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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the year ended December 31, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
Commission File Number (000-25865)
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Copper Mountain Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0702004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Embarcadero Way
Palo Alto, California 94303
(650) 687-3300
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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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 [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of January 31, 2002 was approximately $71,996,967 (based on the
closing price for shares of the registrant's Common Stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of February 15, 2002 was 58,395,636.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 2002 Annual Meeting are incorporated herein by reference into Part III
of this Report. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's year ended
December 31, 2001.
Certain exhibits filed with the registrant's (i) Registration Statement on
Form S-1 (File No. 333-73153), as amended, (ii) Form 10-Q for the quarter ended
September 30, 1999, (iii) Form 10-K for the year ended December 31, 1999, (iv)
Current Report on Form 8-K filed with the Commission on March 15, 2000, (v)
Registration Statement on Form S-1 subsequently converted to Form S-3 (File No.
333-32846), (vi) Notice of Annual Meeting and Definitive Proxy Statement for
the 2000 Annual Meeting of Stockholders filed with the Commission on April 10,
2000, (vii) Registration Statement on Form S-8 filed with the Commission on
June 7, 2000 (File No. 333-38798), (viii) Current Report on Form 8-K filed with
the Commission on March 8, 2001, (ix) Registration Statement on Form S-8 filed
with the Commission on June 28, 2001 and (x) Form 10-Q for the quarter ended
September 30, 2001 are incorporated by reference into Part IV of this Report.
COPPER MOUNTAIN NETWORKS, INC.
FORM 10-K
For the Year Ended December 31, 2001
INDEX
Page
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Part I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 29
Item 3. Legal Proceedings......................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders....................... 31
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.. 32
Item 6. Selected Financial Data................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 44
Item 8. Financial Statements and Supplementary Data............................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures............................................................... 45
Part III
Item 10. Directors and Executive Officers of the Registrant........................ 46
Item 11. Executive Compensation.................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 46
Item 13. Certain Relationships and Related Transactions............................ 46
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 47
Signatures................................................................ 49
PART I
Item 1. Business
Forward Looking Statements
This document contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.
Readers are also urged to carefully review and consider the various
disclosures made by us which attempt to advise interested parties of the
factors which affect our business, including without limitation the disclosures
made under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and under the caption "Risk Factors"
included herein and in the Company's Registration Statements on Form S-1 (No.
333-73153) and on Form S-3 (No. 333-32846).
Overview
Copper Mountain Networks, Inc. (Nasdaq: CMTN) is a provider of intelligent
broadband access solutions. The company designs, manufactures, sells and
supports a broad range of subscriber access and broadband services
concentration equipment for Incumbent Local Exchange Carriers (ILECs),
Competitive Local Exchange Carriers (CLECs), Independent Operating Companies
(IOCs), Inter-exchange Carriers (IXCs), Postal Telephone and Telegraphs (PTTs)
and other facilities-based carrier networks worldwide. These products enable
efficient and scalable deployment of advanced voice, video and data services
while leveraging existing network infrastructures and reducing both capital and
operational costs.
Our revenue is generated primarily from sales of our central office based
equipment: our CopperEdge 200 DSL Concentrators (CE200), the related wide area
network cards, line cards and, to a lesser extent, from sales of our DSL
customer premises equipment (CPE). Additionally, we sell network management
software which provides monitoring and management capabilities. Copper Mountain
also sells the CopperEdge 150 DSL Concentrator (CE150) to support applications
for users in the Multi-Tenant Unit (MTU) market where our equipment is deployed
within buildings which house multiple small to medium-sized businesses or
tenants. For the year ended December 31, 2001, sales to our three largest
customers accounted for approximately 50% of our revenue. While the level of
sales to any specific customer is anticipated to vary from period to period, we
expect that we will continue to have significant customer concentration for the
foreseeable future.
We have also announced the development of a new product, the VantEdge
Broadband Services Concentrator (BSC). We believe that the VantEdge is the
industry's first purpose-built product designed to evolve the central office
for advanced broadband services. The VantEdge is designed to significantly
improve broadband service profitability by integrating and delivering a wide
range of IP and non-IP services to subscribers, while reducing the capital and
operational costs associated with provisioning these new services. The VantEdge
is scheduled for availability in the summer of 2002.
Copper Mountain markets and sells its products directly to
telecommunications service providers and through distribution partners such as
value-added resellers. In 2001 we derived approximately 95% of our
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revenue from sales made directly to telecommunications service providers with
the balance of our sales made through distributors.
Industry Background
DSL technology was initially developed in the early 1990s by U. S. ILECs as
a means to deliver video over the existing copper infrastructure. While the
technology worked, the economics of DSL service deployment were not attractive,
and thus little deployment was funded.
The mid-1990s witnessed two key catalysts to the wide-scale deployment of
DSL: the wide spread adoption and growth of the Internet and the passage of the
Telecommunications Act of 1996. DSL offered higher speed access to the Internet
for consumers and businesses, over the existing copper wiring infrastructure.
While many service providers recognized the opportunity for new services and
revenues, it was the CLECs, whose formation was enabled by the
Telecommunications Act of 1996, that moved most aggressively, securing, funding
and building regional and nationwide networks.
Also in the mid-1990s, the prospect of greater competition from cable
operators deploying cable modems to deliver high-bandwidth services prompted
the ILECs to accelerate their own investments in broadband infrastructure and
they chose DSL as a key technology to compete with the cable operators.
Beginning in late 2000, many competitive carriers found it difficult to
obtain capital to continue the build-out of their networks due to a range of
investor concerns, including the viability of the CLEC business model and the
prospects for and timing of CLEC profitability. This contributed to a wave of
bankruptcies and consolidations among many CLECs and the ones who remained
scaled back their networks and organizations.
Overall, the copper-based broadband subscriber base continues to show strong
growth. In its report dated October 2001 Cahners In-Stat Group forecasted the
total number of U.S. DSL subscribers growing from 2,352,000 in 2000 to
17,450,000 in 2005, a compounded annual growth rate of 49.30%. However, while
the demand picture appears strong, service providers have experienced
significant difficulties due to the considerable macroeconomic downturn in
2001. Capital spending declined significantly in 2001 to reflect this economic
deterioration, with most forecasts indicating a further reduction in 2002. This
reduction in budget for networking equipment, including DSL equipment, has
caused many service providers to slow the expansion of their networks, and
focus on achieving profitability for their existing broadband subscribers.
Many leading broadband service providers have begun to focus on the
scalability of their existing broadband networks, and the possibility of
deploying value-added voice and data services to achieve or improve
profitability. An IEC DSL Executive Survey completed in June 2001 found that
45% of those executives surveyed classified the role of enhanced services as a
"Critical Revenue Stream." Broadband service providers believe that services
such as gaming and video on demand (VOD) for consumers, and derived voice and
virtual private network (VPN) capabilities for businesses, may improve overall
service profitability if delivered to subscribers over a single access line.
Service providers must overcome significant limitations in today's access
networks in order to improve scalability, enable value-added services, and
improve profitability. The central office, as the first location where
subscribers and services can be aggregated and managed, and the last location
where services can be managed before delivery, plays an important role in
scalability and profitability. We believe that service providers will
increasingly look for central office-based solutions to leverage their current
investments, improve scalability, enable value added services, and provide a
platform for future growth and profits.
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The Copper Mountain Solution
Copper Mountain Networks, Inc. (Nasdaq: CMTN) is a provider of intelligent
broadband access solutions. The company offers a broad set of subscriber access
and broadband services concentration equipment for ILECs, CLECs, IOCs, IXCs,
PTTs, and other facilities-based carrier networks worldwide. These products
enable efficient and scalable deployment of advanced voice, video and data
services while leveraging existing network infrastructures and reducing both
capital and operational costs. Copper Mountain's products have been proven in
some of the world's largest broadband network deployments. Our intelligent
broadband access solutions offer the following key benefits:
1) Intelligent aggregation solutions: As large broadband service providers
continue to expand their networks to handle subscriber growth, they are
experiencing some significant scaling issues. Copper Mountain's VantEdge
Broadband Services Concentrator (BSC) is a purpose-built product,
designed specifically for central office deployment in large-scale
broadband access networks, which addresses these scaling issues. We
expect the VantEdge BSC to leverage the service provider's previous
investment in DSL access multiplexors (DSLAMs) and ATM switches, by
intelligently aggregating and managing traffic from existing DSLAMs. We
also expect the VantEdge BSC to enhance service provider profitability
by providing a means of scaling existing networks, while reducing both
capital and on-going operational costs. Additionally, the VantEdge BSC
enables efficient and cost-effective delivery of advanced services, such
as packet voice, streaming video, and broadcast audio/video, whose
deployment in today's broadband access networks is very limited due to
the high cost of delivering these services over existing network
architecture. With the VantEdge BSC, broadband service providers should
be able to both reduce costs and increase revenue, by being able to
offer more services to their subscribers in a cost-effective, scalable
manner.
2) Intelligent subscriber solutions: Copper Mountain Networks' intelligent
subscriber solutions have been deployed in some of the world's largest
broadband networks. Copper Mountain's products are able to operate at
multiple "layers" of network protocol stacks, including internet
protocol (IP), point-to-point protocol (PPP) and asynchronous transfer
mode (ATM). This enables service providers to manage traffic from
multiple services more intelligently than with other products. Further,
Copper Mountain products make possible the delivery of a wider range of
data, voice and video services to subscribers over the service
provider's copper loop infrastructure. Copper Mountain has two product
families that can directly terminate subscriber loops: the VantEdge BSC
family, which is expected to have a subscriber port density of up to 912
ports/chassis in its initial release, and the CopperEdge Intelligent DSL
Concentrator family, which has a subscriber port density of up to 192
ports/chassis. Both product families feature Copper Mountain's
multi-layer service intelligence, giving service providers a range of
chassis options for them to use in various locations, depending on
subscriber density.
3) Carrier class, proven products: Copper Mountain's VantEdge and
CopperEdge product families are designed to meet the stringent
requirements of ILECs, IXCs, IOCs, CLECs and PTTs for deployment in
their networks. The CopperEdge products are typically deployed in
telephone company central offices, and the VantEdge and CopperEdge
products are designed to meet or exceed demanding requirements in the
central office such as power consumption; form factor and size
requirements (19" or 23" rack mountable, with a 12" depth); and the
Telcordia NEBS Level 3 requirements. The VantEdge and CopperEdge product
families also feature redundancy at multiple points in the system, and
hot-swappable cards for easyinstallation and replacement to provide
overall network and service delivery reliability. To ease installation
at the subscriber site, Copper Mountain has developed CPE device
functionality and centralized network management intelligence to enable
zero-configuration "plug-and-play" installation procedures. In a wide
range of customer installations since 1998, including deployment in
multiple nationwide networks comprised of thousands of Copper Mountain
concentrators, Copper Mountain has developed a strong reputation for
performance, reliability, ease of installation and scalability of its
products. Copper Mountain is also an ISO 9001 certified company with
strong internal quality systems, providing further assurances of product
quality and customer responsiveness.
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4) Scalable, proven network management solutions: As broadband access
networks grow, and service providers look to add more subscriber
services to them, the challenge of managing the broadband access
network, including all the network devices, all the subscribers, and all
the services, becomes more complex. User self-selection of services
further complicates the management of these networks. To manage the
intelligent edge of broadband access networks, Copper Mountain offers
the CopperView suite of network management tools. CopperView is a suite
of software applications that runs on one or more computer servers in
the service provider's network operations centers. CopperView
communicates with and manages all the products in the VantEdge,
CopperEdge and CopperRocket families, as well as CopperCompatible CPE
devices that have undergone integration with CopperView. CopperView also
provides a means for the service providers' other Network Management
Systems (NMSs) and Operations Support Systems (OSSs) to interface to
CopperView and to all Copper Mountain network products, so that the
service provider can control end-to-end service provisioning and
management of their entire network. CopperView has been integrated with
the NMS and OSS products of other leading vendors and has been deployed
as a key component of integrated provisioning and management systems
installed in a variety of large production networks. CopperView has been
successfully used to manage broadband access networks consisting of
thousands of CopperEdge DSL concentrators, and tens of thousands of CPE
devices.
Multi-Vendor Interoperability: Copper Mountain has partnered with
third-party customer premise equipment (CPE) manufacturers through the
CopperCompatible(TM) program to develop a broad line of customer premise
equipment, which is compatible with the VantEdge and CopperEdge intelligent
access solutions. At the end of 2001, the CopperEdge platform was certified as
interoperable with over 100 DSL CPE devices, as well as voice products and
routers and switches in the network core. Additionally, the company has a
compatibility program, known as CopperVIP(TM) (Voice in Packets), which tests
and validates compatibility between the VantEdge and CopperEdge family of
products and the leading providers of voice gateways. The CopperVIP program
facilitates the simultaneous delivery of voice and data over the company's
product platforms.
Strategy
Copper Mountain's mission is To design, develop and deliver intelligent
broadband access solutions that enable service providers to offer profitable,
scalable value-added services. This mission reflects one of the company's core
beliefs: that network intelligence must be extended to the edge of the
network--to enable scalable, profitable copper-based broadband services.
The key elements of our strategy include:
Target large, copper-based broadband service providers in North America and
Europe
While we have sold substantially all of our products to CLEC customers to date,
we believe the majority of the market opportunity for copper-based broadband
access products moving forward will come from ILECs, IXCs and PTTs. We believe
the limitations of early generation products, projected subscriber growth, the
desire for second sourcing, and the requirement for intelligent solutions to
enable service providers to deliver advanced services will drive additional
procurement cycles from these customers. We have aligned our product, sales,
marketing, support and distribution structures to reflect this market
opportunity.
Develop intelligent, purpose-built solutions for the central office
The central office has become a critical networking junction for service
providers. It is the first opportunity to consolidate subscribers and services,
and the last opportunity to manage the delivery of multiple services to
subscribers. We believe the likely path of network evolution for service
providers will be to enhance the networking capabilities of the central office
to improve scalability, enable new value-added services, and improve
profitability. We will continue to develop, sell and deliver products that
intelligently aggregate both subscribers and other broadband access equipment
in the central office.
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Become the market leader in Broadband Services Concentrators (BSCs)
We believe a new class of product will emerge in the central office to
address the existing access network limitations, and improve profitability for
service providers. Moreover, we believe that the VantEdge is the first product
purpose-built specifically to address these limitations in the central office.
Our comprehensive central office experience, the proven reliability and
performance of our CopperEdge product line and the features, performance and
price of the VantEdge collectively will play an important role in our work to
establish Copper Mountain as a leader in this important new category.
Expand our DSLAM market share
Copper Mountain has sold over 14,000 CopperEdge DSLAMs, and over 1.2 million
ports. The CopperEdge DSLAM is a stable and reliable platform ideally suited
for small- to medium-sized central offices and medium- to large-sized
multi-tenant buildings. The VantEdge will offer service providers what we
believe to be an unprecedented combination of performance, port density and
intelligence in a next generation DSLAM with an extremely low cost per port
versus competing DSLAMs. With system-wide packet and cell architecture, a 130
gigabits per second (Gbps) backplane, the capability to support 1,824
subscriber ports per shelf, multi-layer traffic management and a host of
automated provisioning features, the VantEdge will offer an ideal platform for
large-scale DSL deployments. We believe this product, coupled with our
CopperEdge product line, will help us to increase our overall market share in
the DSLAM segment.
Accelerate customers' delivery of value-added services over broadband
Many service providers are moving towards offering bundled services over
broadband. To enable these services, they will need to evolve the networks,
specifically the central office. Copper Mountain's solutions are well
positioned to deliver the required features and functionality to deliver these
bundled services in a scalable and cost-effective manner. We expect to develop
partnerships, establish broad interoperability, participate in industry events
and undertake other activities to showcase our solutions and their ability to
accelerate the deployment of value-added services.
Establish broad interoperability
We actively promote broad interoperability with a wide variety of hardware
and software vendors. We have formed the CopperCompatible program through which
we offer licenses of our DSL CPE technology to a number of third-party
manufacturers of CPE equipment. Additionally, we support the interoperability
of voice-related equipment through our CopperVIP program. Our efforts in the
area of interoperability also enable our technology to be combined with other
networking products such as routers, access and aggregation devices, and voice
switches.
Copper Mountain Products
Copper Mountain Networks offers a wide range of intelligent broadband access
solutions to enable efficient and scalable deployment of advanced voice, video
and data services while leveraging existing network infrastructures and
reducing both capital and operational costs. Copper Mountain's products provide
multiple building blocks used to build and expand broadband access networks:
from intelligent central office aggregation solutions that aggregate traffic
from existing DSL access multiplexors; to equipment that terminates the service
provider side of subscriber loop circuits using technologies such as DSL and
T1/E1; to subscriber-side CPE devices to provide connectivity between the
subscriber's in-building networks and the circuit to the service provider; to a
suite of network management tools for managing the intelligent edge of the
service provider's broadband access network. Copper Mountain's products can be
deployed in an end-to-end Copper Mountain-based network, or in a network
interoperating with other vendors' equipment, depending on the requirements of
the service provider. All of Copper Mountain's products feature high degrees of
network and service intelligence,
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to enhance network scalability and to enable new advanced services to be most
efficiently delivered over broadband access networks. Copper Mountain's
solution consists of the following product lines:
. VantEdge(TM) Broadband Services Concentrators are designed to be
installed in telephone company central offices to intelligently
aggregate traffic from existing DSL Access Multiplexors as well as to
directly connect subscriber circuits to subscriber ports on the VantEdge.
. CopperEdge(R) DSL Concentrators are deployed in telephone company
central offices and in multi-tenant buildings to deliver a range of
consumer and business broadband data and voice services to their
customers.
. CopperRocket(R) CPE devices are deployed at the customer premises to
connect subscribers to the CopperEdge DSL Concentrators deployed in the
broadband service provider network.
. CopperView(TM) Network Management Software Tools: Broadband service
providers run CopperView on one or more servers in their network
operations centers, and use CopperView to configure and manage the
networks constructed from and the services delivered by the VantEdge,
CopperEdge and CopperRocket products, as well as other CopperCompatible
CPE devices.
VantEdge Broadband Services Concentrator
The VantEdge Broadband Services Concentrator (BSC) is a product
purpose-built for the central office to address two of the most critical issues
facing broadband service providers today: scalability and profitability. We
expect that the VantEdge BSC will introduce multi-layer service intelligence
into a strategic junction in the service provider's network: the central
office. This is the point where broadband services fan-out to hundreds or
thousands of subscribers over individual subscriber circuits, and where
subscriber traffic can first be effectively aggregated, managed and
concentrated before traveling over inter-office trunks further into the service
provider's network. By using the VantEdge BSC to aggregate traffic from
existing DSL access multiplexors, a service provider should be able to leverage
its existing access network investment and much more cost-effectively scale its
network and add new advanced services immediately and in the future. In
addition, high density line cards will enable the VantEdge BSC to terminate
subscriber lines directly on the VantEdge, which should give the service
provider another option for expanding the access network.
The VantEdge BSC's multi-layer service intelligence will be able to act upon
subscriber traffic at multiple network layers: IP, PPP, ATM, DSL. The VantEdge
will be able to perform multiple types of IP and PPP layer aggregation of
subscriber traffic, so that aggregated "service tunnels" can be sent out of the
central office and further into the service provider's network. This can
dramatically simplify the process of provisioning subscriber services, extend
the useful life of existing ATM switches, and reduce the service provider's
overall capital expenditures by eliminating the need for dedicated subscriber
aggregation equipment further back in the network. The VantEdge BSC will also
perform multi-layer traffic management on all of a subscriber's services
simultaneously, so that higher priority services, whether they be IP or non-IP
services, receive preference over lower-priority services. With its
sophisticated subscriber traffic management features and its support for
features needed by new advanced IP and non-IP services, the VantEdge BSC is
designed to cost-effectively enable service providers to offer more
sophisticated data, switched voice, and streaming audio/video services over
their broadband access networks.
The VantEdge BSC product will feature the following:
. Two chassis options:
. The VantEdge 3000 is designed for the North American market,
featuring 23" rack mounting, 12" depth, 20 slots for interface
modules, and up to 912 subscriber ports in the initial release.
. The VantEdge 3300 is designed for the European and International
markets, featuring 19" rack mounting, 12" depth with front cabling,
14 slots for interface modules, and up to 624 subscriber ports in the
initial release.
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. Two trunk interface modules connect to other DSLAMs for aggregation, or
to the service provider's switched ATM network. Trunk modules in the
initial release are:
. 4 port DS-3/E3
. 4 port OC-3/STM-1
. Two subscriber interface modules directly terminate subscriber circuits
on the VantEdge. Subscriber modules in the initial release are:
. 48 port full-rate ADSL
. 48 port G.shdsl
. A 100Base-T port on the VantEdge chassis faciliates management of the
VantEdge and enables the device to connect to other co-located
IP-over-ethernet equipment for functions such as local content insertion.
. Multi-layer service intelligence enables the VantEdge to act at multiple
network layers (IP, PPP, ATM, DSL) to intelligently deliver subscriber
services.
. Multi-layer traffic management enables the VantEdge to simultaneously
coordinate packets and cells at the port and queue levels, so that all
services (IP and non-IP) can achieve the desired quality for the user
experience.
. Service aggregation enables the VantEdge to aggregate subscriber
services at different layers (IP, PPP, ATM), for efficient delivery to
the equipment further into the service provider's broadband access
network.
. Intelligent networking models enable the VantEdge to concurrently
support multiple advanced networking models to make packet and cell
forwarding decisions, including Transparent Virtual Routing, PPP
aggregation, ATM cell relay, and virtual circuit cross connect.
. Interoperability with other vendors' ATM DSL access multiplexors, ATM
switches, and subscriber-side CPE devices ensures proper operation in a
multi-vendor network environment.
The VantEdge BSC builds upon Copper Mountain's years of experience in
building intelligent, carrier-class networking equipment as well as the
intellectual property base the company has built up over time. Much of the
VantEdge's software base will leverage the feature-rich software of the
CopperEdge product family. Dedicated VantEdge BSC product development activity
commenced in 2000. In 2001, the company formally announced the product at the
Supercomm 2001 trade show, and by the end of 2001 several prospective customers
had indicated interest in the VantEdge by signing non-binding laboratory trial
agreements.
CopperEdge 200 DSL Concentrators
The CopperEdge 200 (CE200) DSL Concentrator terminates up to 192 subscriber
ports and supports a variety of services over those subscriber ports, including
Internet access, VPN access, Frame Relay, ATM cell relay, voice over DSL
(VoDSL), and voice over IP (VoIP). The CE200 is a carrier-class platform
designed specifically for telephone company central office environments, and
meets or exceeds industry standards and applicable regulatory requirements. The
CE200 can also be deployed within multi-tenant buildings. The CE200 consists of
a modular chassis containing power supplies, control system, wide area network
interface modules and subscriber line cards. The CE200 product family features
the following:
. Contains redundant power supplies that can be replaced without
interrupting power to the chassis;
. Supports a range of interfaces for wide area network connections;
. Concurrently supports multiple advanced networking models implemented in
the control system, including Transparent Virtual Routing, ATM cell
relay, virtual circuit cross-connect, Frame Relay Multiplexing, and
Frame Relay to ATM interworking;
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. Accommodates any combination of up to eight DSL or T1 line cards which
connect to the subscriber CPE equipment, including:
ADSL Line Card. The 24-port CopperEdge Asymmetric Digital Subscriber
Line (ADSL) line card enables service providers to offer consumers
converged voice and data services using any of four ADSL
variants--G.dmt, ANSI T1.413, and G.lite, which are based on Discrete
Multi-Tone (DMT), plus CAP/RADSL--all from a single module. This
multi-mode line card conforms to all deployed ADSL and G.lite standards
from the international telecommunication union (ITU) and american
national standards institute (ANSI), ensuring that a wide range of CPE
interoperate seamlessly to serve end-user consumers and teleworkers.
ADSL delivers maximum line speeds of 8.064 Mbps downstream to the user
and 1.024 Mbps upstream and maximum reach of 28,000 feet.
G.shdsl Line Card. The 24-port CopperEdge G.shdsl Line Card implements
the G.shdsl industry standard for high-speed, long-reach symmetric DSL
circuits. Symmetric High-Speed Digital Subscriber Line (G.shdsl) is a
superior delivery mechanism for the reliable, high-speed bandwidth
businesses require, with improved rates and reach over earlier symmetric
technologies. The G.shdsl line card supports speeds up to: 2.3 Mbps at
loop distances as long as 10,000 feet (3 km) from the central office;
1.5 Mbps out to 14,000 feet (4.3 km); and 192 Kbps out to 22,000 feet
(6.7 km).
G.lite Line Card. G.lite is part of Copper Mountain's complete solution
for delivering consumer broadband services. G.lite (ITU standard
G.992.2) enables simultaneous data and voice service over existing
copper phone lines, without splitters or new inside wiring at the
customer premise, eliminating costly installation truck rolls. The
CopperEdge 24-port G.lite line card delivers speeds up to 3.0 Mbps
downstream to the end user and 512 kbps upstream, and a reach of up to
26,200 feet. The G.lite line card also consumes significantly less power
than full-rate ADSL technologies, reducing ongoing operating constraints.
IDSL Line Card. For subscribers who can only be served over
ISDN-capable copper lines, such as subscribers served by a digital loop
carrier (DLC), Copper Mountain provides 24-port ISDN Digital Subscriber
Line (IDSL) line cards. The IDSL line card delivers service at speeds
between 64 kbps and 144 kbps up to a distance of 18,000 feet from the
central office. The use of repeaters will increase the reach to over
30,000 feet.
SDSL Line Card. The 24-port SDSL line card supports speeds from 128
kbps to 1.5 Mbps per port at loop distances as far as 28,000 feet from
the central office. The CopperEdge is capable of bonding up to four 1.5
Mbps SDSL lines via inverse multiplexing (IMUX) technology. SDSL uses
2B1Q line coding to ensure spectral compatibility with other existing
services. SDSL supports a wide range of high-speed data and toll-quality
Voice over DSL (VoDSL) services, including Internet access, Frame Relay,
virtual private networking (VPN), T1 replacement, private branch
exchange (PBX), and multi-line voice--all from a single line card.
T1 Line Card. The CopperEdge 12-port T1 line card offers service
providers wide market coverage, extending the addressable market for
broadband services to include customers previously unable to benefit
from DSL service due to geographic location. The T1 line card utilizes a
1.544 Mbps point-to-point dedicated, digital circuit and operates
concurrently with any combination of Copper Mountain ADSL, G.shdsl,
G.lite, IDSL, and SDSL line cards in a single CopperEdge chassis.
CopperEdge 150 DSL Concentrators
Copper Mountain's lower-density DSL concentrator, the CopperEdge 150 (CE150)
is a DSL concentrator optimized for use in medium to large MTU buildings. The
CopperEdge 150, available in configurations supporting 24 or 48 end-user
customers, supports all six of the line cards listed above (ADSL, G.shdsl,
G.lite,
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IDSL, SDSL and T1). The CE150 enables MTU service providers to deliver multiple
high-bandwidth services concurrently, including Internet access, corporate
virtual private networks (VPNs), and Frame Relay services, as well as PBX
extension and other voice services.
CopperRocket Customer Premise Equipment (CPE)
The CopperRocket family of CPE products consists of SDSL and IDSL modems,
the CopperRocket 201 CPE products. These customer premise devices are simple to
install and offer high-performance Internet and local area network (LAN) access
at several selectable speeds from 64 kbps to 1.5 Mbps. The CopperRocket 201 CPE
products can operate at multiple transmission speeds and distances to satisfy
the price and performance needs of each subscriber. The CopperRocket is a
''plug-and-play'' device. There are no hardware switches, configuration
parameters or end-user software configuration required. Copper Mountain's ZIP!
(Zero Installation Procedure) feature enables the CopperRocket to communicate
with a CopperEdge DSL Concentrator and automatically download all the necessary
configuration parameters to immediately begin full operation.
CopperRocket devices operate over standard copper telephone wire and provide
dedicated, full-duplex throughput at multiple speeds to support network
activities such as file transfers, intranet access and Internet Web browsing.
The CopperRocket's multi-speed DSL feature enables service providers to
remotely adjust line speed based upon subscriber requirements with no
additional investment or software upgrade by the service provider and without
requiring a costly visit to the subscriber premises.
CopperCompatible(TM) CPE
In addition to offering the CopperRocket CPE products, Copper Mountain works
with several leading third-party equipment manufacturers to offer a broad range
of interoperable customer premise equipment through our CopperCompatible
program. To be certified as CopperCompatible, the third party CPE devices must
pass a series of stringent interoperability tests with Copper Mountain's DSL
solutions. This gives service providers and their subscribers multiple
competitive sources for CPE, delivering more innovation than any single vendor
could on its own, as well as a wide array of choices in cost and functionality,
ranging from simple bridges to routers, IADs, and data service units (DSUs)
with advanced features. By the end of 2001, more than 100 CPE devices had been
certified as interoperable with Copper Mountain's platform.
CopperView Network Management Tools
The CopperView suite of network management tools gives the service provider
the ability to effectively manage the intelligent edge of its broadband access
network. CopperView directly communicates with and manages all of Copper
Mountain's network products: the VantEdge, the CopperEdge, and the CopperRocket
product families, as well as CopperCompatible CPE devices. CopperView also
contains interfaces to allow the service provider's other network management
and operations support systems to control and manage all the Copper Mountain
products in the network, thereby enabling end-to-end service provisioning and
management of the entire broadband access network. CopperView has been
successfully integrated with multiple NMS and OSS systems used by various
service providers. CopperView has also proven its ability to scale in large
broadband access networks, by successfully managing networks consisting of
thousands of CopperEdge DSL Concentrators, and hundreds of thousands of CPE
devices. The CopperView suite consists of multiple components:
. The CopperView Access Management System provides management of large
networks of VantEdge Broadband Services Concentrators and CopperEdge DSL
Concentrators with a simple, intuitive user interface.
. The CopperView Element Management System provides a simple, intuitive
user interface that allows configuration and management of a single
VantEdge BSC, and a single CopperEdge DSL concentrator and the CPE
associated with each.
. The CopperCraft text-based interface provides a simple interface for
on-site technicians and for remote access to a VantEdge BSC or
CopperEdge DSL Concentrator.
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Product Deployment
We sell our products for deployment into central offices and multi-tenant
buildings. Telecommunications service providers may deploy in either of these
environments to reach their target market in the most effective manner.
Central Office-Based DSL Service Deployment. Telecommunications Service
Providers may install our intelligent broadband access solutions in an ILEC
central office to offer service to any subscriber served by that central
office. Typically, a CLEC leases from the ILEC a high-bandwidth trunk, usually
a 45 Mbps DS-3 circuit, to connect to the CLEC's regional switching office. The
CLEC then leases an individual copper loop to a subscriber from the ILEC, for a
monthly fee. The copper loop is provisioned through the ILEC's distribution
facilities out to the subscriber premise. The CLEC then provisions the wiring
inside the subscriber premise and installs the CPE.
CLECs or ILECs deploying DSL from central offices may elect do so in select
central offices where the number of potential subscribers is highest, or they
may choose to cover a region by installing in all central offices in that
region. A carrier may also choose a regional deployment strategy or a
nationwide deployment strategy.
Multi-Tenant Building DSL Service Deployment. A telecommunications service
provider can deploy our intelligent broadband access solutions in multi-tenant
buildings to provide Internet access and other data and voice services to the
tenants of that building. Inside the building, the service provider can utilize
the existing telephone wiring to deliver high-bandwidth connections to tenants
on a targeted basis. Tenants in the building can use a single, high-bandwidth
connection from the building to the service provider's switching office,
providing good application performance at a lower cost than the same bandwidth
dedicated to a single subscriber.
Customers
In 2001, sales to our top three largest customers accounted for
approximately 50% of our revenue, of which sales accounted for approximately
23%, 17% and 10%, of our revenue. While the level of sales to any specific
customer is anticipated to vary from period to period, we expect that we will
continue to have significant customer concentration for the foreseeable future.
Our customers' buying patterns have become unpredictable. Future sales, if any,
to the significant customers mentioned above may be substantially less than
historical sales. The loss of historically significant customers has adversely
impacted our business during 2001 and the loss of another significant customer
could have a material adverse effect on our business.
To date, most of our customers have been CLECs, including the three largest
customers referred to above. In response to the financial difficulties
experienced by many of our CLEC customers and the resulting reduction in the
demand for our products, we have modified our business plan to increasingly
target international markets and ILECs and IXCs as potential customers. The
future success of our business may substantially depend on our ability to
successfully penetrate international markets and domestic ILEC and IXC
customers.
Interoperability Partnerships
Copper Mountain has established several CPE licensing relationships with
certain vendors through our CopperCompatible interoperability program to
promote the interoperability of our DSL concentrators with such equipment.
Under this interoperability program, licensees are allowed access to our
technology, which can be used in the design of their CPE. These CPE licensing
relationships have been established with ADC Kentrox, Netopia, 3Com, Cayman
Systems, FlowPoint Corporation and Ramp Networks, among others.
Our CopperVIP initiative, which falls under the CopperCompatible umbrella,
facilitates interoperability of customer premise equipment (CPE), Integrated
Access Devices (IADs), and Integrated Communications
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Platforms (ICPs) with voice gateways from Copper Mountain's voice partners and
Copper Mountain's widely deployed DSL platform. Our voice partners include
CopperCom, Inc., JetStream Communications, and Tollbridge Technologies.
Copper Mountain Sales Organization
Copper Mountain sells and markets its products primarily through our direct
sales organization. Additionally, we have relationships with selected
distributors to expand our distribution capabilities.
Direct Sales (United States). Our national sales effort is overseen by the
Company's vice president of sales, and day-to-day sales management falls under
regional directors and sales managers who are responsible for relationships
with targeted customers. Direct sales teams are also divided by target
customer--with specific teams focused on CLECs, ILECs and IXCs. The sales
management team for each customer is responsible for maintaining contact with
key individuals who have planning and policy responsibility within the
customer's organization. At the same time, our sales engineers work with
customers to support our products and our sales efforts. Direct sales accounted
for approximately 95% of our revenue in 2001.
Direct Sales (Internationally). Copper Mountain's global direct sales also
fall under the responsibility of our vice president of sales and his
international sales organization. In October 2000, we opened an international
office in Amsterdam serving Europe, the Middle East, and Africa.
Channel Sales. In 2000, Copper Mountain also established its
CopperChannel(TM) program to accelerate expansion into new markets worldwide.
The program targets value-added resellers in North American, European, and
Asian markets and enables selected channel partners to resell Copper Mountain's
complete product line. Sales through this program have not been significant.
Copper Mountain Marketing Organization
Marketing follows a traditional structure of Product Marketing, Product
Management, and Corporate Communications. For each area, we employ specialists
on our markets, our products, and support services such as public relations.
The marketing organizations are generally responsible for the following:
1) Product Marketing: Defines the environment into which we sell our
products. This includes defining the industry, customer, and competitive
landscape and direction, market research, sales tools and other outbound
functions.
2) Product Management: Defines, prioritizes and drives the development of
the required features and functionalities into our products, product
strategy, interoperability and other partnerships.
3) Corporate Communications: Responsible for Public Relations, Copper
Mountain's Web site, trade shows, collateral and other production
capabilities.
Customer Service and Support
A high level of continuing service and support is critical to our objective
of developing long-term customer relationships. The majority of our service and
support activities are related to installation support and network
configuration issues. These services are provided by telephone and directly at
customer installations with resources from our customer support group based in
San Diego, California. To date, our revenues from on-site installation and
technical assistance have not been significant.
We offer various training courses for our third-party resellers and
telecommunications service provider customers. We provide technical support for
our hardware products, which have a standard warranty of 12 months, both
directly and through our selected service subcontractors. We also have a
variety of post-warranty
11
hardware, software maintenance and support programs. To date, revenues
attributable to customer service and support services have not been significant.
Research and Development
We believe that our future success depends on our ability to adapt to the
rapidly changing telecommunications environment, to maintain our significant
expertise in core technologies, and to continue meeting and anticipating our
customers' needs. We continually review and evaluate technological changes
affecting the telecommunications market and invest substantially in
applications-based research and development. In the future our new product
development strategy may combine internal development efforts with
acquisitions, joint ventures and licensing or marketing arrangements relating
to new products and technologies to meet market demands.
Competition
The telecommunications equipment industry is highly competitive. We compete
directly with Cisco Systems, Inc., Lucent Technologies, Inc., Alcatel S.A.,
Nokia Corporation and Paradyne Corporation, among others.
The principal competitive factors in our market include:
. Incumbency and pre-existing relations with telecomm service providers;
. Depth and breadth of product portfolio;
. Key product features;
. System reliability and performance;
. Price and aggressive discounting;
. Ease of installation and use;
. Technical support and customer service; and
. Size and stability of operations.
We believe our success in competing with other manufacturers of
telecommunications products depends primarily on our engineering, manufacturing
and marketing and sales skills, the price, quality and reliability of our
products and our delivery and service capabilities.
Manufacturing
Our manufacturing operations consist primarily of supporting prototype
development, materials planning and procurement, final assembly, testing and
quality control. We use several independent suppliers to provide certain
printed circuit boards, chassis and subassemblies. We subcontract substantially
all of our manufacturing to one company, Plexus Corporation, located in Nampa,
Idaho.
Our manufacturing process enables us to configure our products to meet a
wide variety of individual customer requirements. We have achieved
International Standard Organization 9001 registration for quality assurance in
design, sale, production, installation and service. We plan to strengthen
manufacturing capability both in our existing facilities and through expansion
of activities with independent suppliers and manufacturers. Our future growth
will require an extension of existing internal and external manufacturing
resources, hiring of additional technical personnel, improved coordination of
supplier relationships with our inventory ordering and management practices,
and expansion of information systems to accommodate planned growth across these
areas.
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We use a combination of standard parts and components, which are generally
available from more than one vendor, and three key components that are
purchased from sole or single source vendors for which alternative sources are
not currently available: two semiconductor chips and a system control module.
If supply of these key components should cease, we would be required to
redesign our products. We have evaluated alternate source vendors in the past
for each of these key components and will continue to do so, as appropriate,
but these vendors may not meet our quality standards for component vendors.
While we work closely with some well-established vendors, we have no supply
commitments from our vendors and we generally purchase components on a purchase
order basis, as opposed to entering into long term procurement agreements with
vendors. To date, we have generally been able to obtain adequate supplies in a
timely manner from vendors or, when necessary, to meet production needs from
alternative vendors. We believe that, in most cases, alternative supplies of
standard parts and components can be identified if current vendors are unable
to fulfill our needs. However, delays or failure to identify an alternate
vendor, if required, or a reduction or interruption in supply, or a significant
increase in the price of components would materially and adversely affect our
business, financial condition and results of operations and could impact
customer relationships.
Intellectual Property
We rely on a combination of copyright, trademark, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
our trade secrets and know-how. Although we employ a variety of intellectual
property in the development and manufacturing of our products, we believe that
none of such intellectual property is individually critical to our current
operations. Taken as a whole, we believe our intellectual property rights are
significant and that the loss of all or a substantial portion of such rights
could have a material adverse effect on our results of operations. There can be
no assurance that our intellectual property protection measures will be
sufficient to prevent misappropriation of our technology. In addition, the laws
of many foreign countries do not protect our intellectual properties to the
same extent as the laws of the United States. From time to time, we may desire
or be required to renew or to obtain licenses from others in order to further
develop and market commercially viable products effectively. There can be no
assurance that any necessary licenses will be available on reasonable terms.
Employees
As of December 31, 2001 we employed 191 employees, including 30 in sales,
marketing and customer support, 9 in manufacturing, 130 in engineering, and 22
in finance, human resources, information systems and administration. Two of our
employees are located at our international offices. None of our employees is
represented by collective bargaining agreements, and management considers
relations with its employees to be good.
Risk Factors
You should carefully consider the following risk factors and the other
information included herein before investing in our common stock. Our business
and results of operations could be seriously harmed by any of the following
risks. The trading price of our common stock could decline due to any of these
risks, and you may lose part or all of your investment.
The Difficulties Experienced By Many of Copper Mountain's Current Customers
And The Challenges Associated With Penetrating New Markets Have Had And Are
Expected To Continue To Have an Adverse Effect On Copper Mountain's Business.
To date, Copper Mountain has sold the majority of its products to
competitive local exchange carrier or CLEC customers. Many CLECs have
experienced difficulties continuing to finance their businesses. As a result,
these CLECs have been forced to scale back their operations, and some,
including our historically two largest
13
customers Northpoint Communications, Inc. and Rhythms Netconnections, Inc.,
have filed for bankruptcy protection. Our business, financial condition and
results of operations have been materially and adversely affected by these
difficulties in the CLEC industry. We expect that our business will continue to
suffer unless and until we are able to diversify our customer base to derive a
substantially greater percentage of our revenues from other types of
telecommunication service providers, such as ILECs, who are not experiencing
the same level of financial difficulties.
The failure of our CLEC customers to raise sufficient capital to fund their
operations and continue to order and pay for our products has impaired and may
continue to impair Copper Mountain's revenues and profitability. To the extent
we ship products to customers who become unable to pay for the products, we may
be required to write-off significant amounts of our accounts receivable.
Similarly, to the extent that our customers order products and then suspend or
cancel the orders prior to shipping, we will not generate revenues from the
products we build, our inventories may increase and our expenses will increase.
Specifically, we may incur substantially higher inventory carrying costs, as
well as be faced with the risk of the excess inventory that could become
obsolete over time.
The uncertainties in the CLEC industry in general and among our CLEC
customers in particular, and the resulting impact on our business, has made it
increasingly difficult for us to reliably forecast our revenues and
profitability. We expect that we will continue to be faced with these
challenges for as long as the CLEC industry experiences financial difficulties,
or until we can successfully shift our business away from reliance on our CLEC
customers and add customers with stronger financial positions.
If Copper Mountain Does Not Successfully Introduce and Commercialize the
VantEdge Product, Our Business Will Be Materially Adversely Impacted
In response to the financial difficulties experienced by our CLEC customers
and the resulting reduction in the demand for our products, we have focused our
marketing strategy on targeting ILECs, IXCs and international PTTs as potential
customers. The future success of our business will substantially depend on our
ability to successfully penetrate such customers. These customers have
traditionally been characterized by longer sales cycles and have historically
been slow to adopt new products. Accordingly, we anticipate that we may
continue to face challenges in connection with our plan to more aggressively
pursue this market, and our failure to successfully do so could materially
adversely affect our business, financial condition and results of operations.
Sales of our existing DSL products, which were primarily aimed at the CLEC
market, have been decreasing for the last five quarters. We expect such sales
to continue to decrease, if they continue at all. As a result, our future
success is substantially dependant upon our ability to successfully market and
commercialize our new VantEdge product on a timely basis. We began development
of the VantEdge product in 1999, and formally announced the product in 2001. We
expect that the VantEdge product will be generally available for sale beginning
in the summer of 2002. We may not be able to finish the development and
commercialization of the VantEdge product by that time, if at all, for various
reasons, including those set forth in these risk factors. Even if we are
successful in bringing the VantEdge product to market, sales of the VantEdge
product may not be sufficient to allow us to continue to operate our business.
Our business will be materially adversely impacted if we do not successfully
introduce and commercialize the VantEdge product.
Copper Mountain May Not Be Able to Obtain Additional Capital to Fund Its
Operations When Needed, and Without Additional Capital Copper Mountain May
Not Be Able to Sustain Its Operations
We currently require approximately $8 million to $12 million in cash per
quarter to fund our operations, and we presently expect this rate of quarterly
cash use to continue through 2002. As a result, we believe that we have
sufficient cash and cash equivalents to fund our operations for at least the
next twelve months. These estimates reflect various assumptions, including the
assumption that sales of our existing products will continue at
14
approximately the same levels as in the fourth quarter of 2001, that testing,
continued development and commercialization of our new VantEdge product
proceeds as planned, that we do not incur significant additional expense
related to litigation, including any adverse determination in the litigation
described elsewhere in this Form 10-K under the heading "Legal Proceedings."
Any of these assumptions may prove to be incorrect. In particular, revenues
from sales of our products have decreased in each of the previous five
quarters. In future quarters, it is unclear whether we will continue to
generate revenue from sales of our current products at the same levels, if at
all. Moreover, in our dispute with Flextronics, Flextronics has indicated that
it will seek to attach $15.2 million of our cash as security for the amount of
damages that they claim we owe them. If they are successful in this effort, our
available cash would be reduced by $15.2 million at least temporarily and
perhaps permanently. Also, the development and commercialization of our
VantEdge product might be delayed or might require the expenditure of
significantly more funds than currently anticipated, in which case our
liquidity and capital resources would be adversely affected.
We currently fund our operations with our cash, cash equivalents and
marketable investments. In order to fund our operations beyond the second
quarter of 2003, we expect that we will have to raise additional funds.
Moreover, we may require such financing sooner than anticipated. We anticipate
that we will have to seek equity or long-term debt financing in the private or
public capital markets to obtain the funds we need to continue operations. Such
capital raising may be made more difficult if we are no longer listed on the
NASDAQ stock market as a result of our failure to continue to meet the listing
requirements required by NASDAQ, which is a risk we could face.
If additional funds are raised through the issuance of equity securities,
the percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or such equity securities may have rights,
preferences or privileges senior to or more favorable than those of the holders
of our common stock. If additional funds are raised through the issuance of
debt securities, such securities would have rights, preferences and privileges
senior to or more favorable than those of the holders of common stock and the
terms and conditions relating to such debt could impose restrictions on our
operations.
Additional financing may not be available when needed on terms and
conditions favorable to us or at all. If adequate funds are not available or
are not available on acceptable terms and conditions, we may be unable to fund
our ongoing operations. In addition, our inability to obtain cash may:
. make us unable to successfully introduce and commercialize our VantEdge
product;
. damage our customers' perceptions of us and our management team;
. inhibit our ability to sell our products to a customer base which values
financial strength and stability; and
. decrease our stock price.
Any or all of these consequences would materially adversely affect our
business, financial condition or results of operations.
Copper Mountain May Not Achieve Quarterly or Annual Profitability
Copper Mountain experienced a significant decline in revenues in 2001 and
expects to continue incurring significant sales and marketing, research and
development and general and administrative expenses and, as a result, we may
have difficulty achieving profitability. We cannot be certain that we will
realize sufficient revenues in the future to achieve profitability on an annual
or quarterly basis.
15
Copper Mountain Derives Almost All of Its Revenues From a Small Number of
Customers and Copper Mountain's Revenues May Decline Significantly if Any
Major Customer Cancels or Delays a Purchase of Copper Mountain's DSL Products
Copper Mountain sells its products predominantly to CLECs. Sales to our
largest three customers accounted for approximately 50% of our net revenue for
the year ended December 31, 2001. Unless and until we diversify and expand our
customer base, our future success will significantly depend upon the timing and
size of future purchase orders, if any, from our larger CLEC customers and, in
particular:
. the product requirements of these customers;
. the financial and operational success of these customers;
. the success of these customers' services deployed using our products; and
. the attractiveness of our products compared to our competitors products.
Our revenue has declined on a sequential basis each quarter since the third
quarter of the year ended December 31, 2000 to the fourth quarter of the year
ended December 31, 2001. In light of the market dynamics of the
telecommunication service provider industry, it has become extremely difficult
for us to forecast our revenues. Future sales, if any, to our historically
significant customers may be substantially less than historical sales. The loss
of another major customer or the delay of significant orders from any
significant customer, even if only temporary, could among other things reduce
or delay our net revenue, adversely impact our ability to achieve annual or
quarterly profitability and adversely impact our ability to generate positive
cashflow, and, as a consequence, could materially adversely affect our
business, financial condition and results of operations.
Historically, our backlog at the beginning of each quarter has not been
equal to expected revenue for that quarter. Accordingly, we are dependent upon
obtaining orders in a quarter for shipment in that quarter to achieve our
revenue objectives. In addition, due in part to factors such as the timing of
product release dates, purchase orders and product availability, significant
volume shipments of product could occur at the end of any given quarter.
Failure to ship products by the end of a quarter may adversely affect our
operating results. Furthermore, our customers may delay delivery schedules,
cancel their orders without notice or be unable to pay for delivered product.
Due to these and other factors, quarterly revenue, expenses and results of
operations could vary significantly in the future, and period-to-period
comparisons should not be relied upon as indications of future performance.
Failure to Effectively Manage Operations in Light of Copper Mountain's
Changing Revenue Base Will Adversely Affect Its Business
In the past, Copper Mountain has rapidly and significantly expanded and
contracted its operations and anticipates that in the future, expansion or
contraction in certain areas of its business may be required to address
potential changes in its client base and market opportunities. In particular,
we expect to face numerous challenges in the execution of our new business
strategy to focus more on the domestic ILEC and IXC market. In connection with
this endeavor, we may not be able to implement management information and
control systems in an efficient and timely manner, and our current or planned
personnel, systems, procedures and controls may not be adequate to support our
future operations. If we are unable to manage growth or reduction in growth
effectively, our business, financial condition and results of operations will
be materially adversely affected. The volatility in our business has placed a
significant strain on our managerial and operational resources. To maintain the
level of our operations and personnel, we may be required to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. install new management information and telecommunications systems; and
. train, motivate and manage our sales and marketing, engineering,
technical and customer support employees.
16
As of December 31, 2001 we operated our business from facilities in Palo
Alto, California and San Diego, California. We expect to continue to face
challenges related to effectively and efficiently coordinating our operations
between our facilities. If we are unsuccessful in meeting these challenges, our
business and operating results may be adversely affected.
We also have excess facilities in Fremont, San Diego and in Palo Alto that
are subleased or in the process of being subleased. We are obligated to
continue making payments on these leases. If we are unable to sublease these
properties to financially viable sub-lessees at rates comparable to those we
are obligated to pay, it could adversely impact our financial condition.
We cannot assure you that we will be able to sufficiently decrease our
operating expenses. If we are unable to realize sufficient savings from
re-sizing our business, and/or sufficiently increase our revenues, our ability
to deploy and service our products, fund our operations or respond to
competitive pressures could be significantly impaired.
Copper Mountain Has a Limited Operating History
Copper Mountain has a limited operating history as we were incorporated in
March 1996. Due to our limited operating history, it is difficult or impossible
for us to predict future results of operations and you should not expect future
revenue to be comparable to our historic revenue, nor are recent quarterly
revenues a reliable indicator of future quarterly revenues. In addition, we
believe that comparing different periods of our operating results is not
meaningful, and you should not rely on the results for any period as an
indication of our future performance. Investors in our common stock must
consider our business and prospects in light of the risks and difficulties
typically encountered by companies in their early stages of development,
particularly those in rapidly evolving markets such as the telecommunications
equipment industry and particularly within our volatile market segment. Some of
the specific risks include whether we are able:
. to compete in the intensely competitive market for telecommunications
equipment;
. to attract new customers;
. to maintain a stable, sustainable customer base;
. to successfully penetrate international markets;
. to expand our addressable market by selling into the incumbent or ILEC
market, the IXC market and international markets;
. to introduce new products and product enhancements in a timely and
competitive fashion; and
. to successfully manage the size of our operational infrastructure.
We discuss these and other risks in more detail below.
A Number of Factors Could Cause Copper Mountain's Operating Results to
Fluctuate Significantly and Cause Its Stock Price to be Volatile
Copper Mountain's quarterly and annual operating results have fluctuated in
the past and are likely to fluctuate significantly in the future due to a
variety of factors, many of which are outside of our control. If our quarterly
or annual operating results do not meet the expectations of securities analysts
and investors, the trading price of our common stock could significantly
decline. Some of the factors that could affect our quarterly or annual
operating results include:
. telecommunications and DSL market conditions and economic conditions
generally;
. the financial viability and telecommunications equipment capital
expenditure activities of our major customers and prospective customers;
17
. our ability to penetrate the ILEC, IXC and PTT markets;
. our prospective customers' confidence in our ability to remain
financially viable and these customers' willingness to purchase our
products;
. the loss of any one or more of our major customers or a significant
reduction in orders from those customers;
. fluctuations in demand for our products and services;
. the timing and amount of, or cancellation or rescheduling of, orders for
our products and services, particularly large orders from our key
customers and our strategic distribution partners;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. new product introductions or announcements and price reductions of
products offered by our competitors;
. a decrease in the average selling prices of our products;
. our ability to achieve cost reductions;
. our ability to obtain sufficient supplies of sole or limited source
components for our products;
. changes in the prices of our components;
. our ability to maintain production volumes and quality levels for our
products;
. the volume and mix of products sold and the mix of distribution channels
through which they are sold;
. increased competition, particularly from larger, better capitalized
competitors; and
. costs relating to possible acquisitions and integration of technologies
or businesses.
Copper Mountain Sells the Majority of Its Products to Telecommunications
Service Providers That May Reduce or Discontinue Their Purchase of Copper
Mountain's Products At Any Time
The purchasers of Copper Mountain's products to date have predominantly been
the emerging telecommunications service providers known as CLECs. These
telecommunications service providers require substantial capital for the
development, construction and expansion of their networks and the introduction
of their services. Financing may not be available to emerging
telecommunications service providers on favorable terms, if at all. The
inability of our current or potential CLEC customers to acquire and keep
customers, to successfully raise needed funds, or to respond to any other
trends such as price reductions for their services or diminished demand for
telecommunications services generally, has adversely affected their operating
results or caused them to reduce their capital spending programs. If our
customers are unable to raise sufficient capital or forced to defer or curtail
their capital spending programs, our sales to those telecommunication service
providers may be adversely affected, which could have a material adverse effect
on our business, financial condition and results of operations. In addition,
many of our telecommunications service provider customers have recently
experienced consolidation, reduced or eliminated access to the capital markets
and in some cases bankruptcy. The loss of one or more of our telecommunications
service provider customers due to the aforementioned factors could have a
material adverse effect on our business, financial condition and results of
operations.
If DSL Technology and Copper Mountain's DSL Product Offerings Are Not
Accepted by Telecommunications Service Providers, Copper Mountain May Not Be
Able to Sustain or Grow Its Business
Copper Mountain's future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by financially viable
telecommunications service providers, of which there are a limited number, and
end users of their services. We have invested substantial resources in the
development of
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DSL technology, and all of our products are based on DSL technology or depend
on the widespread acceptance and continued deployment of DSL technology.
Telecommunications service providers are continuously evaluating alternative
high-speed data access technologies and may, at any time, adopt technologies
other than the DSL technologies offered by Copper Mountain. Even if
telecommunications service providers adopt policies favoring full-scale
implementation of DSL technology, they may defer purchases of our products or
they may not choose to purchase our product offerings. In addition, we have
limited ability to influence or control decisions made by telecommunications
service providers. In the event that the telecommunications service providers
to whom we market our products adopt technologies other than the DSL
technologies offered by Copper Mountain or choose not to purchase Copper
Mountain's DSL product offerings or Copper Mountain's other product offerings,
we will not be able to sustain or grow our business.
We Have Been Named as a Defendant in Securities Class Action Litigation That
Could Result In Substantial Costs and Divert Management's Attention and
Resources
Since October 2000, approximately twenty-four complaints have been filed in
the United States District Court for the Northern District of California
against Copper Mountain and two of our officers, and similar complaints have
been filed against Copper Mountain and our directors in Delaware and California
state courts, alleging violations of the securities laws arising out of
declines in the Company's stock price. Specifically, the complaints allege
claims in connection with various alleged statements and omissions to the
public and to the securities markets. In May 2001, the complaints filed in
federal court were consolidated into a single complaint. No assurances can be
made that we will be successful in our defense of the claims specified in any
of these complaints. If we are not successful in our defense of such claims, we
could be forced to make significant payments to our stockholders and their
lawyers, and such payments could have a material adverse effect on our
business, financial condition and results of operations if these payments are
not entirely covered by our insurance. Even if our defense against such claims
is successful, the litigation could result in substantial costs and divert
management's attention and resources, which could adversely affect our business.
In December 2001, Copper Mountain and certain of our officers and directors
were named as defendants in a class action shareholder complaint filed in the
United States District Court for the Southern District of New York. Similar
complaints were filed in the same Court against hundreds of other public
companies that conducted initial public offerings ("IPOs") of their common
stock in the late 1990s (the "IPO Lawsuits"). In the complaint, the plaintiff
alleges that Copper Mountain, certain of our officers and directors and our IPO
underwriters violated the federal securities laws because our IPO registration
statement and prospectus contained untrue statements of material fact or
omitted material facts regarding the compensation to be received by, and the
stock allocation practices of, the IPO underwriters. The plaintiff seeks
unspecified monetary damages and other relief. The IPO Lawsuits have been
consolidated for pretrial purposes. We have not been required to answer the
complaint filed against us, and no discovery has been served on us. We believe
the lawsuit is without merit and intend to defend against it vigorously.
Copper Mountain is Currently Involved in a Dispute With Flextronics Related
to Certain Purchases of Inventory
In April 1999, we entered into a Manufacturing Contract with Flextronics
International Fremont, Inc., whereby Flextronics purchased components for and
manufactured equipment that we sold to customers. In or about March 2001,
Flextronics claimed that, due to reductions by us in our equipment forecasts,
Flextronics had purchased more inventory than was necessary to meet our reduced
equipment needs, and that we were responsible to purchase this excess inventory
from Flextronics. As a result, on or about May 31, 2001, we and Flextronics'
successor in interest, Flextronics International USA, Inc. entered into a
letter agreement regarding this disputed excess inventory. The letter agreement
requires us to pay Flextronics $30.3 million in four separate installments,
subject to our right to audit the amount of the excess inventory, and contains
provisions for adjusting the balance due to Flextronics based on discrepancies
found in the audit and agreed upon by the parties. In or about September 2001,
after we had paid the first two installments of $7.6 million, totaling $15.2
million,
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we concluded in the course of our audit that Flextronics had overstated the
amount of the excess inventory and that we only owed $14.6 million under the
letter agreement, meaning that we had overpaid Flextronics by approximately
$480,000. Flextronics has refused to refund this amount and disputes the
results of our audit. On or about December 4, 2001, Flextronics demanded that
we make the remaining payments due under the letter agreement and pay for an
additional $11.3 million in excess inventory. We have not made the remaining
payments, which were due in October 2001 and January 2002, and we believe that
Flextronics has no basis for its request that we pay for an additional $11.3
million in excess inventory.
On December 12, 2001, pursuant to the dispute resolution procedures in the
contract, we filed a demand for arbitration against Flextronics with the
American Arbitration Association in San Diego County, case number
73Y1810040901ARC, seeking a declaration that we do not owe Flextronics any
further amounts under the letter agreement and seeking, among other relief,
reimbursement for the approximately $480,000 overpayment. Flextronics has not
filed a response to the demand. No arbitration date has been set.
On or about January 30, 2002, Flextronics filed a civil action against us in
the Superior Court of the State of California, County of Santa Clara, case
number CV804953, alleging that we breached the contract and letter agreement
and seeking, among other relief, $15.2 million it claims to be due under the
letter agreement, interest, attorneys' fees and costs, and a writ of attachment
in the amount of $15.2 million to secure its claims pending the outcome of the
arbitration. No trial date has been set. We believe that we have meritorious
defenses to this action and intend to defend this action vigorously. We also
intend to file a petition to compel arbitration and/or a motion to stay the
civil action if Flextronics will not agree to arbitrate its claims. The
ultimate outcome of this dispute is not currently practically determinable.
If Flextronics obtains a writ of attachment in its civil action, the
resulting restriction of the use of our assets could have a material adverse
effect on our business. If Flextronics prevails on its claims, we could be
forced to make significant payments to Flextronics and such payments could have
a material adverse effect on our business, financial condition, and results of
operations. Even if we prevail in this dispute, the efforts required could
result in substantial costs and divert management's attention and resources,
which could adversely affect our business.
Unless Copper Mountain Is Able to Keep Pace With the Rapidly Changing Product
Requirements of Its Customers, It Will Not Be Able to Sustain or Grow Its
Business
The telecommunications and data communications markets are characterized by
rapid technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and evolving offerings by
telecommunications service providers. We believe our future success will
depend, in part, on our ability to anticipate or adapt to such changes and to
offer, on a timely basis, hardware and software products which meet customer
demands. Our inability to develop on a timely basis new products or
enhancements to existing products, or the failure of such new products or
enhancements to achieve market acceptance, could materially adversely affect
our business, financial condition and results of operations.
Copper Mountain's Product Cycles Tend to be Short and Copper Mountain May
Incur Substantial Non-Recoverable Expenses or Devote Significant Resources to
Sales That Do Not Occur When Anticipated
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. Therefore, the resources we devote to product sales
and marketing may not generate revenues for us and from time to time we may
need to write-off excess and obsolete inventory. In the past, we have
experienced such write-offs attributed to the obsolescence of certain printed
circuit boards and product sub-assemblies and to an excess of raw materials and
finished goods on hand and on order. If we incur substantial sales, marketing
and inventory expenses in the future that we are not able to recover, it would
affect our liquidity and could have a material adverse effect on our business,
financial condition and results of operations.
20
Copper Mountain's Ability to Sustain or Grow Its Business May Be Harmed if It
Is Unable to Develop and Maintain Certain Strategic Relationships with Third
Parties to Market and Sell Copper Mountain's Products
Copper Mountain's success will depend in part upon its strategic
distribution partnerships, including its original equipment manufacturer
agreements under which we agree to manufacture, and sell our products to
certain distribution partners. The amount and timing of resources which our
strategic partners devote to our business is not within our control. Our
strategic partners may not perform their obligations as expected. In some
cases, agreements with our strategic partners may be relatively new, and we
cannot be certain that we will be able to acheive expected revenues from such
partners or sustain the level of revenue generated thus far under such
strategic arrangements. If any of our strategic partners chooses not to renew,
breaches or terminates its agreement or fails to perform its obligations under
its agreement, we may not be able to sustain or grow our business. In the event
that such relationships are terminated, we may not be able to continue to
maintain or develop strategic relationships or to replace strategic partners.
In addition, any strategic agreements we enter into in the future may not be
successful.
Intense Competition in the Market for Telecommunications Equipment Could
Prevent Copper Mountain From Increasing or Sustaining Revenue and Prevent
Copper Mountain From Achieving Annual Profitability
The market for telecommunications equipment is highly competitive. We
compete directly with the following companies: Cisco Systems, Inc., Lucent
Technologies, Inc., Alcatel S.A., Nokia Corporation and Paradyne Corporation,
among others. If we are unable to compete effectively in the market for DSL
telecommunications equipment, our revenue levels and future results from
operations could be materially adversely affected. Many of our current and
potential competitors have significantly greater selling and marketing,
technical, manufacturing, financial, and other resources, including better
access to the capital markets, larger cash reserves, higher market
capitalizations, and vendor-sponsored lease financing programs. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could in the future develop new technologies that compete with our
products or render our products obsolete. Although we believe we may have
certain technological and other advantages over our competitors, realizing and
maintaining such advantages will require a continued level of investment in
research and development, marketing and customer service and support. Due to
the rapidly evolving markets in which we compete, additional competitors with
significant market presence and financial resources, including other large
telecommunications equipment manufacturers, may enter those markets, thereby
further intensifying competition. We may not have sufficient resources to
continue to make the investments or achieve the technological advances
necessary to compete successfully with existing competitors or new competitors.
Also, to the extent we introduce new product offerings intended to capitalize
on the anticipated trend toward broad deployment of DSL services, including DSL
services targeted at residential subscribers seeking high-speed access to
public communications networks, we will encounter new competitors such as
coaxial cable and wireless equipment vendors. Even if we are successful in
competing in the business DSL market, we may not be able to compete
successfully in the market for residential subscribers.
Future Consolidation in the Telecommunications Equipment Industry May
Increase Competition That Could Harm Copper Mountain's Business
The markets in which Copper Mountain competes are characterized by
increasing consolidation both within the data communications sector and by
companies combining or acquiring data communications assets and assets for
delivering voice-related services. We cannot predict with certainty how
industry consolidation will affect our competitors. We may not be able to
compete successfully in an increasingly consolidated industry. Increased
competition and consolidation in our industry could require that we reduce the
prices of our products and result in our loss of market share, which would
materially adversely affect our business, financial condition and results of
operations. Additionally, because we are now, and may in the future be,
dependent on certain strategic relationships with third parties in our
industry, any additional consolidation involving these parties could reduce the
demand for our products and otherwise harm our business prospects.
21
Copper Mountain May Experience Difficulties in the Introduction of New
Products That Could Result in Copper Mountain Having to Incur Significant
Unexpected Expenses or Delay the Launch of New Products
Copper Mountain intends to continue to invest in product and technology
development. The development of new or enhanced products, including but not
limited to the VantEdge line of products announced in 2001 and other new or
enhanced DSL concentrator products and broadband services concentrator
products, is a complex and uncertain process requiring the accurate
anticipation of technological and market trends. We may experience design,
manufacturing, marketing and other difficulties that could delay or prevent our
development, introduction or marketing of new products and enhancements. The
introduction of new or enhanced products also requires that we manage the
transition from older products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. In the future, we expect to
develop certain new products, such as new broadband services concentrators and
associated line cards, new DSL concentrators, line cards for different DSL
variants and new types of customer premise equipment. We may not successfully
develop, introduce or manage the transition of these new products. Furthermore,
products such as those we currently offer may contain undetected or unresolved
errors when they are first introduced or as new versions are released. Despite
testing, errors may be found in new products or upgrades after commencement of
commercial shipments. These errors could result in:
. delays in or loss of market acceptance and sales;
. diversion of development resources;
. injury to our reputation; and
. increased service and warranty costs.
Any of these could materially adversely affect our business, financial
condition and results of operations.
Copper Mountain Is Dependent on Widespread Market Acceptance of Its Products
Widespread market acceptance of Copper Mountain's products is critical to
its future success. Factors that may affect the market acceptance of our
products include market acceptance of broadband services concentrators in
general and Copper Mountain's broadband services concentrator products in
particular, market acceptance of DSL technology in particular, the performance,
price and total cost of ownership of our products, the availability and price
of competing products and technologies and the success and development of our
resellers, original equipment manufacturers and field sales channels. Many of
these factors are beyond our control. The introduction of new and enhanced
products may cause certain customers to defer or return orders for existing
products. Although we maintain reserves against such returns, such reserves may
not be adequate. We cannot be certain that we will not experience delays in
product development in the future. Failure of our existing or future products
to maintain and achieve meaningful levels of market acceptance would materially
adversely affect our business, financial condition and results of operations.
Because Substantially All of Copper Mountain's Revenue is Derived From Sales
of a Small Number of Products, Its Future Operating Results Will Be Dependent
on Sales of These Products
Copper Mountain currently derives substantially all of its revenues from its
product family of DSL solutions and expects that this concentration will
continue in the foreseeable future. The market may not continue to accept or
order our current products, and we may not be successful in marketing any new
or enhanced products, including, but not limited to our broadband services
concentrator. Any reduction in the demand for our current products or our
failure to successfully develop or market and introduce new or enhanced
products could materially adversely affect our operating results and cause the
price of our common stock to decline. We have already experienced these effects
as a result of the financial troubles facing many of our CLEC customers,
including the filing of a petition for Chapter 11 protection by our two
historically largest customers Northpoint
22
Communications, Inc and Rhythms Netconnections, Inc. Factors that could, in the
future, affect sales of our current or new or enhanced products include:
. the demand for DSL solutions;
. our successful development, introduction and market acceptance of new
and enhanced products that address customer requirements;
. product introductions or announcements by our competitors;
. price competition in our industry and between DSL and competing
technologies; and
. technological change.
Copper Mountain's Limited Ability to Protect Its Intellectual Property May
Adversely Affect Its Ability to Compete
Copper Mountain's success and ability to compete is dependent in part upon
its proprietary technology. Any infringement of our proprietary rights could
result in significant litigation costs, and any failure to adequately protect
our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of a competitive advantage and
decreased revenues. We rely on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. Despite our efforts to protect
our proprietary rights, existing copyright, trademark and trade secret laws
afford only limited protection. In addition, the laws of certain foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. Attempts may be made to copy or reverse engineer
aspects of our products or to obtain and use information that we regard as
proprietary. Accordingly, we may not be able to protect our proprietary rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our products is difficult. Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our future operating
results.
Claims Against Copper Mountain Alleging Its Infringement of a Third Party's
Intellectual Property Could Result in Significant Expense to Copper Mountain
and Result in Its Loss of Significant Rights
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims asserting that our products infringe or
may infringe proprietary rights of third parties, if determined adversely to
us, could have a material adverse effect on our business, financial condition
or results of operations. In addition, in our agreements, we agree to indemnify
our customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. As the
number of entrants in our market increases and the functionality of our
products is enhanced and overlaps with the products of other companies, we may
become subject to claims of infringement or misappropriation of the
intellectual property rights of others. Any claims, with or without merit,
could be time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, cause product shipment delays or require us
to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon our operating results. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. Legal action claiming patent infringement may be commenced against us. We
cannot assure you that we would prevail in such litigation given the complex
technical issues and inherent uncertainties in patent litigation. In the event
a claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign our products to avoid infringement, our business, financial condition
and results of operations would be materially adversely affected.
23
If Copper Mountain Loses Key Personnel It May Not Be Able to Successfully
Operate Its Business
Copper Mountain's success depends to a significant degree upon the continued
contributions of the principal members of its sales, marketing, engineering and
management personnel, many of whom perform important management functions and
would be difficult to replace. Specifically, we believe that our future success
is highly dependent on our senior management. Except for an agreement with our
President and Chief Executive Officer and our Senior Vice President of
Engineering, we do not have employment contracts with our key personnel. In any
event, employment contracts would not prevent key personnel from terminating
their employment with Copper Mountain. The loss of the services of any key
personnel, particularly senior management and engineers, could materially
adversely affect our business, financial condition and results of operations.
If Copper Mountain is Unable to Retain and Hire Additional Qualified
Personnel As Necessary, It May Not Be Able to Successfully Achieve Its
Objectives
We may not be able to attract and retain the necessary personnel to
accomplish our business objectives and we may experience constraints that will
adversely affect our ability to satisfy customer demand in a timely fashion or
to support our customers and operations. We have at times experienced, and
continue to experience, difficulty in recruiting qualified personnel.
Recruiting qualified personnel is an intensely competitive and time-consuming
process.
In addition, companies in the telecommunications industry whose employees
accept positions with competitors frequently claim that such competitors have
engaged in unfair hiring practices. We may receive notice of such claims as we
seek to hire qualified personnel and such notices may result in material
litigation. We could incur substantial costs in defending ourselves against any
such litigation, regardless of the merits or outcome of such litigation.
Copper Mountain's Dependence on Sole and Single Source Suppliers Exposes It
to Supply Interruption
Although Copper Mountain generally uses standard parts and components for
its products, certain key components are purchased from sole or single source
vendors for which alternative sources are not currently available. The
inability to obtain sufficient quantities of these components may in the future
result in delays or reductions in product shipments which could materially
adversely affect our business, financial condition and results of operations.
We presently purchase two semiconductor chips and a system control module from
vendors for which there are currently no substitutes. We have evaluated
alternative source vendors in the past for these key components and will
continue to do so as appropriate, but any alternative vendors may not meet our
quality standards for component vendors. In the event of a reduction or
interruption of supply of any such components, as much as nine months could be
required before we would begin receiving adequate supplies from alternative
suppliers, if any. It is possible that a source may not be available for us or
be in a position to satisfy our production requirements at acceptable prices
and on a timely basis, if at all. Alternatively, as a result of the long lead
times associated with ordering certain materials or components, we may not be
able to accurately forecast our need for materials and components and this
could result in excess inventory and related write-offs, which could have a
material adverse effect on our business.
In addition, the manufacture of certain of these single or sole source
components is extremely complex, and our reliance on the suppliers of these
components exposes us to potential production difficulties and quality
variations, which could negatively impact cost and timely delivery of our
products. Any significant interruption in the supply, or degradation in the
quality, of any component could have a material adverse effect on our business,
financial condition and results of operations.
Copper Mountain's Dependence on Independent Manufacturers Could Result in
Product Delivery Delays
Copper Mountain currently uses a small number of independent manufacturers
to provide certain printed circuit boards, chassis and subassemblies and, in
certain cases, to complete final assembly and testing of our
24
products. Our reliance on independent manufacturers involves a number of risks,
including the absence of adequate capacity, the unavailability of or
interruptions in access to certain process technologies and reduced control
over delivery schedules, manufacturing yields and costs. If our current
manufacturers are unable or unwilling to continue manufacturing our components
in required volumes, it could take up to six months for an alternative
manufacturer to supply the needed components in sufficient volumes. It is
possible that a source may not be available to us when needed or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis, if at all. Any significant interruption in supply would result in
the allocation of products to customers, which in turn could have a material
adverse effect on our business, financial condition and results of operations.
Intense Demand Within the Telecommunications Industry for Parts and
Components May Create Allocations or Shortages Which May Expose Copper
Mountain to Supply Interruption
From time to time, the demand in the telecommunications industry for parts
and components, including semiconductors, programmable devices and printed
circuit boards, can be intense. During these periods manufacturers and
suppliers who provide such components to us experience supply shortages which
may in turn affect their ability to meet our production demands. While we seek
to enter into contracts with our suppliers which guarantee adequate supplies of
components for the manufacturing of our products, we cannot be certain that
suppliers will always be able to adequately meet our demands. To date, we have
not experienced any shortages of components or parts which have impacted our
ability to meet the shipment requirements of our customers. However, in the
event that we receive allocations of components from our suppliers or
experience outright interruption in the supply of components we could
experience an inability to ship or deliver our products to our customers in a
timely fashion. Any significant allocation of or interruption in the supply of
any component could have a material adverse effect on our business, financial
condition and results of operations.
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which Would Adversely Affect Its Results of Operations
In certain cases, Copper Mountain's current and prospective customers are
able to exert a high degree of influence over Copper Mountain. These customers
may have sufficient bargaining power to demand low prices and other terms and
conditions that may materially adversely affect our business, financial
condition and results of operations. In addition, prior to selling our products
to such customers, we must typically undergo lengthy product approval
processes. Historically this product approval process has taken as long as one
year; in the future we expect this process to take as long as two years,
especially for ILECs, IXCs and PTTs. Accordingly, we are continually submitting
successive versions of our products as well as new products to our current and
prospective customers for approval. The length of the approval process can vary
and is affected by a number of factors, including customer priorities, customer
budgets, customers' evaluation of competing products and regulatory issues
affecting telecommunication service providers. Delays in the product approval
process or failure to gain any such approval could materially adversely affect
our business, financial condition and results of operations. While we have been
successful in the past in obtaining product approvals from our customers,
future approvals, if any, and the ensuing sales of such products, if any,
likely will take far longer to attain than in the past and may not continue to
occur. Delays can also be caused by late deliveries by other vendors, changes
in implementation priorities and slower than anticipated growth in demand for
the services that our products support. A delay in, or cancellation of, the
sale of our products could adversely affect the Company's results from
operations or cause them to significantly vary from quarter to quarter.
Changes to Regulations Affecting the Telecommunications Industry Could Reduce
Demand for Copper Mountain's Products or Adversely Affect Its Results of
Operations
Any changes to legal requirements relating to the telecommunications
industry, including the adoption of new regulations by federal or state
regulatory authorities under current laws or any legal challenges to existing
laws or regulations relating to the telecommunications industry could have a
material adverse effect upon the
25
market for Copper Mountain's products. Moreover, our distributors or
telecommunications service provider customers may require, or we may otherwise
deem it necessary or advisable, that we modify our products to address actual
or anticipated changes in the regulatory environment. Our inability to modify
our products or address any regulatory changes could have a material adverse
effect on our business, financial condition or results of operations.
Copper Mountain's Failure to Comply with Regulations and Evolving Industry
Standards Could Delay or Prevent Its Introduction of New Products
The market for Copper Mountain's products is characterized by the need to
meet a significant number of communications regulations and standards, some of
which are evolving as new technologies are deployed. In order to meet the
requirements of our customers, our products may be required to comply with
various regulations including those promulgated by the Federal Communications
Commission, or FCC, and standards established by Underwriters Laboratories and
Bell Communications Research. Failure of our products to comply, or delays in
compliance, with the various existing and evolving industry regulations and
standards could delay or prevent the introduction of our products. Moreover,
enactment by federal, state or foreign governments of new laws or regulations,
changes in the interpretation of existing laws or regulations or a reversal of
the trend toward deregulation in the telecommunications industry could have a
material adverse effect on our customers, and thereby materially adversely
affect our business, financial condition and results of operations.
If Copper Mountain's Products Contain Defects, Copper Mountain May Be Subject
to Significant Liability Claims from Its Customers and the End-Users of Its
Products and Incur Significant Unexpected Expenses and Lost Sales
Copper Mountain's products have in the past contained, and may in the future
contain, undetected or unresolved errors when first introduced or as new
versions are released. Despite extensive testing, errors, defects or failures
may be found in our current or future products or enhancements after
commencement of commercial shipments. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
development resources, injury to our reputation or increased service and
warranty costs, any of which could have a material adverse effect on our
business, financial condition and results of operations. Moreover, because our
products are designed to provide critical communications services, we may
receive significant liability claims. Our agreements with customers typically
contain provisions intended to limit our exposure to liability claims. These
limitations may not, however, be effective in any or all cases or under any or
all scenarios, and they may not preclude all potential claims resulting from a
defect in one of our products or from a defect related to the installation or
operation of one of our products. Although we maintain product liability
insurance covering certain damages arising from implementation and use of our
products, our insurance may not cover any claims sought against us. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful could seriously damage our reputation and our business.
Copper Mountain May Engage in Future Acquisitions That Dilute Its
Stockholders, Cause It to Incur Debt and Assume Contingent Liabilities
As part of Copper Mountain's business strategy, we expect to review
acquisition prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. We may acquire businesses, products or
technologies in the future. In the event of such future acquisitions, we could:
. issue equity securities which would dilute current stockholders'
percentage ownership;
. incur substantial debt; or
. assume contingent liabilities.
26
Such actions by us could materially adversely affect our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition could materially
adversely affect our results of operations;
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with suppliers and
customers;
. risks of entering markets in which we have no or limited prior
experience; and
. potential loss of key employees of acquired organizations.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we have acquired or might acquire in the future,
and our failure to do so could have a material adverse effect on our business,
financial condition and results of operations.
We May Expand or Reduce Our Operations in International Markets. Our Failure
to Effectively Manage Our International Operations Could Harm Our Business.
Entering new international markets may require significant management
attention and expenditures and could adversely affect our operating margins and
earnings. To date, we have not been able to successfully penetrate these
markets. To the extent that we are unable to do so, our growth in international
markets would be limited, and our business could be harmed.
We expect that our international business operations will be subject to a
number of material risks, including, but not limited to:
. difficulties in managing foreign sales channels;
. difficulties in enforcing agreements and collecting receivables through
foreign legal systems and addressing other legal issues;
. longer payment cycles;
. taxation issues;
. differences in international telecommunications standards and regulatory
agencies;
. product requirements different from those of our current customers;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or political
changes.
Copper Mountain's Stock Price Has Been and May Continue to be Extremely
Volatile
The trading price of our common stock has been and is likely to continue to
be extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by us or our competitors;
. changes in financial estimates by securities analysts;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
27
. additions or departures of key personnel;
. announcements or loss of strategic relationships with third parties or
telecommunications equipment providers by us or our competitors;
. announcements related to our major customers or potential future
customers, including announcements related to their financial condition,
plans for network or service deployments and equipment purchase plans
and decisions;
. sales of common stock;
. failure to continue to meet the minimum listing requirements of the
NASDAQ stock market, which is a risk we could face; and
. other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks have been highly volatile. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such companies. We
have become the target of such litigation, and several class action lawsuits
have been filed against us and certain of our officers alleging violation of
Federal securities laws related to declines in our stock price. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could materially adversely affect our business, financial
condition and results of operations.
Copper Mountain Presents Pro Forma Operating Results on a Periodic Basis. Our
Investors Should Understand That Such Presentation Is Not Intended to Be a
Presentation In Accordance With Generally Accepted Accounting Principles
Copper Mountain presents such financial information because we believe that
many of our investors find this information to be useful in analyzing and
interpreting our results from operations for a period. Such information is
presented for information purposes only and is not intended to be a substitute
for financial statements presented in accordance with generally accepted
accounting principles. We believe that this information is presented in a
manner that sufficiently describes the differences between the pro forma
presentation and a presentation in accordance with generally accepted
accounting principles. You should know that our pro forma results are not a
presentation in accordance with generally accepted accounting principles and
are not presented in accordance with the standards applied to financial
statements filed with the Securities and Exchange Commission. For more
information regarding pro forma financial statements, refer to the "Investor
Alert" issued by the Securities and Exchange Commission, which can be found at
www.sec.gov (Release 2001-144, issued December 4, 2001). For more information
on how Copper Mountain's pro forma financial results are different from its
financial results presented in accordance with generally accepted accounting
principles, please refer to the footnotes accompanying such pro forma financial
statements.
Substantial Future Sales of Copper Mountain's Common Stock in Private
Placements or in the Public Market Could Cause Its Stock Price to Fall
Sales of a large number of shares of Copper Mountain's common stock in
private placements or in the public market or the perception that such sales
could occur could cause the market price of its common stock to drop. As of
December 31, 2001, we had approximately 58 million shares of common stock
outstanding. We have filed four registration statements on Form S-8 with the
Securities and Exchange Commission covering the 19.1 million shares of common
stock reserved for issuance under our 1996 Equity Incentive Plan, 1999
Non-Employee Directors' Stock Option Plan, 1999 Employee Stock Purchase Plan,
the OnPREM 1998 Stock Option
28
Plan, the 2000 Nonstatutory Stock Option Plan and for options issued outside
such plans. As of December 31, 2001, approximately 3.9 million shares are
currently subject to exercisable options. Sales of a large number of shares
could have an adverse effect on the market price for our common stock.
Certain Provisions in Copper Mountain's Corporate Charter and Bylaws May
Discourage Take-Over Attempts and Thus Depress the Market Price of Our Stock
Provisions in Copper Mountain's certificate of incorporation, as amended and
restated, may have the effect of delaying or preventing a change of control or
changes in its management. These provisions include:
. the right of the Board of Directors to elect a director to fill a
vacancy created by the expansion of the Board of Directors;
. the ability of the Board of Directors to alter our bylaws without
getting stockholder approval;
. the ability of the Board of Directors to issue, without stockholder
approval, up to 10,000,000 shares of preferred stock with terms set by
the Board of Directors; and
. the requirement that at least 10% of the outstanding shares are needed
to call a special meeting of stockholders.
Each of these provisions could discourage potential take-over attempts and
could adversely affect the market price of our common stock.
Item 2. Properties
We lease one facility in Palo Alto, California for research and development,
administrative, sales and marketing purposes representing approximately 12,000
square feet of space. The lease for this facility expires in May 2007. We lease
one facility in San Diego, California, which is used for manufacturing,
engineering, customer support and administration representing approximately
66,000 square feet of space. The lease for this facility expires in May 2005.
The Company also has other leased properties that have been subleased or are in
the process of being subleased. The Company believes that its facilities
currently are adequate to meet its requirements.
Item 3. Legal Proceedings
On October 20, 2000, a Copper Mountain stockholder, Ariel Hernandez, on
behalf of himself and purportedly on behalf of a class of Company stockholders,
filed a compliant in the United States District Court for the Northern District
of California (the "Northern District") against the Company and two officers of
the Company, alleging violations of the federal securities laws arising out of
recent declines in the Company's stock price. Thereafter, approximately
twenty-three similar complaints were filed in the Northern District, along with
two related derivative actions against the Company and its directors in
Delaware and California Superior Court (the "Complaints"). The Complaints
allege claims in connection with various alleged statements and omissions to
the public and to the securities markets. The Northern District Complaints have
been consolidated into a single action identified as In re Copper Mountain
Networks Securities Litigation, case number C-00-3894-VRW. The Company recently
filed a motion to dismiss the consolidated complaint, which was heard on
November 29, 2001. The Court has not issued a ruling on that motion. The
Complaints have been tendered to the Company's insurance carrier. No discovery
has been conducted.
In December 2001, the Company and certain of its officers and directors were
named as defendants in a class action shareholder complaint filed in the United
States District Court for the Southern District of New York. Similar complaints
were filed in the same Court against hundreds of other public companies that
conducted initial public offerings ("IPOs") of their common stock in the late
1990s (the "IPO Lawsuits"). In the complaint, the plaintiff alleges that the
Company, certain of its officers and directors and its IPO underwriters
violated the federal
29
securities laws because the Company's IPO registration statement and prospectus
contained untrue statements of material fact or omitted material facts
regarding the compensation to be received by, and the stock allocation
practices of, the IPO underwriters. The plaintiff seeks unspecified monetary
damages and other relief. The IPO Lawsuits have been consolidated for pretrial
purposes before United States Judge Shira Scheindlin of the Southern District
of New York. The Company has not been required to answer the complaint filed
against it, and no discovery has been served on the Company. The Company
believes the lawsuit is without merit and intends to defend against it
vigorously.
In April 1999, we entered into a Manufacturing Contract with Flextronics
International Fremont, Inc., whereby Flextronics purchased components for and
manufactured equipment that we sold to customers. In or about March 2001,
Flextronics claimed that, due to reductions by us in our equipment forecasts,
Flextronics had purchased more inventory than was necessary to meet our reduced
equipment needs, and that we were responsible to purchase this excess inventory
from Flextronics. As a result, on or about May 31, 2001, we and Flextronics'
successor in interest, Flextronics International USA, Inc. entered into a
letter agreement regarding this disputed excess inventory. The letter agreement
required us to pay Flextronics $30.3 million in four separate installments,
subject to our right to audit the amount of the excess inventory, and contains
provisions for adjusting the balance due to Flextronics based on discrepancies
found in the audit and agreed upon by the parties. In or about September 2001,
after we had paid the first two installments of $7.6 million, totaling $15.2
million, we concluded during the course of our audit that Flextronics had
overstated the amount of the excess inventory and that we only owed $14.6
million under the letter agreement, meaning that we had overpaid Flextronics by
approximately $480,000. Flextronics has refused to refund this amount and
disputes the results of our audit. On or about December 4, 2001, Flextronics
demanded that we make the remaining payments due under the letter agreement and
pay for an additional $11.3 million in excess inventory. We have not made the
remaining payments, which were due in October 2001 and January 2002, and we
believe that Flextronics has no basis for its request that we pay for an
additional $11.3 million in excess inventory.
On December 12, 2001, pursuant to the dispute resolution procedures in the
contract, we filed a demand for arbitration against Flextronics with the
American Arbitration Association in San Diego County, case number
73Y1810040901ARC, seeking a declaration that we do not owe Flextronics any
further amounts under the letter agreement and seeking, among other relief,
reimbursement for the approximately $480,000 overpayment. Flextronics has not
filed a response to the demand. No arbitration date has been set.
On or about January 30, 2002, Flextronics filed a civil action against us in
the Superior Court of the State of California, County of Santa Clara, case
number CV804953, alleging that we breached the contract and letter agreement
and seeking, among other relief, $15.2 million it claims to be due under the
letter agreement, interest, attorneys' fees and costs, and a writ of attachment
in the amount of $15.2 million to secure its claims pending the outcome of the
arbitration. No trial date has been set. We believe that we have meritorious
defenses to this action and intend to defend this action vigorously. We also
intend to file a petition to compel arbitration and/or a motion to stay the
civil action if Flextronics will not agree to arbitrate its claims. The
ultimate outcome of this dispute is not currently practically determinable.
On or about January 16, 2001, NorthPoint Communications, Inc., and related
companies (collectively, "NorthPoint"), filed voluntary petitions under Chapter
11 of the Bankruptcy Code, initiating bankruptcy proceedings in the Northern
District of California, San Francisco Division (the "Bankruptcy Cases").
NorthPoint was a customer of the Company. The Bankruptcy Cases were converted
to cases under Chapter 7 of the Bankruptcy Code on June 12, 2001. The Company
timely filed a proof of claim against NorthPoint in an amount not less than
U.S. $10,433,082 arising from, without limitation, prepetition unsecured claims
under certain executory equipment purchase and software licensing agreements, a
marketing and development agreement, and service agreements, which have been
rejected. No action has been taken with regard to any allowance of or objection
to the Company's claims against NorthPoint. It is not clear at this time
whether or to what extent the Company's claims may be allowed, and whether or
to what extent there may be assets available to provide any payments on account
of any ultimately allowed claims.
30
On July 27, 2001 the Company filed a complaint in the San Francisco County
Superior Court against Morgan Stanley Dean Witter & Co. ("Morgan Stanley")
alleging breach of contract, breach of fiduciary duty and negligence in
connection with certain losses on investments. This case was dismissed with
prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2001.
31
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "CMTN." The Common Stock was initially offered to the public
on May 13, 1999 at $10.50 per share. The following table sets forth the range
of high and low closing sales prices on the Nasdaq National Market of the
Company's Common Stock for the periods indicated, as reported by Nasdaq. All
per share prices have been adjusted for a 2 for 1 stock dividend which was
effective December 10, 1999. Such quotations represent inter-dealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
High Low
------- ------
Fiscal 2000
First Quarter....................... $115.00 $46.50
Second Quarter...................... 99.00 48.88
Third Quarter....................... 125.72 36.00
Fourth Quarter...................... 39.44 4.03
Fiscal 2001
First Quarter....................... $ 8.63 $ 2.51
Second Quarter...................... 5.45 2.07
Third Quarter....................... 3.66 0.80
Fourth Quarter...................... 2.25 0.72
To date, the Company has neither declared nor paid any dividends on the
Common Stock. The Company currently intends to retain all future earnings, if
any, for use in the operation and development of its business and, therefore,
does not expect to declare or pay any cash dividends on the Common Stock in the
foreseeable future. As of February 15, 2002, there were 1,054 holders of record
of the Common Stock.
32
Item 6. Selected Financial Data
In the table below, we provide you with our summary historical financial
data. We have prepared this information using our financial statements, for the
years ended December 31, 2001, 2000, 1999, 1998, and 1997. When you read this
selected historical financial data, it is important that you read the
historical financial statements and related notes as well as the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K. Historical results are not
necessarily indicative of future results. Amounts below are in thousands,
except per share data.
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
Statement of Operations Data:
Net revenue.................................... $ 22,425 $281,576 $112,723 $ 21,821 $ 211
Cost of revenue................................ 65,285(1) 165,128(2) 53,002 12,400 1,717
--------- -------- -------- -------- --------
Gross margin................................. (42,860) 116,448 59,721 9,421 (1,506)
Operating expenses:
Research and development..................... 37,733 37,494 15,523 7,225 4,753
Sales and marketing.......................... 16,586 34,868 16,158 5,363 1,510
General and administration................... 15,664 21,823 5,998 3,428 1,928
Amortization of purchased intangibles........ 5,326 17,753 -- -- --
Amortization of deferred stock
compensation............................... 4,934 3,664 5,431 3,929 1,490
Restructuring costs.......................... 20,382 -- -- -- --
Write-off of purchased intangibles........... 40,833 -- -- -- --
Write-off of in-process research and
development................................ -- 6,300 -- -- --
--------- -------- -------- -------- --------
Total operating expenses................. 141,458 121,902 43,110 19,945 9,681
--------- -------- -------- -------- --------
Income (loss) from operations.................. (184,318) (5,454) 16,611 (10,524) (11,187)
Interest and other income...................... 4,141 9,618 4,385 406 268
Interest expense............................... (878) (611) (289) (213) (97)
--------- -------- -------- -------- --------
Income (loss) before income taxes.............. (181,055) 3,553 20,707 (10,331) (11,016)
Provision for income taxes..................... -- 1,860 8,490 -- --
--------- -------- -------- -------- --------
Net income (loss).............................. $(181,055) $ 1,693 $ 12,217 $(10,331) $(11,016)
========= ======== ======== ======== ========
Basic net income (loss) per share (3).......... $ (3.41) $ 0.03 $ 0.39 $ (3.87) $ (7.81)
========= ======== ======== ======== ========
Diluted net income (loss) per share (3)........ $ (3.41) $ 0.03 $ 0.23 $ (3.87) $ (7.81)
========= ======== ======== ======== ========
Shares used in basic per share calculations (3) 53,039 50,584 31,289 2,666 1,410
========= ======== ======== ======== ========
Shares used in diluted per share
calculations (3)............................. 53,039 58,217 52,282 2,666 1,410
========= ======== ======== ======== ========
- --------
(1) Includes charges totaling $53.5 million during the year related to future
inventory purchase commitments and inventory on hand in excess of
anticipated requirements, including charges of $51.0 million, which were
expected to be non-recurring.
(2) Includes charges totaling $41.9 million during the year related to future
inventory purchase commitments and inventory on hand in excess of
anticipated requirements, including charges of $35.0 million, which were
expected to be non-recurring.
(3) See Note 1 of the Notes to Financial Statements for a description of the
computation of basic and diluted net income (loss) per share and the number
of shares used to compute basic and diluted net income (loss) per share.
33
As of December 31,
-----------------------------------------
2001 2000 1999 1998 1997
------- -------- -------- ------- -------
Balance Sheet Data:
Cash, cash equivalents and short-term marketable
investments................................... $72,825 $162,616 $117,169 $18,529 $ 9,517
Working capital................................. 43,681 143,387 132,187 24,326 7,653
Total assets.................................... 96,469 304,885 165,775 36,209 12,332
Long-term debt and capital lease obligation,
less current portion.......................... 3,534 6,654 4,044 1,965 735
Total stockholders' equity...................... 50,185 224,826 143,321 26,843 9,069
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
From Copper Mountain's inception in March 1996 through December 1997, its
operating activities related primarily to developing, building and testing
prototype products; building its technical support infrastructure; commencing
the staffing of its marketing, sales and customer service organizations; and
establishing relationships with its customers. We commenced shipments of our
CopperEdge product family in September 1997, including line cards for these
Copper Edge systems and our CopperRocket DSL customer premise equipment, or DSL
CPE.
Our revenue is generated primarily from sales of our central office-based
equipment: our CopperEdge 200 DSL concentrators, or CE200, the related wide
area network cards, line cards and, to a lesser extent, from sales of our DSL
CPE. Additionally, we sell network management software which provides
monitoring and management capabilities for the CE200, revenues from which have
not been material to date. We also sell our CopperEdge 150 DSL concentrators,
or CE 150 to customers in the multiple tenant unit, or MTU, market.
For the year ended December 31, 2001, sales to our three largest customers
accounted for approximately 50% of our revenue, of which sales to mPower
Communications, Versatel and Rhythms Netconnections ("Rhythms") accounted for
approximately 23%, 18% and 10% of our revenue, respectively. While the level of
sales to any specific customer is anticipated to vary from period to period, we
expect that we will continue to have significant customer concentration for the
foreseeable future. In August 2001, Rhythms filed a petition for Chapter 11
protection with the U.S. Bankruptcy Court. We do not expect any future sales to
Rhythms. Our customers buying patterns have become unpredictable. Future sales,
if any, to the other significant customers mentioned above may be substantially
less than historical sales. The loss of any one of our major customers or the
delay of significant orders from such customers, even if only temporary, could
among other things reduce or delay our net revenue, adversely impact our
ability to sustain or achieve annual or quarterly profitability and adversely
impact our ability to generate positive cash flow, and, as a consequence, could
materially adversely affect our business, financial condition and results of
operations.
In the future, we expect that revenues, if any, will be substantially
dependent on sales of our new VantEdge product. We expect that the VantEdge
product will be generally available for sale beginning in the summer of 2002,
however, we may not be successful in introducing VantEdge by that time or
generating revenues via VantEdge at that time or thereafter.
We market and sell our products directly to telecommunications service
providers and through distributors. We generally recognize revenue from product
sales or sales type leases upon shipment if collection of the resulting
receivable is probable and product returns are reasonably estimated and the
sales-type lease criteria are met. No revenue is recognized on products shipped
on a trial basis. Estimated sales returns, based on historical experience by
product, are recorded at the time the product revenue is recognized. To date,
significant revenues generated from international sources are entirely
comprised of sales to Versatel.
34
We expect our gross margin to be affected by many factors including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, costs from our contract manufacturers, the mix
of products or system configurations sold and the volume and timing of sales of
follow-on line cards for systems shipped in prior periods.
To date, gross margin on sales of our DSL access systems and related wide
area network and line cards, typically sold as combined systems, have been
higher than gross margin on sales of DSL CPE. Furthermore, combined systems are
not generally fully-populated (i.e., less than the total number of line cards
which each system can support) when sold. When our customers add more
subscribers than are supported in the initial configuration, we expect that
these customers will purchase additional line cards from us to increase
subscriber capacity. The sale of additional line cards generates higher gross
margin than the initial sale of combined systems. Gross margin on our DSL CPE
is expected to decline in the future and we expect to face pricing competition
which may result in lower average selling prices for these products as other
suppliers of Copper Mountain compatible CPE enter the market.
We outsource most of our manufacturing and supply chain management
operations, and we conduct manufacturing engineering, quality assurance,
program management, documentation control and product repairs at our facility
in San Diego, California. Accordingly, a significant portion of our cost of
revenue during the periods presented consists of payments to the contract
manufacturers Plexus Corporation and Flextronics International Ltd. We selected
our manufacturing partners with the goal of lowering per unit product costs as
a result of manufacturing economies of scale. However, we cannot assure you
that we will maintain the volumes required to realize these economies of scale
or when or if such cost reductions will occur. The failure to obtain such cost
reductions could materially adversely affect our gross margins and operating
results.
During the year ended December 31, 2001 and 2000 we recorded charges to cost
of revenue for inventory on hand and on order totaling $53.5 million and $41.9
million, respectively, including charges that were expected to be non-recurring
of $51.0 million and $35.0 million, respectively. The amounts of the charges
were determined based on estimates of the amounts we were committed to purchase
and the anticipated demand for our products at the time the charges were taken.
Actual results could differ from our estimates. In particular, information
provided by our vendors to estimate these charges related to the quantity and
price of goods committed to may be lower or higher than the estimates made in
2001 and in 2000. Also, our customers buying patterns have become
unpredictable. Accordingly, actual demand for our products could be materially
less or more than our estimates. The ultimate amount of inventory purchase
commitments and ultimate amount of excess inventory cost incurred could differ
materially from our estimates as a result of these uncertainties.
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development and testing of our products and enhancement of our
network management software. We believe that continued investment in research
and development is critical to attaining our strategic product objectives and,
as a result, we expect these expenses to increase in absolute dollars in the
future.
Sales and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and field service support
functions, as well as trade shows and promotional expenses.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources, management
information systems and administrative personnel, recruiting expenses,
professional fees, bad debt expenses and other general corporate expenses.
During the year ended December 31, 2001, we recorded a net charge of $1.9
million in bad debt expense related to an investment in a sales-type lease.
This charge was estimated based on an updated credit assessment of the lessee.
Actual results could differ from our estimates. Future payments received from
the lessee that are not estimated to be collected, if any, will be recorded as
a reduction to bad debt expense and as interest income.
35
Prior to the year ended December 31, 2000, amortization of deferred stock
compensation resulted from the granting of stock options to employees with
exercise prices per share determined to be below the fair values per share for
financial reporting purposes of our common stock at dates of grant. During the
year ended December 31, 2000, additional deferred compensation was recorded as
part of the purchase price of OnPREM Networks Corporation. During the second
quarter of 2001, additional deferred compensation was recorded in conjunction
with our stock option exchange program (see Note 7 of the Notes to Financial
Statements). During the third and fourth quarter of 2001, additional deferred
compensation was recorded in conjunction with a grant of restricted stock to
employees. The intrinsic value of the options to purchase common stock granted
under the Exchange Program will be re-measured at the end of each period for
the life of the option. We expect that the total amount of deferred
compensation expense that will be recognized under the Exchange Program could
vary from period to period and the ultimate amount of deferred compensation
expense that will be recognized is not currently determinable. The deferred
compensation is being amortized to expense in accordance with FASB
Interpretation No. 28 over the vesting period of the individual options. We
recorded total deferred stock compensation of $26.0 million from inception to
December 31, 2001 and amortized $19.6 million from inception to December 31,
2001. In August 2001, the Company granted 3,550,000 shares of restricted common
stock to certain employees. The shares, which are restricted as to sale or
transfer until vesting, will vest 50% one year from the date of grant and
ratably each month thereafter for a period of 12 months. The related net
compensation expense of approximately $7.2 million will be amortized over the
vesting period of two years. In October 2001, the Company granted 1,550,000
shares of restricted common stock to certain employees. The shares, which are
restricted as to sale or transfer until vesting, will vest monthly ratably
after one year of service for a total vesting period of 24 months. The related
net compensation expense of approximately $1.8 million will be amortized in
accordance with FASB Interpretation No. 28 over the vesting period of two
years. Deferred stock compensation and amortization of deferred stock
compensation could materially increase or decrease in future periods.
On March 7, 2001, the Company announced that it had adopted a business plan
to re-size its business to reflect current and expected business conditions.
This restructuring plan was largely completed during 2001. As a result of the
adoption of this plan, the Company recorded charges of $4.4 million during the
three months ended March 31, 2001. These charges primarily relate to:
consolidation of the Company's continuing operations resulting in impairment of
assets, anticipated losses on disposition of assets as well as excess lease
costs; and the elimination of job responsibilities, resulting in costs incurred
for employee severance. Employee reductions occurred in almost all areas of the
Company, including operations, marketing, sales and administrative areas. As a
result of this plan, the Company had reduced its non-temporary work force by
approximately 100 positions. Substantially all reductions related to this plan
occurred prior to March 31, 2001.
On August 2, 2001, the Company announced that it had adopted a business plan
to again re-size its business to reflect current and expected business
conditions. This restructuring plan is expected to largely be completed during
2002. As a result of the adoption of this plan, the Company recorded charges of
$16.0 million during the three months ended September 30, 2001. These charges
primarily relate to: consolidation of the Company's continuing operations
resulting in impairment of assets, anticipated losses on disposition of assets
as well as excess lease costs; and the elimination of job responsibilities,
resulting in costs incurred for employee severance. Employee reductions
occurred in all areas of the Company. As a result of this plan, the Company
reduced its non-temporary work force by approximately 150 additional positions.
Substantially all reductions occurred prior to September 30, 2001.
As a part of these plans, the carrying values of certain assets were written
down. The impaired assets include furniture, leasehold improvements, computers
and other assets used in certain of the areas of the Company impacted by the
reduction in force. The projected future cash flows from these assets were less
than the carrying values of the assets. The carrying values of the assets held
for sale and the assets to be held and used were reduced to their estimated
fair values based on the present value of the estimated expected future cash
flows. Estimated expected future cash flows for the impaired assets are not
significant. In the year ended December 31, 2001, the Company recorded losses
from impairment of assets of $9.2 million, which were recorded as restructuring
costs. The cost of these losses was previously estimated to be $10.9 million.
This estimate was
36
reduced by the utilization of assets, primarily laboratory equipment,
previously estimated to be held for disposition. Substantially all of the
impaired assets are being held for disposition and will not continue to be
depreciated. Depreciation expense for the year ended December 31, 2001 was
reduced by $1.9 million as a result of this charge. The Company estimates that
depreciation expense will be reduced by $2.7 million, $2.4 million, $1.8
million and $0.4 million for the years ending December 31, 2002, 2003, 2004 and
2005, respectively, as a result of this charge.
Also as part of these plans, the Company elected to consolidate its
operations and attempt to sublease certain of its facilities, which housed
portions of its operations, marketing, sales and administrative activities. In
the year ended December 31, 2001, the Company recorded estimated excess lease
costs of $7.6 million which were recorded as restructuring costs. Estimated
excess lease costs are based on assumptions of differences between lease
payments and sublease receipts that could be realized on potential subleases
and assumed carrying terms. These assumptions are based on reasonably possible
rates and terms from other recent leases of comparable properties. The excess
lease costs were previously estimated to be $5.9 million. The increase in this
estimate is attributable to an increase in the estimated holding periods for
the remaining leases and decreased estimated sublease receipts based on
continuing deterioration in the market for comparable rental office space. The
rates and terms of the actual sub-leases may differ materially from these
estimates which could result in changes in the restructuring charge recognized
during the year ended December 31, 2001. Future cash outlays related to these
plans are expected to be completed in 2007.
Future minimum amounts due under sub-lease receivables as of December 31,
2001 are as follows (in thousands):
Year ending December 31,
2002.......................................... $1,867
2003.......................................... 1,554
2004.......................................... 1,053
2005.......................................... 260
------
Total minimum lease payments..................... $4,734
======
Details of the restructuring charges are as follows (in 000s):
Reserve Balance
at December 31,
Cash/Non-cash Charge Activity 2001
------------- ------- -------- ---------------
Impairment of assets................... Non-cash $ 9,200 $ (9,087) $ 113
Excess lease costs..................... Cash 7,586 (1,132) 6,454
Elimination of job responsibilities.... Cash 3,596 (2,961) 635
------- -------- ------
$20,382 $(13,180) $7,202
======= ======== ======
In connection with these plans, the OnPREM product line was discontinued.
Accordingly, management determined that the estimated future cash flows from
certain intangible assets acquired in the purchase of OnPREM Networks
Corporation would likely not be sufficient to recover the carrying value of
such assets. The Company calculated the present value of expected future cash
flows to determine the fair value of the assets. This evaluation resulted in a
write-off of $40.8 million of goodwill and other intangible assets in the year
ended December 31, 2001. The underlying factors contributing to the decline in
expected financial results included changes in the Company's strategic focus in
the marketplace and an overall decline in the telecommunications equipment
market.
37
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
income data for the periods indicated.
Years Ended
December 31,
---------------------
2001 2000 1999
------ ----- -----
Net revenue......................................... 100.0% 100.0% 100.0%
Cost of revenue..................................... 291.1 58.6 47.0
------ ----- -----
Gross margin..................................... (191.1) 41.4 53.0
Operating expenses:
Research and development......................... 168.3 13.3 13.8
Sales and marketing.............................. 74.0 12.4 14.3
General and administration....................... 69.8 7.8 5.4
Amortization of purchased intangibles............ 23.7 6.3 --
Amortization of deferred stock compensation...... 22.0 1.3 4.8
Restructuring costs.............................. 90.9 -- --
Write-off of purchased intangibles............... 182.1 -- --
Write-off of in-process research and development. -- 2.2 --
------ ----- -----
Total operating expenses..................... 630.8 43.3 38.3
------ ----- -----
Income (loss) from operations....................... (821.9) (1.9) 14.7
Interest and other income........................... 18.4 3.4 3.9
Interest expense.................................... (3.9) (.2) (.3)
------ ----- -----
Income (loss) before income taxes................... (807.4) 1.3 18.3
Provision for income taxes.......................... -- 0.7 7.5
------ ----- -----
Net income (loss)................................... (807.4)% 0.6% 10.8%
------ ----- -----
Years Ended December 31, 2000 and 2001
Net Revenue. Our revenue decreased from $281.6 million in 2000 to $22.4
million in 2001. This decrease was due to significantly fewer sales of our
CE200 and CE150 DSL access concentrators and related line cards. Sales to our
four largest customers for the year ended December 31, 2000, NorthPoint,
Lucent, McLeodUSA and Rhythms Netconnections, decreased from $62.2 million,
$53.5 million, $47.6 million and $27.3 million, respectively, for the year
ended December 31, 2000 to an aggregate of $3.8 million for the year ended
December 31, 2001. During 2001, Northpoint and Rhythms Netconnections filed
petitions for Chapter 11 protection with the U.S. Bankruptcy Court. There are
no expected future sales to Northpoint or Rhythms Netconnections. During 2002,
McLeodUSA filed a petition for Chapter 11 protection with the U.S. Bankruptcy
Court. Future sales to McLeodUSA, if any, may be substantially less than
historical sales. Sales to our three largest customers for the year ended
December 31, 2001, mPower Communications, Versatel and Rhythms Netconnections,
were $5.2 million, $4.0 million and $2.2 million, respectively. Our customers
buying patterns have become unpredictable. Future sales, if any, to the other
significant customers mentioned above may be substantially less than historical
sales. Our future sales will be substantially dependent upon our ability to
successfully introduce, commercialize and sell our VantEdge product.
Gross Margin. Our gross margin decreased from $116.4 million in 2000 to
$(42.9) million in 2001. The decrease in gross margin occurred primarily
because of charges taken during the year ended December 31, 2001 to reduce
inventory to an estimated net realizable value, a decrease in net revenue,
decreased average selling prices and decreased production volumes. Gross margin
percentages also decreased on a year-over-year basis, from 41.4% for the year
ended December 31, 2000 to (191.1)% for the year ended December 31, 2001.
During the year ended December 31, 2000, the Company recorded charges totaling
$41.9 million related to future
38
inventory purchase commitments of finished products and raw materials in excess
of anticipated requirements, including charges of $35.0 million which were
expected to be non-recurring and excess inventory on hand compared to
comparable charges of $53.5 million, including charges of $51.0 million which
were expected to be non-recurring for the year ended December 31, 2001. Before
the impact of these charges, gross margin as a percentage of sales for the year
ended December 31, 2001 was relatively consistent with that of the prior year.
Research and Development. Our research and development expenses were
relatively consistent at $37.5 million in 2000 compared to $37.7 million in
2001. During 2001, increases in consulting and services and salaries and
benefits were offset by decreases in spending on prototype equipment, employee
recruiting and travel costs. Research and development expenses as a percentage
of net revenue increased from 13.3% in 2000 to 168.3% in 2001. The increase in
research and development expense as a percentage of net revenue was primarily
the result of a decrease in our net revenue during 2001. We intend to continue
to invest in research and development programs in future periods for the
purpose of enhancing current products, reducing the cost of current products
and developing new products.
Sales and Marketing. Our sales and marketing expenses decreased from $34.9
million in 2000 to $16.6 million in 2001. This decrease was primarily the
result of a decrease in personnel expenses for sales and marketing staff,
decreased promotional and product marketing expenses, decreased sales
commissions associated with lower net revenue, decreased expenses related to
customer support and decreased travel costs. The increase in sales and
marketing expense as a percentage of net revenue from 12.4% in 2000 to 74.0% in
2001 was primarily the result of a decrease in our net revenue during 2001.
General and Administrative. Our general and administrative expenses
decreased from $21.8 million in 2000 to $15.7 million in 2001. This decrease
was primarily the result of a decrease in bad debt expense, decreased staffing
for finance, management information systems, and human resources, and
reductions in recruiting and facility related expenses. General and
administrative expenses as a percentage of net revenue increased from 7.8% in
2000 to 69.8% in 2001. This increase was primarily the result of a decrease in
our net revenue during 2001.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles decreased from $17.8 million in 2000 to $5.3 million in 2001. We
purchased OnPREM Networks Corporation on February 29, 2000 for approximately
$73.8 million. As a result of the purchase we recorded purchased intangibles of
approximately $71.6 million. Immediately following the purchase we wrote-off
$6.3 million of in-process research and development in 2000 for projects for
which technological feasibility had not been established and for which there
was no alternative future use. Such amount was determined with the assistance
of a third party appraiser based upon the present value of estimated future
cash flow contributions from the identified projects. The remaining purchased
intangibles were being amortized over a three-year period from the date of the
acquisition. During the second quarter of 2001, the Company calculated the
present value of expected future cash flows to determine the fair value of the
assets. This evaluation resulted in a write-off of $40.8 million of goodwill
and other intangible assets. The underlying factors contributing to the decline
in expected financial results included changes in the Company's strategic focus
in the marketplace and an overall decline in the telecommunications equipment
market. In connection with these plans, the OnPREM product line was
discontinued. The Company estimates that amortization of purchased intangibles
will be reduced by $21.3 million and $19.5 million for the years ending
December 31, 2002 and 2003, respectively, as a result of this charge.
Interest and Other Income. Interest and other income decreased from $9.6
million in 2000 to $4.1 million in 2001. This decrease reflects a decrease in
interest income generated from lower average cash balances and investments in
marketable securities in 2001 and decreased average yields on such investments.
Income Taxes. Our effective income tax rate was 0% for 2001 compared to 52%
for 2000. The reduction in the effective tax rate is primarily a result of the
net loss for the year ended December 31, 2001 and the estimate that it is not
probable that our deferred tax assets generated from the net loss in 2001 will
be realized based on anticipated future results.
39
Years Ended December 31, 1999 and 2000
Net Revenue. Our revenue increased from $112.7 million in 1999 to $281.6
million in 2000. This increase was primarily due to the increased commercial
acceptance of DSL technology, the commercial market acceptance of our products,
and investments made in our marketing and sales organization. Incremental sales
made to our established customers accounted for approximately $53.0 million of
the increase with the remaining $115.9 million of the increase being derived
from new customer relationships. Sales to our four largest customers of fiscal
2000, NorthPoint, Lucent, McLeodUSA and Rhythms Netconnections, were $42.2
million, $25.4 million, zero and $32.0 million, respectively, for the year
ended December 31, 1999 compared to $62.2 million, $53.5 million, $47.6 million
and $27.3 million, respectively, for the year ended December 31, 2000. During
2001, Northpoint and Rhythms Netconnections filed petitions for Chapter 11
protection with the U.S. Bankruptcy Court. We do not expect any future sales to
Northpoint or Rhythms Netconnections. During 2002, McLeodUSA filed a petition
for Chapter 11 protection with the U.S. Bankruptcy Court. Future sales to
McLeodUSA, if any, may be substantially less than historical sales. In
addition, our customers buying patterns have become unpredictable. Future
sales, if any, to the significant customers mentioned above may be
substantially less than historical sales.
Gross Margin. Our gross margin increased from $59.7 million in 1999 to
$116.4 million in 2000. The increase in gross margin was primarily the result
of an increase in net revenue for the period. Gross margin percentages
decreased on a year-over-year basis, from 53.0% for the year ended December 31,
1999 to 41.4% for the year ended December 31, 2000. During the fourth quarter
of 2000, the Company recorded a charge of $35 million of which $28.6 million
relates to future inventory purchase commitments of finished products and raw
materials in excess of anticipated requirements and $6.4 million relates to
excess inventory on hand at December 31, 2000. Before the impact of these
charges, gross margin as a percentage of sales for the year ended December 31,
2000 was consistent with the prior year.
Research and Development. Our research and development expenses increased
from $15.5 million in 1999 to $37.5 million in 2000. This increase was
primarily due to an increase in personnel expenses related to an increase in
our engineering staff, increased prototype material costs, increased facility
related costs, and higher depreciation related to an increase in capital
equipment. Research and development expenses as a percentage of net revenue
decreased from 13.8% in 1999 to 13.3% in 2000. The decrease in research and
development expense as a percentage of net revenue was primarily the result of
an increase in our net revenue during 2000. We intend to continue to invest in
research and development programs in future periods for the purpose of
enhancing current products, reducing the cost of current products and
developing new products.
Sales and Marketing. Our sales and marketing expenses increased from $16.2
million in 1999 to $34.9 million in 2000. This increase was primarily the
result of an increase in personnel expenses for sales and marketing staff,
increased expenses related to customer support, increased sales commissions
associated with higher net revenue, and increased promotional and product
marketing expenses. The decrease in sales and marketing expense as a percentage
of net revenue was primarily the result of an increase in our net revenue in
2000.
General and Administrative. Our general and administrative expenses
increased from $6.0 million in 1999 to $21.8 million in 2000. General and
administrative expenses as a percentage of net revenue increased from 5.4% for
1999 to 7.8% for 2000. This increase was primarily the result of an increase in
bad debt expense, increased staffing for finance, management information
systems, and human resources, and growth in recruiting and facility related
expenses.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles increased from zero for the year ended December 31, 1999 to $17.8
million for the year ended December 31, 2000. We purchased OnPREM Networks
Corporation on February 29, 2000 for approximately $73.8 million. As a result
of the purchase we recorded purchased intangibles of approximately $71.6
million. Immediately following the purchase we wrote-off $6.3 million of
in-process research and development for projects for which technological
feasibility
40
had not been established and for which there was no alternative future use.
Such amount was determined with the assistance of a third party appraiser based
upon the present value of estimated future cash flow contributions from the
identified projects. The remaining purchased intangibles is being amortized
over a three-year period from the date of the acquisition.
Interest and Other Income. Interest and other income increased from $4.4
million in 1999 to $9.6 million in 2000. This increase reflects an increase in
interest income generated from higher average cash balances and investments in
marketable securities in 2000, which included the proceeds from our initial
public offering completed in May of 1999 and cash generated from operating
activities during 2000.
Income Taxes. Our effective income tax rate for 2000 was 52% compared to
41% for 1999. The higher tax rate is primarily a result of nondeductible
charges for purchased in-process technology and amortization of goodwill. Prior
to the year ended December 31, 1999, we did not record a tax provision
(benefit) due to our historical net losses. During the first quarter of 2000,
the valuation allowance related to deferred tax assets was eliminated as the
realization of such assets became probable based on anticipated results. The
reduction of the valuation allowance decreased the tax provision by
approximately $7.8 million.
During the fourth quarter of 2000, the Company reestablished a valuation
allowance on its net deferred tax assets because of uncertainty regarding their
realizability due to deductions from employee stock option exercises. When
recognized, the tax benefit of these deferred assets will be accounted for as a
credit to stockholders' equity rather than as a reduction of the income tax
provision.
Liquidity and Capital Resources
Currently, the Company is not generating sufficient revenue to fund its
operations. We expect our operating losses, net operating cash outflows and
capital expenditures to continue if we are unable to increase sales. On March
7, 2001 and August 2, 2001, the Company announced that it had adopted business
plans to re-size its business to reflect current and expected business
conditions. We cannot assure you that we will be able to decrease our operating
expenses significantly below current levels and still remain viable and
competitive. If we are unable to realize sufficient savings from re-sizing our
business, and/or sufficiently increase our revenues, our ability to deploy and
service our products, fund our operations or respond to competitive pressures
could be significantly impaired.
At December 31, 2001, we had cash and cash equivalents of $26.6 million and
short-term marketable investments of $46.2 million. Included in short-term
marketable investments is an investment in commercial paper issued by Southern
California Edison Company at a carrying value of approximately $2.7 million
which matured in February 2001 and was fully paid in March 2002 in the amount
of approximately $3.4 million. The resulting realized gain will be reflected in
the Company's 2002 financial statement for all periods that include the three
months ending March 31, 2002.
We currently require approximately $8 million to $12 million in cash per
quarter to fund our operations, and we presently expect that this rate of
quarterly cash use to continue through 2002. As a result, we believe that we
have sufficient cash, cash equivalents and marketable investments to fund our
operations for at least the next twelve months. These estimates reflect various
assumptions, including the assumptions that the sales of our existing products
will continue at approximately the same levels as in the fourth quarter of
2001, that testing, continued development and commercialization of our new
VantEdge product proceeds as planned, that we do not incur significant
additional expenses related to litigation including any adverse determination
in any of the litigation described elsewhere in this Form 10-K under the
heading "Legal Proceedings." Any of these assumptions may prove to be
incorrect. In particular, revenue from sales of our products have decreased in
each of the previous five quarters. In future quarters, it is unclear whether
we will continue to generate revenue from sales of products at the same levels,
if at all. Moreover, as a result of our dispute with Flextronics, Flextronics
has filed a suit which seeks, among other things to attach approximately $15.2
million of our cash as security for the amount of damage that they claim we owe
to them. If they are successful in this effort,
41
our available cash will be reduced by $15.2 million at least temporarily and
perhaps permanently. We believe that this suit is without merit and we intend
to defend against it vigorously. Finally, the development and commercialization
of our VantEdge product might be delayed or might require the expenditure of
significantly more funds than currently anticipated, in which case our
liquidity and capital resources would be adversely affected.
In order to fund our operations beyond the second quarter of 2003, we expect
that we will have to raise additional funds. We anticipate that we will have to
seek equity or long-term debt financing in the private or public markets to
obtain the funds we need to continue operations.
Additional financing may not be available when needed on terms and
conditions favorable to us or at all. If adequate funds are not available or
are not available on acceptable terms and conditions, we may be unable to fund
our ongoing operations. In addition, our inability to obtain cash may:
. impair our ability to successfully introduce, commercialize and generate
revenues from our VantEdge product;
. damage our customers' perceptions of us and our management team;
. inhibit our ability to sell our products to a customer base which values
financial strength and stability: and
. decrease our stock price.
In August 2000, the Company entered into an $800,000 credit facility with a
financing company for the purchase of equipment under a capital lease
agreement. As of December 31, 2000 and 2001, the full amount of funds available
under this credit facility had been utilized.
In June 2000, the Company secured a $5.0 million credit facility with a
financing company for the purchase of equipment under a capital lease
agreement. As of December 31, 2000 and 2001, the full amount of funds available
under this credit facility had been utilized.
Cash provided by or (used in) operating activities for the years ended
December 31, 2001, 2000 and 1999 was $(86.8) million, $57.2 million and $20.3
million, respectively. The decrease in cash provided by operating activities
for the year ended December 31, 2001 compared to the prior year was primarily
the result of a decrease in our net revenue and an increase in restructuring
costs, partially offset by decreases in selling and marketing expenses and
general and administrative expenses. The increase in cash provided by operating
activities for the year ended December 31, 2000 compared to the prior year was
primarily the result of increases in depreciation and amortization, a write-off
of in-process research and development and an increase in accounts payable and
accrued liabilities in excess of the decrease in net income from $12.2 million
in 1999 compared to net income of $1.7 million in 2000.
Cash provided by or (used in) investing activities for the years ended
December 31, 2001, 2000, and 1999 was $49.6 million, $(22.3) million and
$(92.6) million, respectively. The increase in cash provided by investing
activities for the year ended December 31, 2001 compared to the prior period
was the result of decreased net purchases of marketable investments, partially
offset by an increase in the purchase of computers and other equipment. The
decrease in cash used for investing activities for the year ended December 31,
2000 compared to the prior period was the result of decreased net purchases of
marketable investments, partially offset by an increase in the purchase of
computers and other equipment.
Cash provided by or (used in) financing activities for the years ended
December 31, 2001, 2000 and 1999 was $(2.0) million, $5.5 million and $90.0
million, respectively. The increase in cash used in financing activities for
the year ended December 31, 2001 compared to the prior year was primarily due
to a decrease in proceeds from the sale of common stock and an increase in
payments made on capital lease obligations. The decrease in cash provided by
financing activities for the year ended December 31, 2000 compared to the prior
year was primarily due to the receipt of the proceeds from our initial public
offering in 1999.
42
We have no material commitments other than an obligation to purchase certain
finished product and raw materials in excess of anticipated requirements,
obligations under our credit facilities and operating and capital leases. See
Notes 1, 6 and 8 of Notes to Financial Statements. Our future capital
requirements will depend upon many factors, including the timing of research
and product development efforts and marketing efforts. We expect to continue to
expend amounts on property and equipment related to facility infrastructure,
computer equipment and for research and development laboratory and test
equipment to support on-going research and development operations.
Our capital requirements may vary based upon the timing and the success of
implementation of our business plan and as a result of regulatory,
technological and competitive developments or if:
. demand for our products and services is less than or more than expected;
. Flextronics is successful in restricting the use of our cash;
. our obligation to purchase certain finished product and raw materials in
excess of anticipated requirements is less than or more than expected;
. our plans or projections change or prove to be inaccurate;
. we make acquisitions;
. we accelerate or delay development or availability of new products
(including but not limited to our VantEdge Broadband Services
Concentrator) or otherwise alter the schedule or targets of our business
plan implementation; or
. there is an adverse or favorable determination in any litigation to
which we are a party.
We intend to use our cash and other resources for working capital and other
general corporate purposes. We may also use a portion of our cash and other
resources to acquire complementary businesses or other assets. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including revenue growth, if any, planned capital
expenditures, and the extent and timing of our entry into target markets. Our
management intends to invest our cash in excess of current operating
requirements in interest-bearing, investment-grade securities.
43
Summarized Quarterly Data (Unaudited)
The following tables present unaudited quarterly financial information, for
the eight quarters ended December 31, 2001. We believe this information
reflects all adjustments (consisting only of normal recurring adjustments,
except for a charge to write-off certain intangible assets of $40.8 million, a
charge related to excess inventory on hand and on order of $51.0 million, a
restructuring charge of $20.4 million, a $1.9 million charge related to the
collectibility of certain receivables and a charge related to the investment in
commercial paper of Southern California Edison of $1.0 million for the year
ended December 31, 2001 and a charge to write-off purchased in-process research
and development of $6.3 million, a charge related to excess inventory on hand
and on order of $35.0 million, and a $4.9 million charge related to the
insolvency of Northpoint for the year ended December 31, 2000) that we consider
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles. The results for any quarter are not
necessarily indicative of results for any future period (in thousands, except
per share data):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- - -------- -------- -------- --------
2001
Net revenues........................... $ 8,161 $ 6,054 $ 5,112 $ 3,098
Gross margin........................... (31,367)(1) (14,128)(1) 1,643 991
Loss from operations................... (68,103) (74,678) (29,115) (12,422)
Net loss............................... (66,896) (73,817) (28,325) (12,017)
Basic net loss per share (2)........... (1.27) (1.39) (0.53) (0.23)
Diluted net loss per share (2)......... (1.27) (1.39) (0.53) (0.23)
2000
Net revenues........................... $ 60,824 $ 80,185 $ 93,522 $ 47,045
Gross margin........................... 32,722 44,106 49,439 (9,820)(1)
Income (loss) from operations.......... 8,440 16,009 18,612 (48,515)
Net income (loss)...................... 13,673 10,331 12,075 (34,386)
Basic net income (loss) per share (2).. 0.28 0.20 0.24 (0.66)
Diluted net income (loss) per share (2) 0.24 0.18 0.21 (0.66)
- --------
(1) Includes charges for estimated inventory on hand and on order in excess of
anticipated requirements that were expected to be non-recurring of $35.0
million and $16.0 million recorded in the first quarter and second quarter,
respectively.
(2) Basic and diluted net income (loss) per share computations for each quarter
are independent and may not add up to the net income (loss) per share
computation for the respective year. Net income (loss) per share data for
all periods presented has been adjusted to reflect the two-for-one stock
dividend that was effective December 10, 1999. See Note 1 of Notes to the
Financial Statements for an explanation of the determination of basic and
diluted net income (loss) per share.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and our investments in certain held-to-maturity securities.
Under our current policies, we do not use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical 100 basis point
adverse move in interest rates along the entire interest rate yield curve would
not materially affect the fair value of interest sensitive financial
instruments at December 31, 2001.
At December 31, 2001, the Company held an investment in commercial paper
issued by Southern California Edison Company. The investment is included in
short-term marketable investments at a carrying value of approximately $2.7
million which matured in February 2001 and was fully paid in March 2002 in the
amount of approximately $3.4 million. The resulting realized gain will be
reflected in the Company's 2002 financial statements for all periods that
include the three months ending March 31, 2002.
44
Item 8. Financial Statements
The Company's financial statements at December 31, 2001 and 2000, and for
each of the three years in the period ended December 31, 2001, and the Report
of Ernst & Young LLP, Independent Auditors, are included in this Report on
pages F-1 through F-28.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
45
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be set forth under the captions
"Election of Directors" and "Executive Officers" in our definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the 2002 Annual Meeting of Stockholders (the "Proxy Statement"), which is
incorporated by reference herein.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
Number
------
(a) Documents filed as part of the report:
(1) Report of Ernst & Young LLP, Independent Auditors F-1
Balance Sheets at December 31, 2001 and 2000 F-2
Statements of Operations for 2001, 2000 and 1999 F-3
Statements of Stockholders' Equity for 2001, 2000 and 1999 F-4
Statements of Cash Flows for 2001, 2000 and 1999 F-5
Notes to Financial Statements F-6
Schedule II Valuation and Qualifying Accounts II-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(2) Exhibits
Exhibit
Number Description of Document
- ------ -----------------------
2.1 Agreement and Plan of Merger and Reorganization among the Company, Copper Mountain
Acquisition Corp. and OnPREM Networks Corporation dated January 25, 2000.(4)
3.1 Bylaws of the Company.(1)
3.2 Amended and Restated Certificate of Incorporation of the Company.(1) (6)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Stock Certificate.(1)
10.1 Amended and Restated 1996 Equity Incentive Plan (the "1996 Plan").(6)
10.2 Form of Stock Option Agreement pursuant to the 1996 Plan.(1)
10.3 1999 Employee Stock Purchase Plan and related offering documents.(1)
10.4 Employment Agreement between the Company and Steve Hunt, dated July 31, 1996.(1)
10.5 Employment Agreement between the Company and Richard Gilbert, dated March 22, 1998.(1)
10.6 Master Equipment Lease between the Company and Comdisco, Inc., dated September 30, 1997.(1)
10.7 Loan and Security Agreement between the Company and Silicon Valley Bank, dated August 14,
1998.(1)
10.8 Loan and Security Agreement between the Company and Silicon Valley Bank and MMC/GATX
Partnership No. 1, dated October 4, 1996.(1)
10.9 Office Lease between the Company and Public Storage Properties XVIII, Inc., dated June 14, 1996.(1)
10.10 Office Lease between the Company and R.G. Harris & Company, dated August 12, 1997.(1)
10.11 Office Sublease between the Company and Stuart Leeb and Associates, dated May 1, 1998.(1)
10.12 Office Lease between the Company and Palomar Enterprises, Inc., dated July 20, 1998.(1)
10.13 Warrant Agreement between the Company and MMC/GATX Partnership No. 1, dated October 4,
1996.(1)
10.14 Warrant Agreement between the Company and Silicon Valley Bank, dated October 4, 1996.(1)
10.15 Warrant Agreement between the Company and Intel Corporation, dated January 14, 1997.(1)
+10.16 General Agreement for the Procurement of Products and Services and the Licensing of Software
between the Company and Lucent Technologies Inc., dated November 17, 1998.(1)
+10.17 OEM Purchase and Development Agreement between the Company an 3COM Corporation, dated
November 24, 1998.(1)
47
Exhibit
Number Description of Document
------ -----------------------
+10.18 Development, Manufacturing and Supply Agreement between the Company and Netopia, Inc., dated
May 19, 1998.(1)
10.19 1999 Non-Employee Directors' Stock Option Plan.(1)
10.20 Form of Nonqualified Stock Option for use with 1999 Non-Employee Directors' Stock Option
Plan.(1)
10.21 Form of Indemnification Agreement(1)
+10.22 Equipment Purchase Agreement between the Company and NorthPoint Communications, Inc. dated
April 8, 1999.(1)
+10.23 Standard Full Service Gross Office Lease among the Company, Pacific Sorrento Mesa Holdings,
L.P., and Pacific Stonecrest Holdings, L.P., dated March 31, 1999.(1)
+10.24 Equipment Purchase Agreement between the Company and NorthPoint Communications, Inc. dated
July 21, 1999.(2)
+10.25 Equipment Purchase Agreement between the Company and Rhythms NetConnections, Inc. dated
December 10, 1999.(3)
10.26 Software License Agreement between the Company and Rhythms NetConnections, Inc. dated
December 10, 1999.(3)
+10.27 Customer Technical Support Services Agreement between the Company and Rhythms
NetConnections, Inc. dated December 10, 1999.(3)
10.28 Employment Agreement between the Company and Joseph D. Markee, dated March 12, 1999.(1)
10.29 OnPREM Networks Corporation 1998 Stock Option Plan(3).
10.30 Form of Stock Option Agreement pursuant to the OnPREM Networks Corporation 1998 Stock
Option Plan.(3)
10.31 Employment Agreement between the Company and Wilson O. Cochran, II, dated February 29,
2000.(5)
10.32 Non-Competition Agreement between the Company and Wilson O. Cochran, II, dated February 29,
2000.(5)
10.33 2000 Nonstatutory Stock Option Plan.(7)
10.34 Form of Stock Option Agreement and Form of Stock Option Grant Notice used in connection with
the 2000 Nonstatutory Stock Option Plan.(7)
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
24.1 Power of Attorney. Reference is made to page 49.
- --------------------------------------------------------------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission (the "Commission") on
March 1, 1999 (File No. 333-73153), as amended by Amendment No. 1 filed
with the Commission on April 13, 1999, Amendment No. 2 filed with the
Commission on April 26, 1999, and Amendment No. 3 filed with the Commission
on May 11, 1999.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999.
(4) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed
with the Commission on March 15, 2000.
(5) Filed as an exhibit to the Registration Statement on Form S-1 filed with
the Commission on March 20, 2000 (File No. 333-32846), as amended by
Amendment No. 1 filed with the Commission on April 27, 2000 and Amendment
No. 2 filed with the Commission on April 28, 2000, and amended
post-effectively on June 8, 2000 to convert to a Registration Statement on
Form S-3.
(6) Filed as an exhibit to the Registrant's Notice of Annual Meeting and
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders
filed with the Commission on April 10, 2000.
(7) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
filed with the Commission on June 7, 2000 (File No. 333-38798).
* Filed Herewith
+ Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 1, 2002
COPPER MOUNTAIN NETWORKS, INC.
By: /s/ RICHARD S. GILBERT
--------------------------------
Richard S. Gilbert
President, Chief Executive Officer
and Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard S. Gilbert and/or Michael O. Staiger,
and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
that all said attorneys-in-fact and agents, or any of them or their or his
substitute or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ RICHARD S. GILBERT
- ----------------------------- President, Chief Executive March 1, 2002
Richard S. Gilbert Officer and Chairman of the Board
(Principal Executive
Officer)
/s/ MICHAEL O. STAIGER
- ----------------------------- Chief Financial Officer and March 1, 2002
Michael O. Staiger Secretary (Principal Financial
Officer and Principal
Accounting Officer)
/s/ TENCH COXE
- ----------------------------- Director March 1, 2002
Tench Coxe
/s/ ROGER EVANS
- ----------------------------- Director March 1, 2002
Roger Evans
/s/ JOSEPH D. MARKEE
- ----------------------------- Director March 1, 2002
Joseph D. Markee
/s/ RAYMOND V. THOMAS
- ----------------------------- Director March 1, 2002
Raymond V. Thomas
/s/ ANDREW W. VERHALEN
- ----------------------------- Director March 1, 2002
Andrew W. Verhalen
/s/ JOSEPH R. ZELL
- ----------------------------- Director March 1, 2002
Joseph R. Zell
49
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Copper Mountain Networks, Inc.
We have audited the accompanying balance sheets of Copper Mountain Networks,
Inc. as of December 31, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Copper Mountain Networks,
Inc. at December 31, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
February 1, 2002
F-1
COPPER MOUNTAIN NETWORKS, INC.
BALANCE SHEETS
December 31,
--------------------
2001 2000
--------- --------
(in thousands, except
per share data)
ASSETS
- ------
Current assets:
Cash and cash equivalents................................. $ 26,623 $ 65,838
Short-term marketable investments......................... 46,202 96,778
Accounts receivable, net.................................. 1,574 19,496
Inventory................................................. 7,502 26,405
Other current assets...................................... 393 7,961
--------- --------
Total current assets......................................... 82,294 216,478
Marketable investments....................................... -- 6,161
Property and equipment, net.................................. 12,251 24,961
Other assets................................................. 1,924 11,126
Purchased intangibles........................................ -- 46,159
--------- --------
Total assets................................................. $ 96,469 $304,885
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable.......................................... $ 17,661 $ 23,963
Adverse purchase commitments.............................. 8,083 28,600
Accrued restructuring costs............................... 3,205 --
Accrued liabilities....................................... 6,544 17,351
Current portion of obligations under capital leases and
equipment notes payable................................. 3,120 3,177
--------- --------
Total current liabilities.................................... 38,613 73,091
Obligations under capital leases and equipment notes
payable, less current portion.............................. 3,534 6,654
Accrued restructuring costs.................................. 3,884 --
Other accrued................................................ 253 314
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $.001 par value, 100,000 shares
authorized, 58,351 and 52,053 shares issued and
outstanding at December 31, 2001 and 2000, respectively. 58 52
Additional paid in capital................................ 246,126 236,675
Deferred compensation..................................... (5,666) (2,283)
Accumulated deficit....................................... (190,673) (9,618)
Other comprehensive income................................ 340 --
--------- --------
Total stockholders' equity................................... 50,185 224,826
--------- --------
Total liabilities and stockholders' equity................... $ 96,469 $304,885
========= ========
See accompanying notes to financial statements
F-2
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF OPERATIONS
Year Ended
December 31,
- - ------------------------------------
2001 2000 1999
- - --------- -------- --------
(in thousands, except per share data
Net revenue......................................... $ 22,425 $281,576 $112,723
Cost of revenue..................................... 65,285 165,128 53,002
--------- -------- --------
Gross margin..................................... (42,860) 116,448 59,721
Operating expenses:
Research and development......................... 37,733 37,494 15,523
Sales and marketing.............................. 16,586 34,868 16,158
General and administrative....................... 15,664 21,823 5,998
Amortization of purchased intangibles............ 5,326 17,753 --
Amortization of deferred stock compensation *.... 4,934 3,664 5,431
Restructuring costs.............................. 20,382 -- --
Write-off of purchased intangibles............... 40,833 -- --
Write-off of in-process research and development. -- 6,300 --
--------- -------- --------
Total operating expenses..................... 141,458 121,902 43,110
--------- -------- --------
Income (loss) from operations....................... (184,318) (5,454) 16,611
Other income (expense):
Interest and other income........................ 4,141 9,618 4,385
Interest expense................................. (878) (611) (289)
--------- -------- --------
Income (loss) before income taxes................... (181,055) 3,553 20,707
Provision for income taxes.......................... -- 1,860 8,490
--------- -------- --------
Net income (loss)................................... $(181,055) $ 1,693 $ 12,217
========= ======== ========
Basic net income (loss) per share................... $ (3.41) $ 0.03 $ 0.39
========= ======== ========
Diluted net income (loss) per share................. $ (3.41) $ 0.03 $ 0.23
========= ======== ========
Basic common equivalent shares...................... 53,039 50,584 31,289
========= ======== ========
Diluted common equivalent shares.................... 53,039 58,217 52,282
========= ======== ========
- --------
* The following table shows how the Company's deferred stock compensation
would be allocated to cost of revenue and the respective expense categories:
Cost of revenue........... $ 237 $ 163 $ 432
Research and development.. 1,388 1,284 1,257
Sales and marketing....... 796 611 1,639
General and administrative 2,513 1,606 2,103
-------- -------- --------
Total.................. $ 4,934 $ 3,664 $ 5,431
======== ======== ========
See accompanying notes to financial statements
F-3
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
----------------- --------------
Number Number
of of
Shares Amount Shares Amount
------- -------- ------ ------
Balance at December 31, 1998............................... 10,223 $ 44,502 5,034 $ 5
Conversion of preferred to common stock.................... (10,223) (44,502) 30,670 31
Issuance of common stock, net.............................. -- -- 9,200 9
Stock grants for consulting services....................... -- -- 1 --
Repayment of notes receivable from Stockholders............ -- -- -- --
Deferred compensation related to the grant of stock options -- -- -- --
Amortization related to deferred stock compensation........ -- -- -- --
Net exercise of warrant to purchase common Stock........... -- -- 235 --
Tax benefit from the exercise of stock options............. -- -- -- --
Exercise of options to purchase common stock............... -- -- 2,522 3
Net income................................................. -- -- -- --
------- -------- ------ ---
Balance at December 31, 1999............................... -- -- 47,662 48
Common stock issued for acquisition of OnPREM.............. -- -- 1,142 1
Deferred compensation related to the acquisition of OnPREM. -- -- -- --
Amortization related to deferred stock compensation........ -- -- -- --
Common stock issued under Employee Stock Purchase Plan..... -- -- 143 --
Exercise of options to purchase common stock............... -- -- 3,106 3
Net income................................................. -- -- -- --
------- -------- ------ ---
Balance at December 31, 2000............................... -- -- 52,053 52
Options to purchase common stock for consulting services... -- -- -- --
Deferred compensation related to the grant of stock options -- -- -- --
Amortization related to deferred stock compensation........ -- -- -- --
Cancellation of options to purchase common stock........... -- -- -- --
Issuance of restricted stock to employees.................. -- -- 5,100 5
Cancellation of restricted stock issued to employees....... -- -- (150) --
Common stock issued under Employee Stock Purchase Plan..... -- -- 141 --
Exercise of options to purchase common stock............... -- -- 852 1
Net exercise of warrants to purchase common stock.......... -- -- 355 --
Unrealized gain on marketable investment................... -- -- -- --
Net loss................................................... -- -- -- --
------- -------- ------ ---
Balance at December 31, 2001............................... -- $ -- 58,351 $58
======= ======== ====== ===
Notes
Receivable Additional Other
From Paid in Deferred Accumulated comprehensive
Stockholders Capital Compensation Deficit Income
------------ ---------- ------------ ----------- -------------
Balance at December 31, 1998............................... $(41) $ 15,667 $(9,762) $ (23,528) $ --
Conversion of preferred to common stock.................... -- 44,471 -- -- --
Issuance of common stock, net.............................. -- 88,664 -- -- --
Stock grants for consulting services....................... -- 7 -- -- --
Repayment of notes receivable from Stockholders............ 41 -- -- -- --
Deferred compensation related to the grant of stock options -- 234 (234) -- --
Amortization related to deferred stock compensation........ -- -- 5,431 -- --
Net exercise of warrant to purchase common Stock........... -- -- -- -- --
Tax benefit from the exercise of stock options............. -- 9,389 -- -- --
Exercise of options to purchase common stock............... -- 717 -- -- --
Net income................................................. -- -- -- 12,217 --
---- -------- ------- --------- ----
Balance at December 31, 1999............................... -- 159,149 (4,565) (11,311) --
Common stock issued for acquisition of OnPREM.............. -- 70,158 -- -- --
Deferred compensation related to the acquisition of OnPREM. -- -- (1,382) -- --
Amortization related to deferred stock compensation........ -- -- 3,664 -- --
Common stock issued under Employee Stock Purchase Plan..... -- 1,429 -- -- --
Exercise of options to purchase common stock............... -- 5,939 -- -- --
Net income................................................. -- -- -- 1,693 --
---- -------- ------- --------- ----
Balance at December 31, 2000............................... -- 236,675 (2,283) (9,618) --
Options to purchase common stock for consulting services... -- 4 (4) -- --
Deferred compensation related to the grant of stock options -- 99 (77) -- --
Amortization related to deferred stock compensation........ -- -- 1,459 -- --
Cancellation of options to purchase common stock........... -- (556) 556 -- --
Issuance of restricted stock to employees.................. -- 9,004 (5,556) -- --
Cancellation of restricted stock issued to employees....... -- (239) 239 -- --
Common stock issued under Employee Stock Purchase Plan..... -- 691 -- -- --
Exercise of options to purchase common stock............... -- 448 -- -- --
Net exercise of warrants to purchase common stock.......... -- -- -- -- --
Unrealized gain on marketable investment................... -- -- -- -- 340
Net loss................................................... -- -- -- (181,055) --
---- -------- ------- --------- ----
Balance at December 31, 2001............................... $ -- $246,126 $(5,666) $(190,673) $340
==== ======== ======= ========= ====
Total
Stockholders'
Equity
-------------
Balance at December 31, 1998............................... $ 26,843
Conversion of preferred to common stock.................... --
Issuance of common stock, net.............................. 88,673
Stock grants for consulting services....................... 7
Repayment of notes receivable from Stockholders............ 41
Deferred compensation related to the grant of stock options --
Amortization related to deferred stock compensation........ 5,431
Net exercise of warrant to purchase common Stock........... --
Tax benefit from the exercise of stock options............. 9,389
Exercise of options to purchase common stock............... 720
Net income................................................. 12,217
---------
Balance at December 31, 1999............................... 143,321
Common stock issued for acquisition of OnPREM.............. 70,159
Deferred compensation related to the acquisition of OnPREM. (1,382)
Amortization related to deferred stock compensation........ 3,664
Common stock issued under Employee Stock Purchase Plan..... 1,429
Exercise of options to purchase common stock............... 5,942
Net income................................................. 1,693
---------
Balance at December 31, 2000............................... 224,826
Options to purchase common stock for consulting services... --
Deferred compensation related to the grant of stock options 22
Amortization related to deferred stock compensation........ 1,459
Cancellation of options to purchase common stock........... --
Issuance of restricted stock to employees.................. 3,453
Cancellation of restricted stock issued to employees....... --
Common stock issued under Employee Stock Purchase Plan..... 691
Exercise of options to purchase common stock............... 449
Net exercise of warrants to purchase common stock.......... --
Unrealized gain on marketable investment................... 340
Net loss................................................... (181,055)
---------
Balance at December 31, 2001............................... $ 50,185
=========
See accompanying notes to financial statements
F-4
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
------------------------------
2001 2000 1999
- - --------- -------- ---------
(in thousands)
Cash flows from operating activities:
Net income (loss).............................................................. $(181,055) $ 1,693 $ 12,217
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Write-off of purchased intangibles.......................................... 40,833 -- --
Depreciation and amortization............................................... 15,424 25,158 3,089
Non-cash restructuring costs................................................ 9,200 -- --
Non-cash compensation....................................................... 4,934 3,664 5,438
Loss on investment in marketable securities................................. 1,020 -- --
Write-off of in-process research and development............................ -- 6,300 --
Loss on disposal of equipment............................................... -- -- 193
Tax benefit from the sale of stock options.................................. -- -- 9,389
Changes in operating assets and liabilities:
Accounts receivable...................................................... 17,922 (504) (10,966)
Inventory................................................................ 18,736 (13,604) (8,133)
Other current assets and other assets.................................... 16,770 (14,710) (1,095)
Accounts payable and accrued liabilities................................. (17,170) 49,244 10,174
Adverse purchase commitments............................................. (20,517) -- --
Accrued restructuring costs.............................................. 7,089 -- --
--------- -------- ---------
Net cash provided by (used in) operating activities................................ (86,814) 57,241 20,306
--------- -------- ---------
Cash flows from investing activities:
Purchases of marketable investments............................................ (143,997) (97,800) (113,416)
Maturities of marketable investments........................................... 200,054 91,764 27,411
Purchases of property and equipment............................................ (6,421) (17,143) (6,572)
Cash received in the purchase of OnPREM........................................ -- 844 --
--------- -------- ---------
Net cash provided by (used in) investing activities................................ 49,636 (22,335) (92,577)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of equipment notes payable.............................. -- -- 2,464
Payments on capital lease obligations and equipment notes...................... (3,177) (1,844) (1,853)
Repayment of shareholders notes receivable..................................... -- -- 41
Proceeds from issuance of common stock......................................... 1,140 7,371 89,393
--------- -------- ---------
Net cash provided by (used in) financing activities................................ (2,037) 5,527 90,045
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents............................... (39,215) 40,433 17,774
Cash and cash equivalents at beginning of year..................................... 65,838 25,405 7,631
--------- -------- ---------
Cash and cash equivalents at end of year........................................... $ 26,623 $ 65,838 $ 25,405
========= ======== =========
Supplemental information:
Interest paid.................................................................. $ 878 $ 611 $ 289
========= ======== =========
Common stock issued for acquisition of OnPREM.................................. $ -- $ 70,159 $ --
========= ======== =========
Equipment acquired under capital lease obligations and notes................... $ -- $ 6,013 $ 2,303
========= ======== =========
Issuance of stock for consulting services...................................... $ 4 $ -- $ 7
========= ======== =========
See accompanying notes to financial statements
F-5
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Copper Mountain Networks, Inc. (the "Company" or "Copper Mountain"), a
Delaware corporation, is a supplier of high-speed DSL-based communication
solutions for the broadband access market. The Company's solutions enable
telecommunication service providers to provide high-speed, cost-effective
connectivity over the existing copper wire infrastructure to the business,
multiple tenant unit and residential markets.
The Company operates in one business segment, developing, marketing and
supporting advanced communications products which enable high-speed data access
to business, multi-tenant unit and residential users. The markets for
high-speed data access products are characterized by rapid technological
developments, frequent new product introductions, changes in end user
requirements and evolving industry standards. The Company's future success will
depend on its ability to develop, introduce and market enhancements to its
existing products, to introduce new products in a timely manner which meet
customer requirements and to respond to competitive pressures and technological
advances. Further, the emergence of new industry standards, whether through
adoption by official standards committees or widespread use by telephone
companies or other telecommunications service providers, could require the
Company to redesign its products.
Basis of Presentation
The accompanying financial statements include the accounts of the Company
and its branch offices in the Netherlands and in Singapore, which was closed
during 2001. Activities performed by the branches are a direct and integral
extension of the Company's primary business and are accounted for within the
Company's corporate records without consolidation. Accordingly, no foreign
currency translation is reflected in the accompanying financial statements as
management considers the functional currency of each branch to be that of the
United States dollar.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Examples include estimated restructuring costs,
excess inventory and adverse purchase commitments, provisions for returns, bad
debts; the ultimate realizability of investments and intangible assets and the
ultimate outcome of litigation. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value. The
Company generally invests its excess cash in debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any significant losses on its cash and cash equivalents.
F-6
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable investments,
accounts receivable, accounts payable, accrued liabilities, obligations under
capital leases and equipment notes payable approximates fair value, unless the
fair value is not practicably determinable.
Investments
At December 31, 2001, the Company held investments in investment grade debt
securities with various maturities through June 2002 and money market funds.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company's total investments in these securities as of
December 31, 2001 totaled $72.7 million. The Company has included $26.5 million
of these securities in cash and cash equivalents, as of December 31, 2001, as
they have original maturities of less than 90 days. The Company has designated
all of its remaining investments of $46.2 million as held-to-maturity, except
for an investment with a cost basis of $3.4 million in commercial paper issued
by Southern California Edison, which was transferred from being classified as
held-to-maturity to available-for-sale during 2001 because the security had
matured.
During the year ended December 31, 2001, the Company reduced the carrying
value of the investment in commercial paper issued by Southern California
Edison Company to its indicated fair value of approximately $2.7 million.
Included in other income, net for the year ended December 31, 2001 is a loss
adjustment of $1.0 million to adjust the carrying value of the investment to
fair value. Included in other comprehensive income for the year ended December
31, 2001 is an unrealized gain adjustment of $0.3 million. See Note 15 Recent
Event (Unaudited) as it relates to the ultimate net realizable value of this
security.
Concentration of Credit Risk
A relatively small number of customers account for a significant percentage
of the Company's revenues. The Company expects that the sale of its products to
a limited number of customers may continue to account for a high percentage of
revenues for the foreseeable future. The Company's revenues for the year ended
December 31, 2001 include sales to three significant customers totaling $5.2
million, $4.0 million and $2.2 million. The Company's revenues for the year
ended December 31, 2000 include sales to four significant customers totaling
$62.2 million, $53.5 million, $47.6 million and $27.3 million. The Company's
revenues for the year ended December 31, 1999 include sales to three
significant customers totaling $42.2 million, $32.0 million and $25.4 million.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company had significant accounts
receivable balances due from two customers individually representing 63% and
11% of total accounts receivable at December 31, 2001.
In January 2001, Northpoint Communications, Inc. ("Northpoint"), a
significant customer of the Company, filed a petition for Chapter 11 protection
with the U.S. Bankruptcy Court. Net revenue for the year ended December 31,
2000 does not reflect shipments of approximately $9.2 million to Northpoint.
The net impact on the Company's results from operations for the year ended
December 31, 2000 was $4.9 million as a result of the insolvency of Northpoint.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not realized any
significant losses on its cash equivalents or marketable investments.
F-7
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Inventory
Inventory is stated at the lower of cost, principally standard costs, which
approximates actual costs on a first-in, first-out basis, or market. During
2001, the Company recorded charges totaling $53.5 million to cost of revenue to
reduce the carrying value of inventory and to establish adverse purchase
commitment liabilities for inventory purchase commitments of finished products
and raw materials in excess of anticipated requirements and for excess
inventory on hand at December 31, 2001, including charges of $51.0 million that
were expected to be non-recurring. During 2000, the Company recorded charges
totaling $41.9 million to cost of revenue to reduce the carrying value of
inventory and to establish adverse purchase commitment liabilities for future
inventory purchase commitments of finished products and raw materials in excess
of anticipated requirements and for excess inventory on hand at December 31,
2000, including charges of $35.0 million that were expected to be
non-recurring. These reductions were primarily due to a significant decline in
the demand for our products. Other reductions in the value of the inventory are
generally due to the discontinuance of certain products, which is a result of
the development and introduction of new products. Included in the charges
described above were charges to reduce the carrying costs of inventory totaling
$36.3 million, $13.3 million and $750,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging
from two to five years, or lease terms, if shorter, for leasehold improvements.
For the years ended December 31, 2001, 2000 and 1999, depreciation expense,
including amortization of property and equipment acquired under capital lease
obligations, was $10.1 million, $7.4 million and $3.0 million, respectively.
Revenue Recognition
The Company recognizes revenue pursuant to Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements." Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products and/or
services has occurred; (iii) the selling price is fixed or determinable and;
(iv) collectibility is reasonably assured. Sales returns are estimated based on
historical experience and management's expectations and are recorded at the
time product revenue is recognized. In addition, the Company leases equipment
to customers under non-cancelable sales-type leases with terms of generally
three to four years.
Annual service and support arrangements can be purchased by customers for
products no longer under warranty and are generally billed quarterly. Revenue
from service and support arrangements is recognized ratably as services are
performed.
The Company may extend limited stock rotation, product return and price
protection rights to certain distributors and resellers. The Company may not be
able to estimate product returns if the relationship with the distributor is
new or if there is limited historical basis to determine product returns.
Deferred revenue, which is included in accrued liabilities, represents the
margin on shipments of products to distributors or resellers that will be
recognized when the Company can reasonably estimate product returns, at which
time the Company records the revenue and cost of revenue.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred. Costs of equipment for research and development that
have alternative future uses are capitalized when purchased and depreciated
using the straight-line method over the estimated useful lives of the assets,
ranging from two to five years.
F-8
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
December 31, 2001, 2000 and 1999, the Company incurred advertising expense of
$246,000, $4.5 million, and $1.2 million, respectively.
Software Costs
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. There have been no such costs capitalized to date as the costs incurred
subsequent to reaching technological feasibility have not been significant.
Impairment of Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized
when the sum of the expected future undiscounted net cash flows is less than
the carrying amount of the asset. Should an impairment exist, the impairment
loss would be measured based on the excess of the carrying amount of the asset
over the asset's fair value. During the year ended 2001, the Company
implemented restructuring plans that included a number of cost reduction
actions (Note 9). As a result of these plans, impairment losses were recorded
for certain of the Company's long-lived assets. Substantially all of the
Company's long-lived assets are located in the United States.
Warranty Reserves
The Company provides limited warranties on certain of its products for
periods of up to one year. The Company recognizes warranty reserves when
products are shipped based upon an estimate of total warranty costs, and such
reserves are included in accrued liabilities.
Income Taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are determined
based on the difference between the financial statement bases and the tax bases
of assets and liabilities using enacted tax rates. A valuation allowance is
established to reduce a deferred tax asset to the amount that is expected more
likely than not to be realized.
Stock Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income (loss) and net income (loss) per share as if the fair
value method had been applied in measuring compensation expense (See Note 7).
As of December 31, 2001, options to purchase 3.1 million shares are being
accounted for as variable because during the year, the options were modified to
reduce the exercise price. Accordingly, the intrinsic value of these options is
remeasured at the end of each period. At December 31, 2001, the fair value of
the Company's common stock was less than the exercise price of these options
and accordingly, the intrinsic value of these options was zero.
Deferred compensation for options granted to non-employees has been
determined in accordance with SFAS No. 123 and EITF 96-18 as the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest.
Other Comprehensive Income
The Company reports all components of other comprehensive income, including
net income, in the financial statements in the period in which they are
recognized. Other comprehensive income is defined as the change in
F-9
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
equity during a period from transactions and other events and circumstances
from non-owner sources. Net income (loss) and other comprehensive income,
including foreign currency translation adjustments and unrealized gains and
losses on investments, are reported, net of their related tax effect, to arrive
at other comprehensive income (loss). Other comprehensive loss for the year
ended December 31, 2001 included an adjustment of $340,000 for an unrealized
gain on investment. Other comprehensive income for the years ended December 31,
2000 and 1999 did not differ from reported net income.
Derivative Investments and Hedging Activities
The Company recognizes all derivatives as either assets or liabilities in
the balance sheet and measures those instruments at fair value. Changes in the
fair value of derivatives are recorded each period in income or other
comprehensive income, depending on whether the derivatives are designated as
hedges and, if so, the types of hedges. The Company did not use any derivatives
during the year ended December 31, 2001 and there was no cumulative effect
adjustment upon adoption of Statement of Financial Accounting Standards No. 133.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share has been computed in
accordance with SFAS No. 128, "Earnings Per Share," using the weighted-average
number of shares of common stock outstanding and common stock equivalents
during the period.
A reconciliation of shares used in the calculation of basic and diluted net
loss per share attributable to common shareholders is as follows (in thousands):
December 31,
--------------------
2001 2000 1999
------ ------ ------
Weighted average common shares outstanding........................... 53,039 50,584 31,289
Dilutive effect of preferred shares.................................. -- -- 11,091
Dilutive effect of stock options..................................... -- 7,140 8,585
Dilutive effect of restricted shares................................. -- 29 708
Dilutive effect of warrants.......................................... -- 464 609
------ ------ ------
Shares used in computing diluted net income (loss) per common share.. 53,039 58,217 52,282
====== ====== ======
Dilutive securities include options, warrants and preferred stock as if
converted and restricted stock subject to vesting. Potentially dilutive
securities totaling 1.6 million and 1.7 million for the years ended December
31, 2001 and 2000, respectively, were excluded from basic and diluted earnings
per share because of their anti-dilutive effect.
Recapitalization
In April 1999, the Company reincorporated as a Delaware corporation. The
authorized shares of the Company were set at 100 million shares of common stock
($.001 par value) and 5 million shares of preferred stock ($.001 par value).
Under the restated certificate, the Company's board of directors has the
authority, without further action by stockholders, to issue up to 5 million
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon such preferred stock. The issuance of preferred stock could adversely
affect the voting power of holders of common stock. All common share data in
the accompanying financial statements have been adjusted retroactively to give
effect to the reincorporation.
In November 1999, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock in the form of a stock dividend. The
stock dividend was distributed on December 10, 1999 to stockholders of record
on November 24, 1999. All references in the financial statements and notes to
number of shares and per share amounts have been restated to reflect this stock
split.
F-10
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141").
This statement supersedes Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16") and amends or supersedes a number of interpretations
of APB 16. FAS 141 eliminates the pooling-of-interests method of accounting for
business combinations, except certain transactions initiated prior to July 1,
2001 and changes the criteria to recognize intangible assets apart from
goodwill. FAS 141 is effective for any business combination completed after
June 30, 2001. Adoption of FAS 141 is not currently expected to have a material
impact on our results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). This statement supersedes Accounting Principles Board Opinion No.
17, "Intangible Assets." FAS 142 stipulates that goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually, or under
certain circumstances more frequently, for impairment. FAS 142 is effective for
any goodwill and intangible assets acquired after June 30, 2001 and upon
adoption for such assets acquired before July 1, 2001. Companies are required
to adopt FAS 142 in the first fiscal year beginning after December 15, 2001.
Adoption of FAS 142 is not currently expected to have a material impact on our
results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"). FAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. Companies are
required to adopt FAS 143 in the first fiscal year beginning after June 15,
2002. Adoption of FAS 143 is not currently expected to have a material impact
on our results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). This statement supersedes Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS 144
provides a single accounting model for long-lived assets to be disposed of.
Companies are required to adopt FAS 144 in the first fiscal year beginning
after December 15, 2001. Adoption of FAS 144 is not currently expected to have
a material impact on our results of operations.
Reclassifications
Certain prior period amounts and balances have been reclassified to conform
with the current period presentation.
2. Acquisition
On February 29, 2000, the Company completed its acquisition of
privately-held OnPREM Networks Corporation ("OnPREM") of Fremont, California.
OnPREM is a developer of highly integrated DSL solutions for the small and
medium building Multi-Tenant Unit ("MTU") market. Under the terms of the
agreement, Copper Mountain acquired OnPREM in exchange for the issuance of
approximately 1.1 million shares of Copper Mountain common stock and the
assumption of options outstanding under the OnPREM 1998 Stock Plan.
The purchase price of the OnPREM acquisition, excluding acquisition costs,
was $70.1 million based on the average closing price of the Company's common
stock for each of the ten consecutive trading days in the period
F-11
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
that ended two days immediately preceding the date of the acquisition
agreement. The acquisition was accounted for as a purchase. On the date of
acquisition the purchase price was allocated as follows (in thousands):
Goodwill........................... $61,560
Existing technology................ 3,100
Assembled workforce................ 700
In-process research and development 6,300
Current assets..................... 1,000
Non-current assets................. 372
Current liabilities................ (488)
Accrued acquisition costs.......... (3,700)
Deferred compensation.............. 1,286
-------
$70,130
=======
In connection with the acquisition of OnPREM, the Company wrote-off the
purchased in-process research and development of $6.3 million, which was
charged to operations upon completion of the acquisition. The purchased
in-process research and development was solely related to the second version of
OnPREM's DSL concentrator system. The first release of OnPREM's DSL
concentrator system was introduced in March 2000. OnPREM's low-density
integrated DSL concentrator was believed at the time to be complementary to the
Company's existing line of high-density and mid-density DSL concentrators. This
solution targeted meeting the needs of multi-tenant service providers managing
portfolios of buildings of all sizes ranging from small buildings requiring a
low-cost, low-density solution, to large buildings with higher density and
capability requirements. Based on time spent on the second version of OnPREM's
DSL concentrator system and costs incurred, this project was estimated to be
28% complete as of the acquisition date. At the date of acquisition, the total
estimated cost to complete the project was estimated to be approximately
$233,000, primarily consisting of engineering salaries and the project was
expected to be completed during the second quarter of 2000. The estimated fair
value of the project was estimated utilizing a discounted cash flow model which
was based on estimates of operating results and capital expenditures for the
period from February 29, 2000 to December 31, 2003 and a risk adjusted discount
rate of 19%. Since the acquisition date, the scope of the project was
reconsidered. During the year ended December 31, 2001, the Company discontinued
this project, which has delayed anticipated revenues indefinitely. Since the
date of the assessment of the value of the purchased in-process research and
development, there has been a substantial decline in the overall economic
environment that has led many of the Company's customers to delay or reduce
capital spending. The purchased intangibles were being amortized over their
estimated useful life of three years, until those assets were written off in
2001. Amortization expense during the years ended December 31, 2001 and 2000
was $5.3 million and $17.8 million, respectively. The write off of purchased
intangible assets in 2001 was $40.8 million (See Note 9).
3. Completion of Initial Public Offering
On May 13, 1999, the Company completed its initial public offering for the
sale of 9.2 million shares on a split-adjusted basis of common stock at a price
to the public of $10.50 per share, which resulted in net proceeds to the
Company of $89.8 million after payment of the underwriters' commissions but
before offering expenses. Simultaneously with the closing of the initial public
offering, all of the Company's convertible preferred stock was automatically
converted into an aggregate of 30.7 million shares of common stock.
F-12
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
4. Composition of Certain Balance Sheet Captions
December 31,
------------------
2001 2000
-------- --------
(in thousands)
Accounts receivable:
Trade receivables.............................. $ 2,044 $ 21,464
Allowance for doubtful accounts................ (470) (1,968)
-------- --------
$ 1,574 $ 19,496
======== ========
Inventory:
Raw materials.................................. $ 74,532 $ 22,635
Work in process................................ 329 1,529
Finished goods................................. 13,523 14,569
Allowance for excess and obsolescence.......... (80,882) (12,328)
-------- --------
$ 7,502 $ 26,405
======== ========
Property and equipment:
Laboratory equipment and software.............. $ 20,770 $ 18,438
Computer equipment and software................ 6,491 6,885
Office furniture and fixtures.................. 2,343 4,273
Leasehold improvements......................... 1,791 3,366
Construction in progress....................... 349 4,120
-------- --------
31,744 37,082
Less accumulated depreciation and amortization. (19,493) (12,121)
-------- --------
$ 12,251 $ 24,961
======== ========
Accrued liabilities:
Accrued compensation........................... $ 1,683 $ 4,126
Accrued warranty............................... 725 3,714
Accrued paid time off.......................... 1,250 2,203
Deferred revenue............................... 842 2,554
Other.......................................... 2,044 4,754
-------- --------
$ 6,544 $ 17,351
======== ========
5. Investments
At December 31, 2001 and 2000, investments designated as held to maturity
consisted of the following (in thousands):
Current Noncurrent
--------------- ------------
December 31, December 31,
--------------- ------------
2001 2000 2001 2000
------- ------- ---- ------
Held to maturity:
Commercial paper............ $ -- $44,962 $-- $ --
U.S. government securities.. 9,016 3,078 -- --
Corporate medium-term notes. 34,466 48,738 -- 6,161
------- ------- --- ------
$43,482 $96,778 $-- $6,161
======= ======= === ======
At December 31, 2001, the Company had an investment in commercial paper
classified as available for sale at an original cost basis of $3.4 million.
During the year ended December 31, 2001, the Company recognized a
F-13
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
loss of $1.0 million that was considered to be other than temporary and an
unrealized gain in other comprehensive income of $0.3 million. The carrying
value of this investment at December 31, 2001 is $2.7 million which
approximated fair value. See Note 15 Recent Event (Unaudited) as it relates to
the ultimate net realizable value of this security.
6. Notes Payable
In August 1999, the Company entered into a credit facility with a bank for
the purchase of equipment. The credit facility includes $2.4 million in
equipment loans and $2.6 million in commitments for the purchase of equipment
under a capital lease agreement. During the year ended December 31, 1999, the
full amount of funds available under the equipment loan had been utilized. As
of December 31, 2000 and 2001, the full amount of funds available under the
capital lease agreement had been utilized. The borrowings under the equipment
loans and the capital lease agreement are to be repaid in 48 equal monthly
installments and accrue interest at 10.8% per annum. Both obligations are
secured by the related equipment.
A summary of the notes payable is as follows (in thousands):
December 31,
--------------
2001 2000
------ ------
Bank installment loan, with various maturity dates through October 2003, total
monthly payments of $57,000, bearing interest at 10.8%, collateralized by
equipment................................................................... $1,280 $1,793
Less current portion.......................................................... (571) (513)
------ ------
$ 709 $1,280
====== ======
At December 31, 2001, future aggregate annual principal payments on the
notes payable are $571,000, and $709,000 for 2002 and 2003, respectively.
7. Stockholders' Equity
Preferred Stock
At December 31, 1998, the Company had 10.2 million shares of its convertible
preferred stock outstanding. On May 18, 1999, the Company completed its initial
public offering which resulted in the conversion of all of the outstanding
convertible preferred stock into 30.7 million shares of common stock. Following
the conversion, and upon the Company's reincorporation in Delaware, the
Company's certificate of incorporation was amended and restated to delete all
references to such shares of preferred stock. Under the restated certificate,
the Board has the authority, without further action by stockholders, to issue
up to 5.0 million shares of preferred stock in one or more series and to fix
the rights, preferences, privileges, qualifications and restrictions granted to
or imposed upon such preferred stock, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preference
and sinking fund terms, any or all of which may be greater than the rights of
the common stock.
Common Stock
The Company has issued 3.9 million shares of common stock to the founders of
the Company at prices ranging from $.02 to $.04 per share in exchange for
promissory notes bearing interest at rates ranging from 5.5%
F-14
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
to 10% that matured March 12, 2000. The Company had the option to repurchase,
at the original issue price, unvested shares in the event of termination of
employment. In 1998, 476,000 unvested common shares were forfeited upon the
termination of one of the founders. As of December 31, 1999 all amounts
outstanding under the remaining promissory notes had been repaid by the
founders.
Stock Option Cancel and Re-grant Program
In November 2000, the Company allowed employees holding options to purchase
the Company's common stock to cancel certain stock option grants in exchange
for a commitment that options to purchase the same number of common shares
would be granted in May 2001 with an exercise price equal to the fair market
value on the date of the new grant, provided that the participant had not
terminated employment prior to such time (the "Cancel and Re-grant Program").
Options to purchase shares of common stock granted under the Cancel and
Re-grant Program vest ratably over a period of 36 months. All other terms of
options granted under the Cancel and Re-grant Program are substantially the
same as the cancelled options. Options to purchase 4.8 million shares of common
stock were cancelled under the Cancel and Re-grant Program. In May 2001, the
Company granted options to purchase 3.3 million shares of common stock in
conjunction with the Cancel and Re-grant Program at an exercise price of $3.19
per share.
Stock Option Exchange Program
In May 2001, the Company allowed employees holding options to purchase the
Company's common stock to cancel certain stock option grants in exchange for
options to purchase the same number of common shares which were granted in May
2001 with an exercise price equal to the fair market value on the date of the
new grant (the "Exchange Program"). Options to purchase shares of common stock
granted under the Exchange Program vest ratably over a period of 36 months and
have a life of five years from the date of grant. All other terms of options
granted under the Exchange Program are substantially the same as the cancelled
options. In May 2001, the Company cancelled and immediately granted replacement
options to purchase 3.1 million shares of common stock in conjunction with the
Exchange Program at an exercise price of $3.19 per share. The intrinsic value
of the options to purchase common stock will be re-measured at the end of each
period for the life of the option and be amortized over the vesting period in
accordance with FASB Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans." For the year ended
December 31, 2001 the Company recognized compensation expense of zero related
to the Exchange Program.
Restricted Common Stock
During 2001, the Company granted 5,100,000 shares of restricted common stock
to certain employees. The shares, which are restricted as to sale or transfer
until vesting, will vest 50% one year from the date of grant and ratably each
month thereafter for a period of 12 months. During 2001, 150,000 of these
shares were cancelled. The related net compensation expense of approximately
$9.0 million will be amortized in accordance with FASB Interpretation No. 28
over the vesting period of two years. During the year ended December 31, 2001,
the Company recognized compensation expense of $3.5 million related to this
grant of restricted common stock.
1996 Equity Incentive Plan
In August 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"). At December 31, 2001, a total of 10.4 million shares of common
stock are reserved for issuance pursuant to the 1996 Plan. In addition, the
1996 Plan provides for automatic annual increases in the number of shares
reserved for issuance thereunder (beginning in 2000) equal to the lesser of:
(i) 4% of Copper Mountain's outstanding shares on a fully
F-15
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
diluted basis taking into account stock options and warrants and (ii) a lesser
amount determined by the board of directors.
The 1996 Plan provides for the grant of options to the Company's directors,
officers, key employees, consultants and certain advisors. The 1996 Plan
provides for the grant of incentive and nonstatutory stock options, stock
bonuses and rights to purchase stock to employees, directors or consultants of
the Company. The 1996 Plan provides that incentive stock options will be
granted only to employees at no less than the fair market value of the
Company's common stock (no less than 85% of the fair market value for
nonstatutory stock options). Options generally vest 25% one year from date of
grant and ratably each month thereafter for a period of 36 months, and are
exercisable up to ten years from date of grant.
Certain option grants under the 1996 Plan are subject to an early exercise
provision. Common shares obtained on early exercise of unvested options are
subject to repurchase by the Company at the original issue price and will vest
according to the respective option agreement. At December 31, 2001 and 2000,
there are no shares subject to repurchase by the Company.
Non-Employee Directors' Stock Option Plan
In March 1999, the Company adopted the 1999 Non-Employee Directors' Stock
Option Plan ("Directors Plan") to provide for the automatic grant of options to
purchase shares of common stock to our non-employee directors. The Directors
Plan is administered by the board, unless the board delegates administration to
a committee of at least two disinterested directors. A total of 720,000 shares
of common stock have been reserved for issuance under the Directors Plan.
On the effective date of the Directors Plan, each person who was then a
non-employee director was granted an option to purchase 60,000 shares of common
stock. Each person who, after the effective date of the plan, for the first
time becomes a non-employee director automatically will be granted, upon the
date of his or her initial appointment or election to be a non-employee
director, a one-time option to purchase 60,000 shares of common stock. On the
date of each annual meeting of our stockholders commencing with the 2000 annual
meeting of stockholders, each person who is initially elected or appointed to
be a non-employee director at least six months prior to the date of such annual
meeting automatically will be granted an option to purchase 20,000 shares of
common stock.
Options granted under the Directors Plan shall be fully vested and
exercisable on the date of grant and must be exercised within five years from
the date they are granted. The exercise price of options under the Directors
Plan will equal 100% of the fair market value of the common stock on the date
of grant. Unless otherwise terminated by the board of directors, the Directors
Plan automatically terminates when all of our common stock reserved for
issuance under the Directors Plan has been issued. As of December 31, 2001,
720,000 stock options have been granted under the Directors Plan and 196,500
are available for grant.
Nonstatutory Stock Option Plan
In March 2000, the Board adopted the Company's 2000 Nonstatutory Stock
Option Plan (the "NSO Plan"). A total of 600,000 shares of common stock are
reserved for issuance pursuant to the NSO Plan. The NSO Plan provides for the
grant of options to the Company's employees (other than officers), consultants
and certain advisors. The NSO Plan is a broad based plan and its adoption or
amendment is not required to be approved by the Company's stockholders. The NSO
Plan was adopted by the Board to address an expected shortfall in the number of
shares of Common Stock available for issuance under the Company's 1996 Equity
Incentive Plan
F-16
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
prior to the date of the 2000 annual meeting of stockholders. Such shortfall
was expected to occur as a result of the Company's rapid growth and, in
particular, as a result of the additional options granted to attract and retain
former employees of OnPREM Networks Corporation following Copper Mountain's
acquisition of that company. As of December 31, 2001, 581,845 options had been
granted under the NSO Plan and 18,155 are available for grant.
The NSO Plan permits the granting of nonstatutory options, which are not
intended to qualify as incentive stock options within the meaning of Section
422 of the Internal Revenue Code, to employees (other than officers),
consultants and certain advisors. Officers and directors of the Company are not
eligible to be granted options under the NSO Plan. No person is eligible to be
granted options covering more than 500,000 shares of common stock in any
calendar year.
The NSO Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the NSO Plan, the Board or any
such committee has the authority to select the eligible persons to whom grants
are to be made, to designate the number of shares to be covered by each stock
option grant, to establish vesting schedules, to specify the option exercise
price and the type of consideration to be paid upon exercise and, subject to
certain restrictions, to specify other terms of options granted under the plan.
The maximum term of options granted under the NSO Plan is ten years. Options
granted under the plan are generally transferable and generally expire three
months after the termination of an optionee's service. In general, if an
optionee is permanently disabled or dies during his or her service, such
person's options may be exercised up to 12 months following such disability or
18 months following such death.
The exercise price of options granted under the NSO Plan is determined by
the Board or a committee thereof in accordance with the guidelines set forth in
the NSO Plan, however, the exercise price is generally expected to be equal to
100% of the fair market value of the Company's Common Stock on the date of the
grant. Options granted under the NSO Plan vest at the rate specified in the
option agreement, generally over a four year period. Pursuant to the NSO Plan,
shares subject to stock options that have expired or otherwise terminated
without having been exercised in full again become available for grant, but
exercised shares that the Company repurchases pursuant to a right of repurchase
will not again become available for grant.
Upon certain changes in control, all outstanding stock options under the NSO
Plan must either be assumed or substituted by the surviving entity. In the
event the surviving entity does not assume or substitute such stock options,
such stock options will be terminated to the extent not exercised prior to such
change in control.
OnPREM 1998 Stock Option Plan
In connection with the acquisition of OnPREM Networks Corporation in
February 2000, the Company assumed the 1998 Stock Option Plan of OnPREM and all
outstanding options to purchase common stock of OnPREM under such plan. By
virtue of the acquisition, the OnPREM options were proportionally adjusted with
respect to exercise prices and the number of shares subject to each option
based on the exchange ratio used in the acquisition. All other terms of the
OnPREM options, such as vesting schedules, remained unchanged. As of February
29, 2000, the assumed options were exercisable for a total of 131,000 shares of
the Company's common stock with exercise prices ranging from $0.39 to $2.34 per
share. The Company will not make future grants under the 1998 Stock Plan of
OnPREM.
F-17
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
All stock option transactions are summarized as follows (in thousands,
except per share data):
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Balance at December 31, 1998........ 8,531 $ .26
Granted.......................... 4,829 $18.09
Exercised........................ (2,522) $ .28
Cancelled........................ (82) $ 1.97
------
Balance at December 31, 1999........ 10,756 $ 8.25
Granted.......................... 7,388 $46.61
Assumed in acquisition of OnPREM. 131 $ 1.35
Exercised........................ (3,106) $ 2.05
Cancelled........................ (5,810) $52.97
------
Balance at December 31, 2000........ 9,359 $12.73
Granted.......................... 11,812 $ 3.04
Exercised........................ (852) $ 0.53
Cancelled........................ (9,870) $12.24
------
Balance at December 31, 2001........ 10,449 $ 3.24
======
As of December 31, 2001, 2000 and 1999 there were options to purchase 3.5
million shares, 2.3 million shares and 1.9 million shares, respectively, vested
at weighted average exercise prices per share of $3.80, $8.75 and $1.22,
respectively.
The following table summarizes all options outstanding and exercisable by
price range as of December 31, 2001:
Options Outstanding Options Exercisable
- ---------------------------------------------------------- --------------------
Weighted Average Weighted Weighted
Remaining Average Number Average
Range of Number of Shares Contractual Exercise of Shares Exercise
Exercise Prices (thousands) Life-Years Price (thousands) Price
- --------------- ---------------- ---------------- -------- ----------- --------
$ 0.03 - 0.16 1,654 6.3 $ 0.15 1,430 $ 0.15
0.27 - 2.50 1,012 8.5 1.33 293 0.64
2.51 - 2.90 1,892 8.7 2.55 382 2.68
3.19 - 3.19 4,786 7.5 3.19 716 3.19
3.20 - 10.31 1,020 6.7 5.96 636 6.10
58.69 - 72.00 85 3.7 71.16 82 71.70
------ -----
$ 0.03 - 72.00 10,449 7.5 $ 3.24 3,539 $ 3.80
====== =====
Stock Based Compensation
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for their employee stock option plans. Under
APB No. 25, when the exercise price of the Company's employee stock options
equals the fair value price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements. In
previously issued financial statements the Company estimated the deemed fair
value of its common stock in connection with the accounting for stock
F-18
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
options granted during the three fiscal years ended December 31, 1998, which
resulted in the Company recording deferred compensation of $1.1 million, with
respect to certain options granted during 1998. During April 1999, in
conjunction with the Company's initial public offering registration statement,
the Company revised the estimates of the deemed fair value of its common stock
at various dates and has recognized additional deferred compensation of $1.8
million, $2.4 million, $11.1 million and $234,000 during the four fiscal years
ended December 31, 1999. In connection with the acquisition of OnPREM, the
Company recorded deferred compensation of $1.4 million. During 2001, the
Company recorded deferred compensation of $9.0 million related to the issuance
of restricted common stock to employees. The deferred compensation is being
amortized to expense in accordance with FASB Interpretation No. 28 over the
vesting period of the individual options, generally four years.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's pro forma amounts would
have been as indicated below (in thousands, except per share data):
Year Ended December 31,
----------------------------
2001 2000 1999
--------- -------- -------
Net income (loss) as reported.................................... $(181,055) $ 1,693 $12,217
Pro forma net loss under SFAS No. 123............................ (183,623) (32,852) (2,064)
Pro forma basic and diluted net loss per share under SFAS No. 123 (3.46) (0.65) (0.07)
The fair value of each option grant and share of restricted stock issued for
the year ended December 31, 2001 was estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: no dividend yield; volatility factor of 140.0%; risk free interest
rate of 4.0%; and expected life for the option of two years.
The fair value of each option grant for the year ended December 31, 2000 was
estimated on the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: no dividend yield; volatility
factor of 100.0%; risk free interest rate of 6.0%; and expected life for the
option of three and a half years.
The fair value of each option grant from the Company's initial public
offering in May 1999 to December 31, 1999 was estimated on the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: no dividend yield; volatility factor of 76.0%; risk free interest
rate of 6.0%; and expected life for the option of five years.
The fair value of each option grant prior to the Company's initial public
offering in May 1999 was estimated on the date of grant using the minimum value
method with the following weighted-average assumptions: no dividend yield; risk
free interest rate of 5.7% to 6.5%; and expected life for the option of five
years.
The weighted-average estimated fair value of employee stock options granted
during 2001, 2000 and 1999 was $2.59, $31.87 and $14.01 per share,
respectively. For purposes of pro forma disclosures, the estimated fair value
of options is amortized to expense over the vesting period.
Employee Stock Purchase Plan
In February 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the "ESPP"). A total of 600,000 shares of common stock has been reserved for
issuance under the ESPP. The ESPP is intended to qualify
F-19
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
as an employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Code. Under the ESPP, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the commencement of the ESPP. During the years ended December 31,
2001 and 2000, the ESPP purchased 141,000 and 143,000 shares, respectively of
the Company's common stock. As of December 31, 2001, 316,000 shares are
reserved for future purchases. On January 31, 2002, 26,000 shares were
purchased by the ESPP.
Unless otherwise determined by the Board, employees are eligible to
participate in the purchase plan only if they are employed by us for at least
20 hours per week and are customarily employed for at least five months per
calendar year. Employees who participate in an offering may have up to 10% of
their earnings withheld pursuant to the purchase plan. The amount withheld is
then used to purchase shares of common stock on specified dates determined by
the Board of Directors. The price of common stock purchased under the purchase
plan will be equal to 85% of the lower of the fair market value of the common
stock at the commencement date of each offering period or the relevant purchase
date. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment.
Warrants
In January 1997, the Company entered into an agreement with a corporate
partner, whereby the two companies exchanged certain technology and services.
In addition, the Company issued a warrant to such corporate partner to purchase
147,401 shares of Series B convertible preferred stock at a price of $3.39 per
share. The warrant is exercisable for four years following the date of
issuance. The estimated fair value of the warrant was $88,000, which was
capitalized as an intangible asset and amortized over the two-year term of the
agreement. The warrant was convertible into 442,202 shares of common stock. In
January 2001, the warrant was net exercised. There were no cash proceeds as a
result of the exercise and the Company issued a net of 355,000 shares of its
common stock.
Common Shares Reserved for Future Issuance
The following table presents shares reserved for future issuance under the
Company's stock option plans, restricted stock grants and ESPP as of December
31, 2001 (in thousands):
1996 Equity Incentive Plan............... 10,424
Non-Employee Directors' Stock Option Plan 657
Nonstatutory Stock Option Plan........... 600
OnPREM 1998 Stock Option Plan............ 15
Employee Stock Purchase Plan............. 312
------
12,008
8. Commitments
In August 2000, the Company entered into an $800,000 credit facility with a
financing company for the purchase of equipment under a capital lease
agreement. As of December 31, 2000 and 2001, the full amount of funds available
under this credit facility had been utilized. The borrowings under the capital
lease agreement are to be repaid in 48 equal monthly installments and accrue
interest at 9.85% per annum. The obligation is secured by the related equipment.
In June 2000, the Company secured a $5.0 million credit facility with a
financing company for the purchase of equipment under a capital lease
agreement. As of December 31, 2001, the full amount of funds available under
F-20
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
this credit facility had been utilized. The borrowings under the capital lease
agreement are to be repaid in 36 equal monthly installments and accrue interest
at 10.8% per annum. The obligation is secured by the related equipment.
In August 1999, the Company entered into a credit facility with a bank for
the purchase of equipment. The credit facility includes $2.4 million in
equipment loans and $2.6 million in commitments for the purchase of equipment
under a capital lease agreement. During the year ended December 31, 1999, the
full amount of funds available under the equipment loan had been utilized. As
of December 31, 2000 and 2001, the full amount of funds available under the
capital lease agreement had been utilized. The borrowings under the equipment
loans and the capital lease agreement are to be repaid in 48 equal monthly
installments and accrue interest at 10.8% per annum. Both obligations are
secured by the related equipment.
In 1996, the Company entered into an equipment financing agreement with a
bank and leasing company that allows the Company to borrow up to $1.0 million
for purchases of equipment. The notes are secured by the related equipment. As
of December 31, 2000 and 2001 the full amount of funds available under the
equipment financing agreement were utilized.
In connection with the 1996 equipment financing agreement, the Company
agreed to make a final payment equal to 12.5% of the equipment financed at the
end of the amortization period. Additionally, the Company granted warrants to
the bank and leasing company to purchase an aggregate of 50,000 shares of
Series A convertible preferred stock at $1.00 per share of which warrants for
the purchase of 40,000 shares were exercised in 1999 and converted into 120,000
shares of common stock. The remaining warrants to purchase 10,000 shares of
Series A convertible preferred stock, convertible into 30,000 shares of common
stock, are outstanding and exercisable for the longer of ten years from the
date of issuance or five years after an initial public offering. The estimated
fair value of the warrants was approximately $18,000, which was capitalized as
debt issuance costs and is being amortized over the life of the equipment
financing agreement.
The Company leases its facilities under noncancelable operating leases
expiring on various dates through 2007. The leases contain renewal options and
are subject to cost increases. Rent expense totaled $3.9 million, $4.6 million
and $1.6 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Future minimum payments under the noncancelable operating leases and
equipment under capital leases consist of the following at December 31, 2001
(in thousands):
Operating Capital
Leases Leases
--------- -------
Year ending December 31,
2002................................ 6,790 3,190
2003................................ 6,211 2,827
2004................................ 6,430 172
2005................................ 4,303 --
2006................................ 2,045 --
Thereafter.......................... 892 --
------- -------
Total minimum lease payments........... $26,671 6,189
=======
Less amount representing interest...... (815)
-------
Total present value of minimum payments 5,374
Less current portion................... (2,549)
-------
Non-current portion.................... $ 2,825
=======
F-21
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
During September 1997, the Company entered into a capital lease agreement,
which allows for the Company to borrow up to $1,750,000 to finance capital
expenditures. As of December 31, 2001, 2000 and 1999, the Company had borrowed
all of the available funds under this agreement.
In conjunction with the capital lease agreement, the Company issued a
warrant to the lessor to purchase 14,737 shares of Series C convertible
preferred stock at a price of $4.75 per share all of which were exercised in
1999 and converted into 40,000 shares of common stock. The estimated fair value
of the warrant was $25,000, which was capitalized as debt issuance costs and is
being amortized over the life of the financing agreement.
Equipment held under the capital leases totaled $10.1 million and $10.1
million and the related accumulated amortization totaled $7.4 million and $3.8
million at December 31, 2001 and 2000, respectively. The obligations under the
capital leases are secured by the related equipment.
9. Restructuring Costs and Asset Impairments
On March 7, 2001, the Company announced that it had adopted a business plan
to re-size its business to reflect current and expected business conditions.
This restructuring plan was largely completed during 2001. As a result of the
adoption of this plan, the Company recorded charges of $4.4 million during the
three months ended March 31, 2001. These charges primarily relate to:
consolidation of the Company's continuing operations resulting in impairment of
assets, anticipated losses on disposition of assets as well as excess lease
costs; and the elimination of job responsibilities, resulting in costs incurred
for employee severance. Employee reductions occurred in almost all areas of the
Company, including operations, marketing, sales and administrative areas. As a
result of this plan, the Company had reduced its non-temporary work force by
approximately 100 positions. Substantially all reductions related to this plan
occurred prior to March 31, 2001.
On August 2, 2001, the Company announced that it had adopted a business plan
to again re-size its business to reflect current and expected business
conditions. This restructuring plan is expected to largely be completed during
2002. As a result of the adoption of this plan, the Company recorded charges of
$16.0 million during the three months ended September 30, 2001. These charges
primarily relate to: consolidation of the Company's continuing operations
resulting in impairment of assets, anticipated losses on disposition of assets
as well as excess lease costs; and the elimination of job responsibilities,
resulting in costs incurred for employee severance. Employee reductions
occurred in all areas of the Company. As a result of this plan, the Company
reduced its non-temporary work force by approximately 150 additional positions.
Substantially all reductions occurred prior to September 30, 2001.
As a part of these plans, the carrying values of certain assets were written
down. The impaired assets include furniture, leasehold improvements, computers
and other assets used in certain of the areas of the Company impacted by the
reduction in force. The projected future cash flows from these assets were less
than the carrying values of the assets. The carrying values of the assets held
for sale and the assets to be held and used were reduced to their estimated
fair values based on the present value of the estimated expected future cash
flows. Estimated expected future cash flows for the impaired assets are not
significant. In the year ended December 31, 2001, the Company recorded losses
from impairment of assets of $9.2 million, which were recorded as restructuring
costs. The cost of these losses was previously estimated to be $10.9 million.
This estimate was reduced by the utilization of assets, primarily laboratory
equipment, previously estimated to be held for disposition. Substantially all
of the impaired assets are being held for disposition and will not continue to
be depreciated. Depreciation expense for the year ended December 31, 2001 was
reduced by $1.9 million as a result of this charge. The Company estimates that
depreciation expense will be reduced by $2.7 million, $2.4 million, $1.8
million and $0.4 million for the years ending December 31, 2002, 2003, 2004 and
2005, respectively, as a result of this charge.
F-22
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Also as part of these plans, the Company elected to consolidate its
operations and attempt to sublease certain of its facilities, which housed
portions of its operations, marketing, sales and administrative activities. In
the year ended December 31, 2001, the Company recorded estimated excess lease
costs of $7.6 million which were recorded as restructuring costs. Estimated
excess lease costs are based on assumptions of differences between lease
payments and sublease receipts that could be realized on potential subleases
and assumed carrying terms. These assumptions are based on reasonably possible
rates and terms from other recent leases of comparable properties. The excess
lease costs were previously estimated to be $5.9 million. The increase in this
estimate is attributable to an increase in the estimated holding periods for
the remaining leases and decreased estimated sublease receipts based on
continuing deterioration in the market for comparable rental office space. The
rates and terms of the actual sub-leases may differ materially from these
estimates which could result in changes in the restructuring charge recognized
during the year ended December 31, 2001. Future cash outlays related to these
plans are expected to be completed in 2007.
Future minimum amounts due under sub-lease receivables as of December 31,
2001 are as follows (in thousands):
Year ending December 31,
2002..................... $1,867
2003..................... 1,554
2004..................... 1,053
2005..................... 260
------
Total minimum lease payments $4,734
======
Details of the restructuring charges are as follows (in 000s):
Cash/ Reserve Balance at
Non-cash Charge Activity December 31, 2001
-------- ------- -------- ------------------
Impairment of assets............... Non-cash $ 9,200 $ (9,087) $ 113
Excess lease costs................. Cash 7,586 (1,132) 6,454
Elimination of job responsibilities Cash 3,596 (2,961) 635
------- -------- ------
$20,382 $(13,180) $7,202
======= ======== ======
In connection with these plans, the OnPREM product line was discontinued.
Accordingly, management determined that the estimated future cash flows from
certain intangible assets acquired in the purchase of OnPREM Networks
Corporation would likely not be sufficient to recover the carrying value of
such assets. The Company calculated the present value of expected future cash
flows to determine the fair value of the assets. This evaluation resulted in a
write-off of $40.8 million of goodwill and other intangible assets in the year
ended December 31, 2001. The underlying factors contributing to the decline in
expected financial results included changes in the Company's strategic focus in
the marketplace and an overall decline in the telecommunications equipment
market.
10. Litigation and Claims
Since October 2000, approximately twenty-four complaints have been filed in
the United States District Court for the Northern District of California
against the Company and two of its officers, along with one related derivative
action against the Company and its directors in Delaware, alleging violations
of the federal securities laws arising out of recent declines in the Company's
stock price. Specifically, the complaints allege claims in
F-23
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
connection with various alleged statements and omissions to the public and to
the securities markets. No assurances can be made that we will be successful in
our defense of such claims. If we are not successful in our defense of such
claims, we could be forced to make significant payments to our stockholders and
their lawyers, and such payments could have a material adverse effect on our
business, financial condition and results of operations if not covered by our
insurance carrier. Even if such claims are not successful, the litigation could
result in substantial costs and divert management's attention and resources,
which could adversely affect our business, results of operations and financial
position.
In December 2001, the Company and certain of its officers and directors were
named as defendants in a class action shareholder complaint filed in the United
States District Court for the Southern District of New York. Similar complaints
were filed in the same Court against hundreds of other public companies that
conducted initial public offerings ("IPOs") of their common stock in the late
1990s (the "IPO Lawsuits"). In the complaint, the plaintiff alleges that the
Company, certain of its officers and directors and its IPO underwriters
violated the federal securities laws because our IPO registration statement and
prospectus contained untrue statements of material fact or omitted material
facts regarding the compensation to be received by, and the stock allocation
practices of, the IPO underwriters. The plaintiff seeks unspecified monetary
damages and other relief. The IPO Lawsuits have been consolidated for pretrial
purposes. The Company has not been required to answer the complaint filed
against us, and no discovery has been served on the Company. The Company
believes the lawsuit is without merit and intend to defend against it
vigorously.
In April 1999, the Company entered into a Manufacturing Contract with
Flextronics International Fremont, Inc., whereby Flextronics purchased
components for and manufactured equipment that the Company sold to customers.
In or about March 2001, Flextronics claimed that, due to reductions by the
Company in its equipment forecasts, Flextronics had purchased more inventory
than was necessary to meet the Company's reduced equipment needs, and that the
Company was responsible to purchase this excess inventory from Flextronics. As
a result, on or about May 31, 2001, the Company and Flextronics' successor in
interest, Flextronics International USA, Inc. entered into a letter agreement
regarding this disputed excess inventory. The letter agreement required the
Company to pay Flextronics $30.3 million in four separate installments, subject
to the Company's right to audit the amount of the excess inventory, and
contains provisions for adjusting the balance due to Flextronics based on
discrepancies found in the audit and agreed upon by the parties. In or about
September 2001, after the Company had paid the first two installments of $7.6
million, totaling $15.2 million, the Company concluded in the course of the
audit that Flextronics had overstated the amount of excess inventory and that
the Company only owed $14.6 million under the letter agreement, meaning that
the Company had overpaid Flextronics by approximately $480,000. Flextronics has
refused to refund this amount and disputes the results of the audit. On or
about December 4, 2001, Flextronics demanded that the Company make the
remaining payments due under the letter agreement and pay for an additional
$11.3 million in excess inventory. The Company has not made the remaining
payments, which were due in October 2001 and January 2002, and the Company
believes that Flextronics has no basis for its request that the Company pay for
an additional $11.3 million in excess inventory.
On December 12, 2001, pursuant to the dispute resolution procedures in the
contract, the Company filed a demand for arbitration against Flextronics with
the American Arbitration Association in San Diego County seeking a declaration
that the Company does not owe Flextronics any further amounts under the letter
agreement and seeking, among other relief, reimbursement for the approximately
$480,000 overpayment. Flextronics has not filed a response to the demand. No
arbitration date has been set.
On or about January 30, 2002, Flextronics filed a civil action against the
Company in the Superior Court of the State of California, County of Santa
Clara, alleging that the Company breached the contract and letter agreement and
seeking, among other relief, $15.2 million it claims to be due under the letter
agreement, interest, attorneys' fees and costs, and a writ of attachment in the
amount of $15.2 million to secure payment of the $15.2 million it claims to be
due pending the outcome of the
F-24
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
arbitration. No trial date has been set. The Company believes that it has
meritorious defenses to this action and intends to defend this action
vigorously. The Company also intends to file a petition to compel arbitration
and/or a motion to stay the civil action if Flextronics will not agree to
arbitrate its claims. The ultimate outcome of this dispute is not currently
practically determinable.
If Flextronics obtains a writ of attachment in its civil action, the
restriction of the use of assets could have a material adverse effect on the
Company's business. If Flextronics prevails on its claims, the Company could be
forced to make significant payments to Flextronics and such payments could have
a material adverse effect on the Company's business, financial condition, and
results of operations. Even if the Company prevails in this dispute, the
efforts required could result in substantial costs and divert management's
attention and resources, which could adversely affect the business.
The Company incident to its business activities is party to other legal
proceedings and claims. Such matters are subject to many uncertainties and
outcomes are not predictable with assurance. Consequently, management is unable
to ascertain the ultimate aggregate amount of monetary liability, amounts which
may be covered by insurance, or the financial impact with respect to these
matters as of December 31, 2001. However, management believes that the final
resolution of these matters, individually and in the aggregate, will not have a
material adverse impact upon the Company's financial position, results of
operations or cash flows.
11. Leased Equipment
During the year ended December 31, 2000, the Company entered into a $10.0
million credit facility with a customer for the purchase of the Company's
equipment under a capital lease agreement. During the year ended December 31,
2001, this investment was sold at an amount that approximated the carrying
value.
During the year ended December 31, 2000, the Company entered into a $8.6
million credit facility with a customer for the purchase of the Company's
equipment under a capital lease agreement. As of December 31, 2000, the
customer had utilized all of the funds available under this credit facility.
The borrowings under the capital lease agreement are to be repaid in monthly
installments and accrue interest at 10.5% per annum. The lease was being
accounted for as a sales-type capital lease. The obligation is secured by the
related equipment. As of December 31, 2000, $1.9 million and $2.8 million of
the net lease receivable were classified in the Company's balance sheet as
other current assets and other assets, respectively. During the year ended
December 31, 2001, the Company received the lessee's quarterly lease payments;
however, as a result of the continuing deterioration of the lessee's financial
position, the Company recorded a $1.9 million charge to reduce the carrying
value of the lease receivable. This charge is included in bad debt expense for
the year ended December 31, 2001. Any future payments received will be recorded
as a decrease in bad debt expense in the period received.
F-25
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Future minimum amounts due under sales-type capital lease receivables as of
December 31, 2001 are as follows (in thousands):
Year ending December 31,
2002................................... $ 2,757
2003................................... 2,757
2004................................... 1,833
-------
Total minimum lease payments.............. 7,347
Less amount representing unearned interest (1,149)
-------
Total present value of minimum payments... 6,198
Less allowance for collectibility......... (6,198)
-------
$ --
=======
12. Income Taxes
Significant components of the provision for income taxes are as follows (in
thousands):
Year Ended
December 31,
-------------
2001 2000
---- --------
Current provision:
Federal............................................ $-- $ --
State.............................................. -- --
--- --------
Total current:........................................ -- --
Deferred provision:
Federal............................................ -- 30,272
State.............................................. -- 7,244
--- --------
Total deferred:....................................... -- 37,516
Benefit of net operating loss and credit carryforwards -- (27,872)
Benefit of reversal of valuation allowance............ -- (7,784)
--- --------
$-- $ 1,860
=== ========
The following is a reconciliation from the expected statutory federal income
tax expense to the Company's actual income tax expense (in thousands):
Year Ended
December 31,
-----------------
2001 2000
-------- -------
Tax at U.S. statutory rate..................... $(63,611) $ 1,244
Amortization and write off of intangible assets 16,156 8,419
State income taxes, net of federal benefit..... 182 264
Net change in valuation allowance and other.... 47,273 (8,067)
-------- -------
$ -- $ 1,860
======== =======
F-26
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 2001 and 2000 are shown below (in thousands):
December 31,
-------------------
2001 2000
--------- --------
Deferred tax assets:
Net operating loss carryforwards. $ 52,771 $ 23,936
Tax credit carryforwards......... 11,266 9,393
Accruals and reserves............ 51,761 23,422
Deferred compensation............ 1,718 930
Other, net....................... -- 599
--------- --------
Total deferred tax assets........... 117,516 58,280
Valuation allowance................. (117,516) (58,280)
--------- --------
Net deferred tax assets............. $ -- $ --
========= ========
A valuation allowance of $117.5 million has been recorded at December 31,
2001 to offset the net deferred tax assets as realization is uncertain due to
the expectation that deductions from 2001 net operating losses and employee
stock option exercises will exceed future taxable income. When recognized, the
tax benefit of the employee stock option exercise deductions will be accounted
for as a credit to shareholders' equity rather than as a reduction of the
income tax provision.
The Company had federal and California tax net operating loss carryforwards
at December 31, 2001 of approximately $129.5 million and $106.2 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2011 and 2004, respectively, unless previously utilized. Included in
the net operating loss carryforwards are stock option deductions of
approximately $40.8 million. The benefit of these net operating loss
carryforwards will be credited to equity when realized. The Company also has
federal and California research tax credit carryforwards of approximately $6.6
million and $4.6 million, respectively, which will begin to expire in 2011
unless previously utilized.
Pursuant to Internal Revenue Service Code Sections 382 and 383, use of a
portion of the Company's net operating loss and credit carryforwards are
limited because of a cumulative change in ownership of more than 50% which
occurred in prior years. However, the Company does not believe such limitations
have a material impact on the Company's ability to use these carryforwards.
F-27
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
13. Employee Savings Plan
The Company has a 401(k) plan, which allows participating employees to
contribute up to 20% of their salary, subject to annual limits. The Company
may, at its sole discretion, approve Company contributions. The Company has
approved a match of 50% of the first 4% of salary deferred by employees for
years including and following the year ended December 31, 2000. The Board has
not approved any previous matching contributions. During the years ended
December 31, 2001 and 2000, matching contributions were $494,000 and $429,000,
respectively.
14. Related Party Transactions
At December 31, 2001, the Company had a note receivable from an officer with
a face value of $1.0 million included in other assets. This note was issued in
connection with the officer's employment and relocation agreement. The note
bears no interest, is secured by the options to purchase the Company's common
stock held by the officer and is due at the earlier of March 30, 2003, or 15
days from the date the officer ceases to be an employee of the Company.
15. Recent Event (Unaudited)
At December 31, 2001, the Company had an investment in commercial paper
issued by Southern California Edison Company, which is included in short-term
marketable investments at a carrying value of $2.7 million. Also, included in
other comprehensive income at December 31, 2001 is an unrealized gain
adjustment of $0.3 million. In March 2002 the balance of this investment was
fully paid in the amount of $3.4 million. The resulting realized gain in the
amount of $1.0 million will be reflected in the Company's 2002 financial
statements for all periods that include the three months ending March 31, 2002.
F-28
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-64024) pertaining to the 1996 Equity Incentive Plan of Copper
Mountain Networks, Inc. and in the Registration Statement (Form S-8 No.
333-80333) pertaining to the 1996 Equity Incentive Plan, 1999 Employee Stock
Purchase Plan, 1999 Non-employee Directors' Stock Option Plan and Options
Granted Outside Any Plan of Copper Mountain Networks, Inc. and in the
Registration Statement (Form S-8 No. 333-32218) pertaining to the Common Stock
Issuable Upon Exercise of Options Assumed by Copper Mountain Networks, Inc.,
Originally Granted Under the OnPREM Networks Corporation 1998 Stock Option Plan
and in the Registration Statement (Form S-8 No. 333-38798) pertaining to the
2000 Nonstatutory Stock Option Plan and 1996 Equity Incentive Plan, as amended
of Copper Mountain Networks, Inc. of our report dated January 30, 2001, with
respect to the financial statements of Copper Mountain Networks, Inc. included
in the Annual Report (Form 10-K) for the year ended December 31, 2001.
Our audits also included the financial statement schedule of Copper Mountain
Networks, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
March 1, 2002
Schedule II
COPPER MOUNTAIN NETWORKS, INC.
Valuation and Qualifying Accounts*
Additions
----------
Balance at Charged to
Beginning of Costs and Balance at
Year Expenses Deductions End of Year
Allowance for Doubtful Accounts: ------------ ---------- ---------- -----------
Year ended December 31, 1999.. $ -- 140,000 -- $ 140,000
Year ended December 31, 2000.. $ 140,000 7,180,000 5,352,000 $1,968,000
Year ended December 31, 2001.. $1,968,000 24,000 1,522,000 $ 470,000
Additions
---------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
Inventory Reserves: ----------- ---------- ---------- ---------- -----------
Year ended December 31, 1999 $ 1,172,000 750,000 -- 1,094,000 $ 828,000
Year ended December 31, 2000 $ 828,000 13,324,000 -- 1,824,000 $12,328,000
Year ended December 31, 2001 $12,328,000 36,336,000 34,300,000** 2,082,000 $80,882,000
- --------
** This amount was charged to the adverse purchase commitments.
Additions
----------
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
Accrued Warranty: ---------- ---------- ---------- -----------
Year ended December 31, 1999 $ 418,000 1,779,000 267,000 $1,930,000
Year ended December 31, 2000 $1,930,000 2,942,000 1,158,000 $3,714,000
Year ended December 31, 2001 $3,714,000 -- 2,989,000 $ 725,000
Additions
----------
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
Adverse Purchase Commitments: ----------- ---------- ---------- -----------
Year ended December 31, 1999. $ -- -- -- $ --
Year ended December 31, 2000. $ -- 28,600,000 -- $28,600,000
Year ended December 31, 2001. $28,600,000 17,200,000 37,717,000 $ 8,083,000
Additions
----------
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
Deferred Tax Asset Valuation Allowance: ----------- ---------- ---------- ------------
Year ended December 31, 1999...... $ 7,793,000 5,546,000 -- $ 13,339,000
Year ended December 31, 2000...... $13,339,000 52,725,000 7,784,000 $ 58,280,000
Year ended December 31, 2001...... $58,280,000 59,236,000 -- $117,516,000
- --------
* Certain prior period amounts and balances have been reclassified to conform
to the current period presentation.
II-1