|
|
|
|
|
|
Stock-Based Compensation Assumptions
The Company uses the Black-Scholes option-pricing model to determine the fair value of
stock-based awards, including ESPP awards, under ASC 718. This model incorporates various
subjective assumptions including expected volatility, expected term and interest rates. The fair
value of each new option awarded was estimated on the grant date using the assumptions noted as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2010
|
|
2009
|
Stock Options
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
73
|
%
|
|
|
73
|
%
|
Expected term
|
|
6 years
|
|
6 years
|
Risk-free interest
|
|
|
2.80
|
%
|
|
|
2.00
|
%
|
Expected dividends
|
|
|
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 Companys 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 approximately equal to each
grants 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.
Common Stock Warrants
In March 2010, a warrant holder holding common stock warrants for 267,858 shares received
122,212 shares in full settlement of this warrant under the cashless exercise provisions of the
warrant agreement dated February 20, 2003.
18
9. Segment Reporting
The Company has a single reporting segment. Enterprise-wide disclosures related to revenues
and long-lived assets are described below. Net revenues by geographical region were allocated based
on the shipping destination of customer orders, and were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
United States
|
|
$
|
28,686
|
|
|
$
|
36,163
|
|
Asia
|
|
|
2,390
|
|
|
|
6,242
|
|
Europe
|
|
|
779
|
|
|
|
1,090
|
|
Americas excluding United States
|
|
|
380
|
|
|
|
393
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
32,235
|
|
|
$
|
43,888
|
|
|
|
|
|
|
|
|
Long-lived assets, net of depreciation were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
United States
|
|
$
|
5,815
|
|
|
$
|
6,286
|
|
Israel
|
|
|
4,337
|
|
|
|
4,728
|
|
Rest of World
|
|
|
489
|
|
|
|
403
|
|
|
|
|
|
|
|
|
Total long-lived assets, net
|
|
$
|
10,641
|
|
|
$
|
11,417
|
|
|
|
|
|
|
|
|
10. Income Taxes
As part of the process of preparing its unaudited condensed consolidated financial statements,
the Company is required to estimate its income taxes in each of the jurisdictions in which it
operates. This process involves estimating the current tax liability under the most recent tax laws
and assessing temporary differences resulting from the differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included on the unaudited condensed consolidated balance sheets.
Income tax expense was $0.2 million for both the three months ended March 31, 2010 and 2009.
The effective tax rates for these periods differed from the U.S. federal statutory rate primarily
due to the differential in foreign tax rates, non deductible stock compensation expense, other
currently non-deductible items, movement in the Companys valuation allowance and various discrete
items.
11. Comprehensive (Loss) Income
The components of comprehensive (loss) income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net (loss) income
|
|
$
|
(8,769
|
)
|
|
$
|
2,282
|
|
Change in cash flow hedges
|
|
|
76
|
|
|
|
(121
|
)
|
Change in unrealized gains (losses) on marketable securities
|
|
|
(128
|
)
|
|
|
(518
|
)
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(8,821
|
)
|
|
$
|
1,643
|
|
|
|
|
|
|
|
|
19
Accumulated other comprehensive income was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
As of December
|
|
|
|
2010
|
|
|
31, 2009
|
|
Net unrealized losses on cash flow hedges
|
|
$
|
(75
|
)
|
|
$
|
(151
|
)
|
Net unrealized gains on marketable securities
|
|
|
147
|
|
|
|
275
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
72
|
|
|
$
|
124
|
|
|
|
|
|
|
|
|
12. Subsequent Events
On May 4, 2010, the Audit Committee under authority of the Board of Directors authorized a
restructuring plan pursuant to which employees were terminated and a portion of certain facilities
will be vacated for sublease. Approximately $1.3 million of severance and vacated facility charges
are expected to be incurred for the three months ending June 30, 2010.
20
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This quarterly report on
Form 10-Q
contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include
statements as to industry trends and our future expectations and other matters that do not relate
strictly to historical facts. These statements are often identified by the use of words such as
may, will, expect, believe, anticipate, project, intend, could, estimate, or
continue, and similar expressions or variations. These statements are based on the beliefs and
assumptions of our management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other factors that could cause
actual results and the timing of certain events to differ materially from the future results
expressed or implied by such forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in the section titled Risk
Factors and those included elsewhere in this
Form 10-Q
. Furthermore, such forward-looking
statements speak only as of the date of this report. We undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
BigBand develops, markets and sells 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 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 customer base includes seven of the ten largest
service providers in the U.S.
Our product revenues are influenced by a variety of factors, including the level and timing of
capital spending of our customers, and the annual budgetary cycles of, and the timing and amount of
orders from, significant customers. In addition, the selling prices of our products vary based on
the particular customer implementation, which impacts the relative mix of software, hardware and
services associated with the sale.
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 providers request for
proposal, configure our products to work within our customers network architecture, and test our
products first in laboratory testing and then in field environments to ensure interoperability with
existing products in the service providers network. Following testing, our revenue recognition
generally depends on satisfying the acceptance criteria specified in our contract with the customer
and our customers 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 three months ended March 31, 2010 and 2009, we derived
approximately 77% and 83%, 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 products, which are comprised of a combination of software licenses and programmable hardware
platforms. 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 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.
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 expect the
average selling prices of our products to decline over time due to competitive pricing pressures,
but we seek to minimize the impact to
21
our gross margins by introducing new products with higher margins, selling software enhancements to existing products, achieving
price reductions for components and improving product design to reduce costs. 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
customers order, and the architecture of the customers 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. In the three months ending June 30, 2010, we expect our operating expenses to increase
modestly, primarily due to charges associated with our May 4, 2010 restructuring.
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 we see for our business, we continue to invest in key technology projects. We expect research and development expense to remain relatively flat in absolute dollars
in the three months ending June 30, 2010.
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 remain relatively flat in absolute dollars
in the three months ending June 30, 2010.
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 general and administrative expense to remain relatively flat in absolute dollars
in the three months ending June 30, 2010.
On May 4, 2010, the Audit
Committee under authority of the Board of Directors authorized a restructuring plan pursuant to
which employees were terminated and facilities will be vacated for
sublease. Approximately $1.3 million of severance and vacated facility charges are expected to be incurred for the three months ending June 30, 2010. We expect the net annualized
cost savings to be approximately $7 million.
Critical Accounting Policies and Estimates
Our condensed 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 condensed 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 condensed 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.
Critical accounting policies that affect our more significant judgments and estimates used in
the preparation of our condensed consolidated financial statements include accounting for revenue
recognition, the valuation of inventories, warranty liabilities, stock- based compensation, the
allowance for doubtful accounts, the impairment of long-lived assets, and income taxes, the
policies of which are discussed under the caption Critical Accounting Policies and Estimates in
our 2009 Form 10-K filed with the SEC on March 5, 2010. For additional information on the recent
accounting pronouncements impacting our business, see Note 2 of the Notes to Condensed Consolidated
Financial Statements.
22
Results of Operations
The percentage relationships of the listed items from our condensed consolidated statements of
operations as a percentage of total net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Total net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Total cost of net revenues
|
|
|
53.4
|
|
|
|
41.5
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
46.6
|
|
|
|
58.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
41.9
|
|
|
|
26.2
|
|
Sales and marketing
|
|
|
18.8
|
|
|
|
14.7
|
|
General and administrative
|
|
|
14.0
|
|
|
|
10.3
|
|
Restructuring charges
|
|
|
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
74.7
|
|
|
|
54.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(28.1
|
)
|
|
|
4.2
|
|
Interest income
|
|
|
1.6
|
|
|
|
2.1
|
|
Other expense, net
|
|
|
(0.2
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes
|
|
|
(26.7
|
)
|
|
|
5.7
|
|
Provision for income taxes
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(27.2
|
)%
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
Net Revenues
Total net revenues decreased 26.6% to $32.2 million for the three months ended March 31, 2010
from $43.9 million for the three months ended March 31, 2009. The $11.7 million decrease was due to
a $9.0 million decrease in product revenues and a $2.6 million decrease in service revenues. The
decrease is primarily due to customer delays in purchasing decisions on planned deployments,
especially for new technology where our solutions are still being evaluated. While we continue to
provide Verizon with support on our broadcast products, we expect our opportunity for future
expansion to be limited as Verizon has slowed expansion of its FiOS infrastructure.
Our deferred revenues decreased by $18.3 million to $37.4 million as of March 31, 2010 from
$55.7 million as of March 31, 2009. 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 approximately 77% and 83% of net revenues for
the three months ended March 31, 2010 and 2009, respectively. Cox Communications, Time Warner Cable
and Verizon each represented 10% or more of our net revenues for the three months ended March 31,
2010. Brighthouse, Ssangyong Information and Communications Corporation (Ssangyong) and Time Warner
Cable each represented 10% or more of our net revenues for the three months ended March 31, 2009.
Ssangyong is a reseller and its revenue contribution increased during the three months ended March
31, 2009 as a result of sales to LG Powercom, which would have represented 10% or more of our net
revenues had we sold to LG Powercom directly. Time Warner Cable represented more than 40% of our
net revenues for both the three months ended March 31, 2010 and March 31, 2009.
23
Net revenues by geographical region based on the shipping destination of customer orders as a
percentage of total net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
United States
|
|
|
89.0
|
%
|
|
|
82.4
|
%
|
Asia
|
|
|
7.4
|
|
|
|
14.2
|
|
Europe
|
|
|
2.4
|
|
|
|
2.5
|
|
Americas excluding United States
|
|
|
1.2
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
The
most significant change in geographical revenue contribution was a
decline in Asia, which comprised
7.4% of net revenues for the three months ended March 31, 2010 compared to 14.2% for the three
months ended March 31, 2009. The revenue contribution decrease in Asia was primarily attributable
to the sale of our Switched Digital Video Solution to Ssangyong, which represented greater than 10%
of our net revenues for the three months ended March 31, 2009. Revenues at a similar level were not
repeated for the three months ended March 31, 2010.
Product Revenues.
Product revenues decreased 26.7% to $24.9 million for the three months ended
March 31, 2010 from $33.9 million for the three months ended March 31, 2009. This decrease was
primarily due to a $9.4 million decrease in Switched Digital Video revenues, which was partially
offset by a $0.6 million increase in Broadcast Video revenues and a $0.4 million increase in
TelcoTV revenues.
Service Revenues.
Service revenues decreased 26.2% to $7.4 million for the three months ended
March 31, 2010 from $10.0 million for the three months ended March 31, 2009. This decrease was
primarily due to a $2.1 million decrease in Video customer support and maintenance revenues related
to customer delays on certain renewals. Video installation and training revenues decreased $0.3
million as a result of a decline in new customer orders being closed during the three months ending
March 31, 2010.
Gross Profit and Gross Margin
Gross Profit.
Gross profit for the three months ended March 31, 2010 was $15.0 million
compared to $25.7 million for the three months ended March 31, 2009, a decrease of 41.4%. Gross
margin decreased to 46.6% for the three months ended March 31, 2010 compared to 58.5% for the three
months ended March 31, 2009 primarily due to lower product gross margin as described below.
Product Gross Margin
. Product gross margin for the three months ended March 31, 2010 was 44.0%
compared to 55.6% for the three months ended March 31, 2009. This decrease was primarily due to
lower absorption of fixed manufacturing costs, a higher concentration of revenues being generated
from lower margin hardware products and continued downward pricing pressure. Product gross margin
for the three months ended March 31, 2010 and 2009 included stock-based compensation expense of
$0.3 million and $0.2 million, respectively.
Services Gross Margin
. Services gross margin for the three months ended March 31, 2010 was
55.4% compared to 68.2% for the three months ended March 31, 2009. The decrease was primarily due
to a $2.6 million decrease in service revenues and a modest increase in cost of services. Services
gross margin for both the three months ended March 31, 2010 and 2009 included stock-based
compensation expense of $0.2 million.
Operating Expenses
Research and Development
. Research and development expense was $13.5 million for the three
months ended March 31, 2010, or 41.9% of net revenues, compared to $11.5 million for the three
months ended March 31, 2009, or 26.2% of net revenues. The increase was primarily attributable to a
$1.1 million increase in independent contractor costs in Tel Aviv, Israel to accelerate certain new
products to market. Salary and related benefits increased by $0.6 million due to a 36.0% increase
in headcount, primarily in Shenzhen, China, which is a relatively cost effective development
location for us. Research and development expense for the three months ended March 31, 2010 and
2009 included stock-based compensation expense of $1.3 million and $1.0 million, respectively.
24
Sales and Marketing.
Sales and marketing expense was $6.1 million for the three months ended
March 31, 2010, or 18.8% of net revenues, compared to $6.4 million for the three months ended
March 31, 2009, or 14.7% of net revenues. The decrease in absolute dollars was primarily due to a
decrease in commission expense of $0.3 million related to a decrease in the volume of customer
bookings. Sales and marketing expense for the three months ended March 31, 2010 and 2009 included
stock-based compensation expense of $0.7 million and $0.5 million, respectively.
General and Administrative
. General and administrative expense was $4.5 million for the three
months ended March 31, 2010, or 14.0% of net revenues, compared to $4.5 million for the three
months ended March 31, 2009, or 10.3% of net revenues. During the three months ended March 31,
2010, we recorded severance expense of $0.3 million, which was offset by a decrease of $0.3 million
in outside legal and audit services. General and administrative expense for the three months ended
March 31, 2010 and 2009 included stock-based compensation expense of $1.2 million and $1.1 million,
respectively.
Restructuring Charges
. Restructuring charges were zero for the three months ended March 31,
2010 and $1.4 million for the three months ended March 31, 2009, or 3.1% of net revenues. On
February 9, 2009, our Audit Committee under authority of 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. Approximately $0.7
million of charges were incurred in connection with this restructuring plan for severance and
related costs. Also, we recorded a $0.7 million charge related to the increased time and cost
required to sublease our vacated facility as a result of an unfavorable leasing environment. The
facility was originally closed as part of the restructuring plan authorized by our Audit Committee
under authority of the Board of Directors on October 29, 2007 in connection with the retirement of
our CMTS platform.
Interest Income
Interest income was $0.5 million for the three months ended March 31, 2010 compared
to $0.9 million for the three months ended March 31, 2009. The decrease in interest income was
primarily attributable to lower interest rates. Our cash, cash equivalents and marketable
securities decreased to $165.5 million as of March 31, 2010 from $167.5 million as of March 31,
2009.
Other expense, net
Other expense, net, which consists primarily of foreign exchange gains (losses), was an
expense of $88,000 for the three months ended March 31, 2010 compared to an expense of $0.2 million
for the three months ended March 31, 2009. The expense was due to unfavorable foreign exchange
losses primarily generated from our hedging program for the Israeli New Shekel.
Provision for income taxes
Income tax expense for the three months ended March 31, 2010 was $0.2 million, or negative
1.9%, on a pre-tax loss of $8.6 million, compared to tax expense of $0.2 million, or 9.1%, on
pre-tax income of $2.5 million for the three months ended March 31, 2009. The difference between
our effective tax rates and the federal statutory rate of 35% is primarily attributable to the
differential in foreign tax rates, non deductible stock compensation expense, other currently
non-deductible items, movement in our valuation allowance and various discrete items.
We maintained a valuation allowance as of March 31, 2010 against certain of our deferred tax
assets because, based on the available evidence, we believe it is more likely than not that we
would not be able to utilize these deferred tax assets in the future. We intend to maintain this
valuation allowance until sufficient evidence exists to support its reduction. 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.
We had gross unrecognized tax benefits of approximately $3.3 million as of March 31, 2010 and
$3.4 million as of December 31, 2009. We expect the unrecognized tax benefits to decrease by
$0.6 million in the next 12 months.
Our policy to include interest and penalties related to unrecognized tax benefits within our
provision for income taxes did not change. Our major tax jurisdictions are the U.S. and Israel. The
tax years 2000 through 2009 remain open and subject to examination by the appropriate governmental
agencies in the U.S. and the tax years 2006 through 2009 remain open and subject to examination by
the appropriate governmental agencies in Israel.
25
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 March 31, 2010, we had no long-term
debt outstanding.
Cash Flow
Cash, cash equivalents and marketable securities.
We had approximately $165.5
million of cash, cash equivalents, and marketable securities as of March 31, 2010. 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 March 31, 2010 was not included in cash and cash equivalents.
Operating activities
The key line items affecting cash from operating activities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net (loss) income
|
|
$
|
(8,769
|
)
|
|
$
|
2,282
|
|
Add back non-cash charges
|
|
|
5,778
|
|
|
|
5,308
|
|
|
|
|
|
|
|
|
Net (loss) income before non-cash charges (1)
|
|
|
(2,991
|
)
|
|
|
7,590
|
|
Decrease (increase) in accounts receivable
|
|
|
10,648
|
|
|
|
(2,043
|
)
|
Increase in inventories, net
|
|
|
(3,766
|
)
|
|
|
(990
|
)
|
Decrease in deferred revenues
|
|
|
(7,469
|
)
|
|
|
(4,905
|
)
|
Decrease in accounts payable and accrued and other liabilities
|
|
|
(2,937
|
)
|
|
|
(7,332
|
)
|
Other, net
|
|
|
913
|
|
|
|
505
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(5,602
|
)
|
|
$
|
(7,175
|
)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-cash charges primarily related to stock-based compensation and
depreciation of property and equipment.
|
Operating activities used cash of $5.6 million for the three months ended March 31, 2010
compared to $7.2 million for the three months ended March 31, 2009. This was primarily due to a
more favorable change in accounts receivable for the three months ended March 31, 2010, partially
offset by a net loss for the three months ended March 31, 2010.
Investing Activities
Our investing activities provided cash of $0.9 million for the three months ended March 31,
2010, primarily from net sales and maturities of marketable securities of $2.0 million, partially
offset by the purchase of property and equipment, primarily computer and engineering equipment of
$1.1 million.
Financing Activities
Our financing activities provided cash of $0.4 million for the three months ended March 31,
2010 from the issuance of common stock through the exercise of stock options under our equity
incentive plans.
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.
26
Contractual Obligations and Commitments
Our contractual obligations as of March 31, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by December 31:
|
|
|
Total
|
|
|
2010
|
|
|
2012
|
|
|
2014
|
|
|
Thereafter
|
|
|
|
|
Operating lease obligations (1)
|
|
$
|
7,269
|
|
|
$
|
2,383
|
|
|
$
|
4,761
|
|
|
$
|
125
|
|
|
$
|
|
|
Purchase obligations (2)
|
|
|
15,315
|
|
|
|
15,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
22,584
|
|
|
$
|
17,698
|
|
|
$
|
4,761
|
|
|
$
|
125
|
|
|
$
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating lease obligations are net of sublease rentals from a portion of our Tel Aviv facility.
|
|
(2)
|
|
Purchase obligations comprise firm non-cancellable agreements to purchase inventory.
|
Off-Balance Sheet Arrangements
As of March 31, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of
Regulation S-K.
Effects of Inflation
Our monetary assets, consisting primarily of cash, marketable securities and receivables, are
not materially 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 March 31, 2010, 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 three months ended March 31, 2010, 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 invoice.
Our operating expenses 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 help protect against significant fluctuations in value and the volatility
of future cash flows 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 $0.9 million for the three months ended March 31, 2010.
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 three months ending June 30, 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.
27
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, 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. Managements
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 systems
objectives will be met.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2010, 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.
28
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
A discussion of our current litigation is disclosed in the notes to our condensed consolidated
financial statements. See Notes to Condensed Consolidated Financial Statements, Note 7 Legal
Proceedings in Part I, Item 1 of this quarterly report on Form 10-Q.
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
Form 10-Q
, 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 revenues 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 are dependent 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.
|
Since 2009, we have seen reduced capital spending by our customers for our key products. 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 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;
|
|
|
|
changes in market demand for our products;
|
|
|
|
our mix of products sold;
|
|
|
|
the mix of software and hardware products sold;
|
29
|
|
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 77% of our net revenues for the three months
ended March 31, 2010, compared to 83% for the three months ended March 31, 2009. Cox
Communications, Time Warner Cable and Verizon each represented 10% or more of our net revenues for
the three months ended March 31, 2010. Brighthouse, Ssangyong Information and Communications
Corporation (Ssangyong) and Time Warner Cable each represented 10% or more of our net revenues for
the three months ended March 31, 2009. Ssangyong is a reseller and its revenue contribution
increased during the three months ended March 31, 2009 as a result of sales to LG Powercom, which
would have represented 10% or more of our net revenues had we sold to LG Powercom directly. 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. For example, Verizon slowed the rollout of its FiOS
system in 2009, which caused our revenues to decrease in the quarter ended March 31, 2010 compared
to the same quarter in 2009. 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 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;
|
30
|
|
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 are generally 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 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 Ciscos acquisition
of Scientific Atlanta, Motorolas 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 three months ended March 31, 2010. 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.
31
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 the 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 $13.5
million for the three months ended March 31, 2010, 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
products have historically represented a large majority of our revenues, to delivering video over
IP. While we are in the process of developing products based on 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. 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 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 we expect
decreases in the average selling prices of our hardware and software products, which will adversely
impact our operating results.
Our product gross margins declined for the three months ended March 31, 2010 compared to the
three months ended March 31, 2009, and it is likely we will experience lower product gross 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
32
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. However, our deferred revenue
balance as of March 31, 2010 was lower than March 31, 2009 and December 31, 2009. 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.
Continued uncertain 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 long 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 uncertainty 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.
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, including this year, we have undertaken several reductions in
force, experienced a number of changes in our executive management (including the recent departures
of our Chief Operating Officer, Chief Financial Officer and a senior sales executive) and
implemented 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
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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 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 11.0% of our net revenues for the three months ended March 31,
2010 compared to 17.6% for three months ended March 31, 2009. 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
33
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 that 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.
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 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 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
34
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 March 31, 2010, approximately 81% of our research and development headcount was 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 could 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:
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continued uncertainty in the global economy;
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fluctuations in the value of local currencies in the markets we are attempting to penetrate
may adversely affect the price competitiveness of our products;
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fluctuations in currency exchange rates, primarily fluctuations in the Israeli New Shekel,
may have an adverse effect on our operating costs;
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political and economic instability;
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unpredictable changes in foreign government regulations and telecommunications standards;
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legal, cultural and language differences in the conduct of business;
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import and export license requirements, tariffs, taxes and other trade barriers;
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potentially adverse tax consequences;
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the burden of complying with a wide variety of foreign laws, treaties and technical standards;
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acts of war or terrorism and insurrections;
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difficulty in staffing and managing foreign operations; and
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changes in economic policies by foreign governments.
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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 March 31, 2010, we had 179 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 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.
35
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.
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 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
managements time and other resources.
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:
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issue equity securities which would dilute our current stockholders percentage ownership;
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incur substantial debt;
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assume contingent liabilities; or
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spend significant cash.
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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:
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difficulties in the assimilation of acquired operations, technologies and/or products;
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37
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unanticipated acquisition transaction costs;
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the diversion of managements attention from other business;
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adverse effects on existing business relationships with suppliers and customers;
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risks associated with entering markets in which we have no or limited prior experience;
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the potential loss of key employees of acquired businesses;
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difficulties in the assimilation of different corporate cultures and practices; and
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substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.
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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 March 31, 2010, we had $20.7 million in cash and cash equivalents and $144.9 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, 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.
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
38
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
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.
39
Item 6. EXHIBITS
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3.1B
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Form of Amended and Restated Certificate of Incorporation of the Registrant(1)
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3.2B
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Form of Amended and Restated Bylaws of the Registrant(1)
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10.10 C
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Transition Services Agreement David Heard (2)
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10.12 A
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Transition Services Agreement Maurice Castonguay (3)
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
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32.1*
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Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
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(1)
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Incorporated by reference to exhibit of same number filed with the registrants Registration Statement
on Form S-1 (No. 333-139652) on December 22, 2006, as amended.
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(2)
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Incorporated by reference to exhibit of same number filed with the registrants current report on Form
8-K filed on March 4, 2010.
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(3)
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Incorporated by reference to exhibit of same number filed with the registrants current report on Form
8-K filed on March 5, 2010.
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*
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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.
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40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 7, 2010
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BigBand Networks, Inc.
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By:
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/s/ Ravi Narula
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Ravi Narula, Chief Financial Officer
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(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
|
|
|
3.1B
|
|
Form of Amended and Restated Certificate of Incorporation of the Registrant(1)
|
|
|
|
3.2B
|
|
Form of Amended and Restated Bylaws of the Registrant(1)
|
|
|
|
10.10 C
|
|
Transition Services Agreement David Heard (2)
|
|
|
|
10.12 A
|
|
Transition Services Agreement Maurice Castonguay (3)
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
|
|
|
|
32.1*
|
|
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer
|
|
|
|
(1)
|
|
Incorporated by reference to exhibit of same number filed with the registrants Registration Statement
on Form S-1 (No. 333-139652) on December 22, 2006, as amended.
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|
(2)
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|
Incorporated by reference to exhibit of same number filed with the registrants current report on Form
8-K filed on March 4, 2010.
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|
(3)
|
|
Incorporated by reference to exhibit of same number filed with the registrants current report on Form
8-K filed on March 5, 2010.
|
|
*
|
|
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.
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41
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