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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the year ended December 31, 1999
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 )
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.)
2470 Embarcadero Way, Palo Alto, California 94303
(650) 687-3300
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
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
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, 2000 was approximately $2,118,985,000 (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 January 31, 2000 was 47,870,942.
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 2000 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, 1999.
Certain exhibits filed with the registrant's (i) Registration Statement on Form
S-1 (File No. 333-73153), as amended, and (ii) Form 10-Q for the quarter ended
September 30, 1999, are incorporated by reference into Part IV of this Report.
COPPER MOUNTAIN NETWORKS, INC.
FORM 10-K
For the Year Ended December 31, 1999
INDEX
Part I Page
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Item 1. Business 1
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 30
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 38
Part III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 40
Signatures 43
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," "except," "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 Statement on Form S-1 (No. 333-73153).
Overview
Copper Mountain Networks supplies Digital Subscriber Line (DSL) communications
products to telecommunications service providers allowing them to effectively
utilize the existing copper infrastructure to deliver high-speed data and voice
services to their customers. Copper Mountain Networks designs, manufactures,
sells and supports these products and believes the demand for high speed access
solutions which are enabled by such products is significant and will continue to
grow with the use of the Internet, the proliferation of data intensive
applications and the proliferation of and corporate networking applications.
From our inception in March 1996 through December 1997, our 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 and our CopperRocket DSL
customer premise equipment, or DSL CPE. Prior to 1999, we have incurred
significant losses on an annual basis and as of December 31, 1999, we had an
accumulated deficit of $11.3 million.
Our revenue is generated primarily from sales of our central office based
equipment: our CopperEdge 200 DSL concentrators, or the CE200s, 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. During 1999, we introduced the CopperEdge 150 DSL
concentrator, or the CE150, to support applications for users in the Multi-
Tenant Unit (MTU) market where our CE150 is deployed within a building which
houses multiple small to medium sized businesses.
For the year ended December 31, 1999, sales to our three largest customers
accounted for approximately 88% of our revenue, of which sales to NorthPoint
Communications, Inc., Rhythms NetConnections Inc. and Lucent Technologies, Inc.
accounted for approximately 37%, 28%, and 23% 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 from these three customers for the foreseeable future.
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We market and sell our products directly to telecommunications service
providers, through strategic original equipment manufacturers and through
distributors. Currently, we derive approximately 76% of our revenue from sales
made directly to telecommunications service providers.
Summary of 1999 Significant Events
The closing of Copper Mountain's Initial Public Offering, which raised
approximately $90 million, net of underwriting fees.
. The announcement of the CopperEdge 150 DSL Concentrator, a new member of the
CopperEdge family that is optimized for use in mid-sized multi-tenant unit
buildings such as office buildings, business parks, multi-family apartments,
campuses, and hotels. The CopperEdge 150 system has since been deployed by
several MTU-focused service providers.
. The introduction of Copper Mountain's AutoDetect SDSL capability, which
automatically learns the characteristics of the local loop and determines the
maximum SDSL speed that the line can sustain, thereby eliminating manually
intensive testing process and enabling cost-effective accelerated deployments.
. The addition of product functionality enhancements to the CopperEdge platform
to support toll-quality voice services over DSL, and the introduction of the
CopperVIP (voice in packets) interoperability program.
. The announcement of a technology licensing and marketing partnership with
TollBridge Technologies for delivering IP-based multi-line voice over DSL
broadband access. In addition, Copper Mountain unveiled partnerships with
other leading voice gateway providers Jetstream Communications and CopperCom.
. The confirmation by the Dell'Oro Group, in a report issued on February 15,
2000, that Copper Mountain's revenues accounted for 42.5 percent of total
business DSL equipment sales in 1999. In addition, Copper Mountain is
classified in the study as the leader for the number of business central
office (CO) ports shipped in 1999, accounting for 42.9 percent of total ports
delivered. In a prior report published by Dell'Oro on May 24, 1999, Copper
Mountain was ranked the leader in both categories for 1998 as well.
. The results of a survey by Infonetics released in May 1999, which ranked
Copper Mountain first with Competitive Local Exchange Carrier (CLEC) service
providers with respect to their anticipated purchases of DSL equipment through
May 2000.
. The announcement of two new Inverse Multiplexing (IMUX) customer premise
equipment (CPE) devices that can bond up to eight copper pairs to deliver
high-bandwidth services at speeds up to 12 Mbps.
. The announcement of a 24-port, G.lite line card for the CopperEdge family of
DSL concentrators that complies with the G.lite G.992.2 standard ratified by
the International Telecommunication Union (ITU) in 1999. This line card allows
service providers to support high-speed data and POTS voice, integrated over
one line, to the residential DSL market.
. The shipment in the fourth quarter of 1999 of over 1,500 CopperEdge DSL
concentrators bringing the cumulative figure to over 4,600 DSL concentrators
shipped since the Company's inception, with a potential capacity in excess of
870,000 DSL ports.
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. The formation of the CopperPowered Hotel initiative, an industry-wide, open
coalition with leading Service Selection Gateway and equipment vendors serving
the hotel industry. With this initiative, Copper Mountain continued its
expansion to the multi-tenant unit and hospitality marketplaces.
Industry Background
Over the past few years, the volume of data traffic across public
communications networks has increased significantly due to the use of the
Internet as a communications and transaction medium. According to International
Data Corporation, the number of Internet users worldwide reached approximately
63 million in 1998 and is forecasted to grow to approximately 177 million by
2003. International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $4 billion in
1998 to over $39 billion in 2003. In addition to electronic commerce, business
usage of web-based communications, remote access for teleworkers, applications
hosting and other services have generated enormous traffic for the existing
communications infrastructure. To meet this demand, service providers have
installed high-bandwidth fiber optic transmission equipment, high-speed switches
and core routers in backbone and interoffice networks.
In contrast to these core networks, which support digital transmission speeds
exceeding 9 gigabits per second, or Gbps, most access networks, or connections
between subscribers and central offices, often called the "last mile," are
made through the copper infrastructure originally built to transmit analog voice
signals. In fact, over 140 million businesses and homes in the United States are
served by this copper infrastructure, and the worldwide installed base of copper
lines exceeds 700 million. We believe most business and residential users have
found narrowband access, using dial-up analog modems with connection speeds that
do not exceed 56.6 kilobits per second, or Kbps, inadequate to meet their high-
bandwidth requirements.
Until recently, local telephone companies such as the Regional Bell Operating
Companies and GTE Corporation, collectively the incumbent local exchange
carriers, or ILECs, were the exclusive operators of this last-mile, copper wire-
based infrastructure and primarily offered ISDN and T-1 services to address the
need for high-speed connectivity. These service offerings enable symmetrical
data transmission at rates up to 128 Kbps and 1.5 megabits per second, or Mbps,
respectively. ISDN, which requires the installation of special equipment at each
end of the copper access line, has achieved limited success due to complexity
and high cost of deployment. T-1 services provide 12 times the bandwidth of
ISDN, but require expensive infrastructure modification and investment. While
there are various transmission media alternatives for providing broadband
connectivity, such as coaxial cable and wireless, we believe none have the cost
and coverage advantages of using the existing copper infrastructure.
Digital Subscriber Line technology was developed to address the last-mile
bottleneck. While there are several variants of DSL implementations, they all
share several important advantages over traditional high-speed services
delivered over the copper infrastructure as well as cable and wireless broadband
alternatives.
. Guaranteed, Dedicated Bandwidth. DSL is a point-to-point technology that
allows for guaranteed levels of bandwidth. Because DSL connections are
dedicated to each user, DSL does not suffer from service degradation as
other subscribers are added to the system, and, in addition, allows a
higher level of security. Alternative broadcast solutions, such as cable
and wireless, are shared systems which suffer service degradation and
increase the risk of security breaches as additional users share bandwidth.
. Low Cost. Because DSL uses the existing copper-based last-mile connection,
it can be significantly less expensive to deploy to businesses and homes
than other broadband solutions. In addition, recent advances in
semiconductor technology and industry standardization have
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made the widespread deployment of DSL increasingly economical to both
service providers and subscribers.
. Universal Coverage. Since virtually all businesses and homes in the United
States already have installed copper wire connections, DSL technologies can
be made immediately available to a large percentage of potential customers.
In addition, the leading variants of DSL can enable data transmission up to
and beyond 20,000 feet without requiring repeaters.
Despite the advantages of deploying DSL over existing copper infrastructure,
ILECs historically have largely sought to protect their existing T-1 and ISDN
businesses. In the mid-1990s, however, the prospect of greater competition from
cable operators deploying cable modems to deliver high-bandwidth services
prompted the ILECs to accelerate their investments in those DSL technologies
that appeared most appropriate for residential subscribers. The ILECs promoted a
DSL variant called asymmetrical DSL, or ADSL, that permits one-way high-
bandwidth data transfer. Most DSL vendors focused on ADSL solutions for the
residential market because consumers typically download large quantities of
data-intensive content from the Internet, while the amount of data sent upstream
by consumers is typically limited.
More recently, DSL transmission technology has been embraced by a new set of
telecommunications service providers that emerged as a result of the
Telecommunications Reform Act of 1996 (Telecom Act). The Telecom Act redefined
the competitive landscape in the telecommunications industry by creating a legal
framework for new service providers to provide competing local
telecommunications services. The Telecom Act also eliminated a substantial
barrier to entry for these competitive local exchange carriers, or CLECs, by
allowing them to use the existing copper-based network infrastructure built by
the ILECs.
The realization of all of the objectives of the Telecom Act, however, is still
subject to certain uncertainties, including:
. legal proceedings that will further define rights and duties under the
Telecom Act;
. actions or inactions by telephone companies or other carriers that affect
the pace at which changes contemplated by the Telecom Act will occur;
. resolution of questions concerning which parties will finance such changes;
and
. other regulatory, economic and political factors.
Since the implementation of the Telecom Act, some of the new CLECs have
focused on providing competitively priced, high-bandwidth connectivity for
business customers who typically had used T-1 lines from the ILECs to meet their
bandwidth needs or who used dial-up modems but are currently seeking cost-
effective broadband services. These CLECs are focused on providing DSL solutions
that meet the current needs of business subscribers and provide flexibility for
future services.
While many DSL equipment vendors focus on the needs of the residential market,
few focus on the unique needs of business subscribers. In particular, CLECs are
seeking equipment solutions that enable the deployment of cost-effective, full-
coverage, high-bandwidth data access services. Moreover, as the demands of high-
bandwidth users and technology mature, other telecommunications service
providers are also looking for vendors that can effectively incorporate DSL into
communications equipment solutions. Finally, telecommunications service
providers generally want their equipment providers to support a variety of end-
user devices. As the DSL market naturally evolves from business to residential
users, telecommunications service providers will require equipment that enables
them to provide high-speed services across their subscriber base.
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The Copper Mountain Solution
We provide broadband access solutions based on DSL technology to
telecommunication service providers. Our solutions enable CLECs, ILECs and other
telecommunications service providers to provide high-speed, cost-effective,
last-mile connectivity over the existing copper wire telephone infrastructure to
the business, multiple tenant unit and residential markets. Our DSL solutions
provide the following key benefits:
Support for Business Applications. Our products enable CLECs, ILECs and other
telecommunications service providers to deliver business services such as high-
speed Internet access, corporate networking, teleworking and packet-based voice
solutions. We focused our initial service offerings on symmetrical data
transmission addressing the bi-directional bandwidth needs of business users
because relevant applications, such as e-mail, file transfer, web hosting and
corporate intranets, require subscribers to send as well as receive data. Our
CopperEdge DSL Concentrator provides multiple networking models and advanced
packet processing to meet the evolving needs of business subscribers by enabling
simultaneous support for Internet access, Frame Relay, virtual private network
(VPN) and voice-over-packet services.
Full Coverage DSL. Our products allow our service provider customers the
flexibility to reach their targeted subscribers. Our symmetric DSL, or SDSL,
service offering delivers symmetrical bandwidth up to 1.5 Mbps on a single
copper pair, and up to 12 Mbps using inverse multiplexing (IMUX) technology, to
distances up to 28,000 feet from the Central Office while supporting multiple
services over DSL, including Internet access, toll-quality voice services,
corporate VPNs, and Frame Relay. We also offer ISDN-based DSL, or IDSL, which is
the only variant of DSL that can reach those U.S. subscribers connected through
existing remote digital loop carriers without requiring an upgrade of these
remote systems.
Multi-Vendor Interoperability. We have partnered with third-party DSL
customer premise equipment manufacturers through the CopperCompatible program to
develop a broad line of customer premise equipment, or CPE, which are compatible
with our CopperEdge DSL concentrators. We provide CPE manufacturers with
interoperability specifications and intellectual property to assist their
development, and we run a test laboratory to certify the CopperCompatible status
of their products. This program gives telecommunications service providers
multiple sources of compatible CPE. Additionally, the Company has a
compatibility program, known as CopperVIP (Voice in Packets), which tests and
validates compatibility between the CopperEdge family of products and the
leading providers of voice gateways which facilitates the simultaneous delivery
of voice and data over our product platform.
Trouble-Free Operations. Our products are designed to reduce installation
time and support requirements for our telecommunications service provider
customers. Our CopperEdge 200 DSL concentrator is designed to meet the stringent
requirements of the telephone company central office environment. Each
concentrator supports full redundancy and is designed for easy support and
service. In addition, our products and management software are designed for and
proven in large-scale national deployments. Our initial service implementations,
SDSL and IDSL, are based on a mature protocol that is spectrally compatible to
existing ISDN and T-1 network elements which minimizes potential interference
within the central offices of host ILECs. Finally, we have reduced CPE
deployment complexity with a zero-installation "plug-and-play" CPE procedure
that eliminates end-user configuration, removes the need to send a technician to
the customer premise and provides centralized management and control.
Support for Multiple Services. Our platform is a highly-scalable and cost-
effective platform that addresses the strong demand for Internet access
services. In addition, the CopperEdge products maximize return on investment
through support of value added Frame Relay, VPN and voice services. Unlike most
DSL access multiplexer platforms, the CopperEdge solution delivers advanced
packet processing, class of service using weighted fair queuing, and subscriber
aggregation to support multiple simultaneous services.
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Strategy
Our objective is to be the leading supplier of DSL solutions to
telecommunications service providers. The key elements of our strategy include:
Extend Position in the Business DSL Market. Since our inception, we have
focused on providing cost-effective solutions for telecommunications service
providers targeting business subscribers. Business users increasingly require
high-speed data services to conduct business, and non-DSL alternatives are often
expensive, complex and lack sufficient bi-directional bandwidth. We are
targeting telecommunications service providers focused on the business market,
including well-financed CLECs and other telecommunications service providers.
Currently, our major customers include NorthPoint Communications, Inc., Rhythms
NetConnections Inc., Lucent Technologies, Inc., DSL.NET, Onsite Access, and MCI
WorldCom, Inc. We will continue to focus on supporting the requirements of our
existing customers as well as providing solutions to existing and new carriers
that are focused on business users.
Expand Service Offerings Supported by Our Platform. We intend to continue to
add functionality and support for the multiple data and voice services to
increase the usefulness and performance of our products. We believe that we have
enhanced our core product offerings to support a variety of services which offer
better value to service providers and their end-user customers. Our products are
designed to support future services and technology. In addition, we are
developing new offerings with DSL technologies such as full-rate ADSL, and plan
to enhance our offerings as needed by subscribers and service providers.
Leverage Original Equipment Manufacturer and Development Relationships. We
have formed original equipment manufacturer relationships with Lucent
Technologies, Inc. and 3Com. Lucent currently resells our product line as a co-
branded sale. Under the original equipment manufacturer and development
agreement with 3Com, they may sell our CPE products directly or through their
distribution channels. We intend to leverage 3Com's broad distribution network
in the commercial and retail markets. We believe that our current original
equipment manufacturer and development relationships will enhance our market
position, and we will continue to seek additional original equipment
manufacturer relationships.
Target Multi-Tenant Building Deployments Outside the Central Office. In
addition to deploying DSL equipment in ILEC central offices for our CLEC and
other telecommunications service provider customers, we have deployed our DSL
150 concentrators in commercial office buildings and apartment and condominium
buildings. We believe that this market, known as the multi-tenant unit (MTU)
market, will significantly expand the deployment of DSL technology. While we
believe that our current product offerings are well suited to this market, we
will continue to develop new products that will allow carriers to reduce the
cost of high-speed data access to tenants in these types of properties.
Recently, we completed the purchase of OnPREM Networks, Inc., who has developed
a low to medium density DSL concentrator, which will complement our existing
product offerings. In addition, we are working with service providers who are
targeting multi-tenant property managers to focus on this emerging market.
Drive Interoperability. We actively support the interoperability of DSL
technology to facilitate faster and broader market acceptance. 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 DSL technology with voice
related equipment through our CopperVIP program. Under this program we work
directly with makers of voice equipment to achieve and maintain interoperability
with our CopperEdge products. Our efforts in the area of interoperability also
enables our technology to be combined with other networking products such as
routers, access and aggregation devices.
Address Emerging Opportunities in Residential Market. We believe that with
the continued deployment of alternative data-based networks, telecommunications
service providers will seek to offer
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DSL-based services beyond the core market for business subscribers.
Specifically, telecommunications service providers will target residential
subscribers seeking high-speed access to public communications networks. As this
trend toward broad deployment of DSL services evolves, we anticipate significant
opportunities for us to deploy new offerings, such as our recently introduced
G.Lite line card, that leverage both our technology and our relationships with
service providers.
Products
We provide end-to-end DSL solutions that enable service providers to deploy
high-bandwidth services over traditional copper wire telephone infrastructure.
Our product family is designed to offer telecommunication service providers
flexibility in network implementation as well as a wide range of subscriber
equipment offerings. Telecommunications service providers using our products can
allow subscribers access to a full range of DSL services at rates up to 25 times
faster than the current speed (56.6 Kbps) of existing analog modems. Our
products are scalable to enable carriers to cost effectively deploy DSL services
on a selective, regional basis or on a national level addressing thousands of
subscribers. Our products are designed to support the various network
architectures, wide-area network (WAN) interfaces and deployment models of our
service provider customers. Our solution consists of the following product
lines:
. CopperEdge DSL concentrators: Telecommunications service providers install
CopperEdge products in their co-location areas within ILEC central offices
and in multi-tenant buildings to deliver services to their end user
customers.
. CopperRocket DSL CPE: Subscriber connection to the service provider network
is provided at the subscriber's premises with CopperRocket DSL CPE.
. CopperView Network Management Software Tools: Our network management tools
enable telecommunications service providers to manage their Copper Mountain
DSL equipment as well as configure and provision subscriber services.
Because of the large scale deployment of DSL equipment by our CLEC customers,
our shipments of the CE 200 DSL concentrators and the related line and WAN
interface cards have accounted for substantially all of our revenue to date.
CopperEdge 200 DSL Concentrators
Our 192-port, high density DSL concentrator, the CopperEdge 200, or CE200, is
a carrier-class platform designed specifically for ILEC central office
environments, and meets or exceeds industry standards, and applicable regulatory
requirements. The CE200 can be deployed in a central office environment or
within multi-tenant buildings and consists of a modular chassis containing power
supplies, control system, wide area network interface modules and DSL line
cards. All line cards, indicators and switches are accessible from the front of
the system, consistent with current telco industry practices. The following are
characteristics of the CE200:
. contains redundant power supplies that can be replaced without interrupting
power to the chassis to ensure high-availability for subscriber services;
. supports a range of interfaces for wide area network connections;
. supports multiple advanced networking models implemented in the control
system, which can be used concurrently including Frame Relay Multiplexing,
Frame Relay to ATM interworking, Layer 3 IP multiplexing and Layer 2
Ethernet frame multiplexing;
. contains up to 8 line cards containing DSL interfaces which connect to the
subscriber DSL CPE equipment.
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SDSL Line Cards. Our SDSL line cards use technology that is already widely
deployed in access networks, enhancing the ability of telecommunications
service providers to deploy compatible solutions. Each SDSL line card provides
24 ports, each of which can provide service to a subscriber network at speeds
between 160 Kbps and 1.544 Mbps over distances between 22,000 feet and 9,100
feet, respectively.
IDSL Line Cards. For subscribers who can only be served over ISDN capable
copper lines we provide 24 port IDSL line cards. These line cards deliver
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.
CopperEdge 150 DSL Concentrators
Copper Mountain's mid-density DSL concentrator, the CopperEdge 150, or CE150,
is a DSL concentrator optimized for use in Multi-Tenant Unit (MTU) Buildings.
The CopperEdge 150, available in configurations supporting up to 48 end user
customers, offers symmetric bandwidth at selectable speeds ranging from 128 kbps
to 1.5 Mbps. Service providers use the CopperEdge 150 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
The CopperRocket family of CPE products consists of SDSL and IDSL modems and
SDSL and IDSL inverse mutiplexers (IMUX). These 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. Unlike
ISDN modems, 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 c onfiguration
parameters to immediately begin full operation.
The CopperRocket operates over standard copper telephone wire and provides
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. In addition to
offering our own CPE products, we work with third-party providers to offer a
broad range of interoperable customer premise equipment through our
CopperCompatible program.
CopperView Network Management Tools
Our CopperView suite of network management tools are used to configure and
manage our DSL solutions. This set of tools provides user interfaces necessary
to manage large, geographically separated DSL concentrator networks, individual
concentrators and simple on-site or remote management. Because the CopperEdge
DSL concentrator also manages CopperRocket modems by proxy, CopperView allows
carriers to manage their DSL networks end-to-end from one site.
. The CopperView DSL Management System provides global management of large
networks of CopperEdge DSL concentrators with a simple, intuitive user
interface.
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. The CopperView Element Management System provides a graphical user
interface which allows precise configuration and management of a single
CopperEdge DSL concentrator and its CPE.
. The CopperCraft text based interface provides a simple interface for on-
site technicians and for remote access to a DSL concentrator.
Product Deployment
We sell our products for deployment into both central offices and multi-tenant
buildings. Telecommunications service providers may deploy in either or both of
these environments in order to reach their target market in the most effective
manner.
Central Office-Based DSL Service Deployment. Telecommunications Service
Providers may install our CopperEdge DSL concentrator product in a central
office in order to offer service to any subscriber served by that central office
(within the distance limitations of DSL service). Typically, the CLEC leases
from the ILEC a high-bandwidth trunk, usually a 45 Mbps DS-3 circuit, in order
to connect the DSL concentrator to the CLEC's regional switching office. The
CLEC then requests from the ILEC an individual copper loop to a subscriber, for
which the CLEC pays 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 selected
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 CLEC may choose a regional deployment strategy or a nationwide
deployment strategy.
Multi-Tenant Building DSL Service Deployment. A telecommunications service
provider can deploy our CopperEdge DSL concentrators into multi-tenant buildings
in order to provide Internet access and other data and voice services to the
tenants of that building. For a CLEC or an independent service provider, multi-
tenant building deployment can provide access to DSL subscribers in a highly
selective manner without the high costs of central office collocation. Inside
the building, the service provider can utilize the existing telephone wiring to
deliver high-bandwidth connections to each tenant with no building re-wiring
expense. A high-bandwidth leased circuit or wireless transmitter on the roof
connects the building to the service provider's regional switching office or
point of presence. 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 1999, sales to our top three largest customers accounted for approximately
88% of our revenue, of which sales to NorthPoint Communications, Inc., Rhythms
NetConnections, Inc. and Lucent Technologies, Inc., accounted for approximately
37%, 28%, and 23%, 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. The loss of a significant customer could have a material adverse effect
on our business.
Strategic Relationships
We have established several strategic partnerships and licensing agreements
with leading CPE and voice gateway vendors to facilitate the deployment and
acceptance of our products and technology.
9
. Lucent. Under an original equipment manufacturer agreement, Lucent
combines our DSL equipment with its NetCare(R) installation, network
management and customer support professional services to create turnkey DSL
solutions for CLECs. Under the agreement Lucent will co-brand and market
our DSL equipment through November 2001. We have agreed to manufacture, co-
brand and sell our products to Lucent and to provide Lucent with training,
installation and technical support for these products. Lucent also plans to
offer our DSL equipment in combination with some of its existing data
networking, switching and access products to enable service providers to
create broader voice and data network solutions that can evolve and grow
with their business.
. 3Com. 3Com has agreed to market our DSL CPE through November 2001. Under
this agreement we have agreed to manufacture, co-brand and sell our
products to 3Com and to collaborate on future development projects.
Additionally, this agreement calls for both companies to co-market their
DSL products. Moreover, 3Com may request to manufacture its own DSL CPE
products. Both parties have agreed to use good faith efforts to effect such
manufacturing license.
Interoperability Partnerships
We have established several CPE licensing relationships with certain vendors
through our CopperCompatible interoperability program in order to promote the
interoperability of our CopperEdge 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, Cayman Systems, Escalate
Networks, 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 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.
Sales and Marketing
We sell and market our products primarily through our direct sales
organization. Additionally, we have relationships with selected original
equipment manufacturers and distributors in order to expand our distribution
capabilities.
Direct Sales. Our direct sales responsibilities are divided into three North
American geographic regions: West, Central and East. Our sales effort is
directed by regional directors and sales managers who are responsible for
relationships with targeted customers. A key feature of our selling effort is
the relationships we establish at various levels in our customer's organization.
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 sell our products at key levels throughout the customer's
organization. Direct sales accounted for approximately 77% of our revenue in
1999.
Original Equipment Manufacturer Sales. We have established key original
equipment manufacturer relationships with leaders in the telecommunications
equipment and customer premise equipment markets. We intend to maintain a
limited number of relationships with key strategic original equipment
manufacturers who may offer products or have existing customer relationships
which may complement ours. In line with our strategy to offer our
telecommunications service provider customers and their
10
subscribers a broad line of CPE, we have entered into several original equipment
manufacturer relationships for our CopperRocket product line and a number of
interoperability partnerships with CPE providers. We receive sales revenues from
our original equipment manufacturer partners, but do not currently receive
royalty revenue from interoperability arrangements.
Marketing is structured along product and distribution channel lines for each
of our major product areas. For each major product area, we employ dedicated
product marketing and marketing program management specialists. The corporate
marketing staff coordinates activities among our various business units and
provides marketing support services, including marketing communications,
marketing research, trademark administration and other support functions. Our
marketing organization performs the following functions:
. develops specific marketing strategies for each product line;
. works with our direct sales force to develop key account and segmented
market strategies; and
. defines the functions and features of our product and service offerings.
Marketing is responsible for sales support, contract negotiations, in-depth
product presentations, interfacing with operations, setting price levels to
achieve targeted margins, developing new services and business opportunities and
writing proposals in response to customer requests for information or
quotations.
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 has not been significant. In June 1998, we engaged Lucent NetCare(R),
Lucent's data communications service organization, to provide field installation
and maintenance support for our products.
We provide technical support for our products which have warranties of up to
12 months, both directly and through our selected service subcontractors. We
have a variety of comprehensive and flexible hardware and software maintenance
and support programs available for products no longer under warranty, with
services ranging from time and materials remote service support to 24-hour on-
site support, depending on our customer's preferences. We also offer various
training courses for our third-party resellers and telecommunications service
provider customers. To date, revenues attributable to customer service and
support services has 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. We are committed to an ongoing
program of new product development
11
that combines internal development efforts with acquisitions, joint ventures and
licensing or marketing arrangements relating to new products and technologies
from outside sources.
We have focused our recent research and development expenditures on
commercializing our DSL systems, including our CopperEdge solutions and
CopperRocket modems along with CopperView network management tools which support
these technologies. We believe that our extensive experience designing and
implementing high-quality network components has enabled us to develop high-
value integrated systems solutions. As a result of these development efforts, we
believe we have created an industry-leading platform for cost-effective DSL
delivery.
Competition
The telecommunications equipment industry is highly competitive, and we
believe that competition may increase substantially as the introduction of new
technologies, deployment of broadband networks and potential regulatory changes
create new opportunities for established and emerging companies in the industry.
In addition, a number of our competitors have significantly greater financial
and other resources than us to meet new competitive opportunities. We compete
directly with other providers of DSL concentrators including, Cisco Systems,
Inc., Lucent Technologies, Inc., Alcatel S.A., Nokia Corporation and Paradyne
Corporation, among others. In addition, DSL as a technology for deploying
broadband connections is competing with alternative technologies including ISDN,
T-1 and wireless solutions. In the residential market, we will compete against
certain other companies, including companies relying on coaxial cable
infrastructure and cable modem technology.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to our group of competitors. The principal
competitive factors in our market include:
. brand recognition;
. key product features;
. system reliability and performance;
. pricing and vendor-sponsored financing;
. 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 skills, the price, quality and reliability of our products and our
delivery and service capabilities. We may face increasing pricing pressures from
current and future competitors in certain or all of the markets for our products
and services.
We believe that technological change, the increasing addition of voice, video
and other services to networks, continuing regulatory change and industry
consolidation or new entrants will continue to cause rapid evolution in the
competitive environment of the telecommunications equipment market, the full
scope and nature of which is difficult to predict. Increased competition could
result in price reductions, reduced margins and loss of market share by us. We
believe regulatory change in the industry may create new opportunities for
suppliers of telecommunications equipment; however, we expect that such
opportunities may attract increased competition from others as well. We also
believe that the rapid technological changes which characterize the data
communications industry will continue to make the
12
markets in which we compete attractive to new entrants. There can be no
assurance that we will be able to compete successfully with our existing or new
competitors or that competitive pressures faced by us will not materially and
adversely affect our business, financial condition and results of operations.
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, Flextronics International Ltd. located in
Freemont, California.
Our manufacturing process enables us to configure our products to meet a wide
variety of individual customer requirements. We have initiated the process of
seeking 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.
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 semi-conductor chips and a system control module. If
supply of these key components should cease, we would be required to redesign
our products. We are evaluating alternate source vendors for each of these key
components 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.
13
Employees
As of December 31, 1999 we employed approximately 240 full-time employees,
including 52 in sales and marketing, 31 in manufacturing, 105 in engineering, 34
in finance and administration and 18 in customer service. All of our employees
are located in the United States. 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 as well as the information included in our
Registration Statement on Form S-1 (No. 333-73153) 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.
Copper Mountain Has a History of Losses and May Not Achieve or Sustain Annual
Profitability
Copper Mountain has an accumulated deficit of $11.3 million as of December 31,
1999 and may incur net losses in the future. We anticipate continuing to incur
significant sales and marketing, research and development and general and
administrative expenses and, as a result, we will need to generate significantly
higher revenues to sustain profitability on an annual basis. Although our
revenue has grown in recent quarters, we cannot be certain that our revenue
growth will continue or increase in the future or that we will realize
sufficient revenues to sustain profitability on an annual or quarterly basis.
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 competitive local exchange
carriers. Aggregate sales to our three largest customers accounted for
approximately 88% of our total net revenues for the year ended December 31,
1999. Sales to our most significant customers NorthPoint Communications, Inc.,
Rhythms NetConnections, Inc., and Lucent Technologies, Inc. accounted for
approximately 37%, 28%, and 23% of Copper Mountain's net revenues, respectively,
for the year ended December 31, 1999. Accordingly, 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 largest
customers and, in particular:
. the product requirements of these customers;
. the financial and operational success of these customers; and
. the success of these customers' services deployed using our products.
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 recognition of revenues, harm our reputation in the industry, and
reduce our ability to accurately predict cash-flow, and, as a consequence, could
materially adversely affect our business, financial condition and results of
operations.
Copper Mountain Has a Limited Operating History
14
Copper Mountain has a very 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 growth to be comparable to our recent revenue growth. In
addition, we believe that comparing different periods of our operating results
is not meaningful, as 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. Some of the specific risks include whether we are able:
. to compete in the intensely competitive market for telecommunications
equipment;
. to expand our sales, support and distribution organization;
. to effectively introduce new products and product enhancements in a timely
and competitive fashion; and
. to expand 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 its 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:
. the timing and amount of, or cancellation or rescheduling of, orders for
our products and services, particularly large orders from our key customers
and original equipment manufacturers;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. announcements, new product introductions and reductions in price 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;
. the loss of any one of our major customers or a significant reduction in
orders from those customers;
15
. increased competition, particularly from larger, better capitalized
competitors;
. fluctuations in demand for our products and services;
. costs relating to possible acquisitions and integration of technologies or
businesses; and
. telecommunications and DSL market conditions and economic conditions
generally.
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 our fiscal quarter.
Failure to ship products by the end of a quarter may adversely affect our
operating results. Furthermore, our customers may delay delivery schedules or
cancel their orders without notice. Due to these and other factors, quarterly
revenues, 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.
Copper Mountain Sells the Majority of Its Products to Emerging
Telecommunications Service Providers That May Reduce or Discontinue Their
Purchase of Copper Mountain's Products At Any Time
The customers of Copper Mountain's products to date have predominantly been
telecommunications service providers. The market for the services provided by
telecommunications service providers who compete against traditional telephone
companies has only begun to emerge since the passage of the Telecom Act, and
many of these service providers are still building their infrastructure and
rolling out their services. 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 emerging telecommunications service
provider 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, could
adversely affect their operating results or cause them to reduce their capital
spending programs. If our customers are forced to defer or curtail their capital
spending programs, our sales to those telecommunication service providers may be
adversely affected, which would have a material adverse effect on our business,
financial condition and results of operations. In addition, many of the
industries in which telecommunications service providers operate have recently
experienced consolidation. The loss of one or more of our telecommunications
service provider customers, through industry consolidation or otherwise, could
reduce or eliminate our sales to such a customer and consequently 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 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 DSL technology, and
all of our products are based on 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
16
technology, they may not choose to purchase our DSL 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, we may not be able to sustain or grow 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. If
we incur substantial sales, marketing and inventory expenses in the future that
we are not able to recover, it could have a material adverse effect on our
business, financial condition and results of operations.
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 be substantially dependent upon its strategic
partnerships, including its original equipment manufacturer agreements with
Lucent Technologies, Inc. and 3Com Corporation under which we have agreed to
manufacture, and sell our products to Lucent and 3Com. 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.
Agreements with our strategic partners are relatively new, and we cannot be
certain that we will be able to sustain the level of revenue generated thus far
under these strategic arrangements. If any of our strategic partners 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
these 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.
In June 1999, Lucent completed the acquisition of Ascend Communications, Inc.,
a competitor of ours, which offers a competing DSL solution. Subsequently, in
September 1999, Lucent announced a new DSL product based on technology acquired
from Ascend. As a result, Lucent may seek to reduce the marketing and/or sales
of our products in favor of their own competitive products. We expect that the
availability to Lucent of these alternative products will expose Copper Mountain
to increased competition from Lucent. Because of this competition, we expect
sales to Lucent, both in terms of dollars and as a
17
percent of sales, will decline over time. In addition, our other customers may
elect to purchase alternative products from Lucent and reduce their future
purchases of Copper Mountain products.
Intense Competition in the Market for Telecommunications Equipment Could
Prevent Copper Mountain From Increasing or Sustaining Revenue and Prevent Copper
Mountain From Sustaining Annual Profitability
The market for telecommunications equipment is highly competitive. We compete
directly with the following companies: Nokia Corporation, Alcatel S.A, Cisco
Systems, Inc., Lucent Technologies, Inc., and Paradyne Corporation, among
others. If we are unable to compete effectively in the market for DSL
telecommunications equipment, our revenue and future profitability 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 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 even render our products
obsolete. Although we believe we presently have certain technological and other
advantages over our competitors, realizing and maintaining such advantages will
require a continued high 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, including the future affects of Lucents
acquisition of Ascend, 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.
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 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
18
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 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 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 demand our
current products, and we may not be successful in marketing any new or enhanced
products. 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. Factors that could 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
19
. 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.
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, 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 agreements with our President and
Chief
20
Executive Officer, Chief Technology Officer, and 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
Copper Mountain has experienced growth in revenues and expansion of its
operations which have placed significant demands on its management, engineering
staff and facilities. We have recently hired additional engineering, sales,
marketing, customer support and administrative personnel. Continued growth will
also require us to hire more engineering, sales and administrative personnel. 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 received one such notice from another
company and, although to date this notice has not resulted in litigation, we may
receive other notices in the future 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.
Failure to Manage the Growth of Copper Mountain's Operations Will Adversely
Affect Its Business
Copper Mountain has rapidly and significantly expanded its operations and
anticipates that further significant expansion will be required to address
potential growth in its client base and market opportunities if it is successful
in implementing its business strategy. 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
effectively, our business, financial condition and results of operations will be
materially adversely affected. During 1999, we increased the number of employees
from 111 to 240. This expansion is placing a significant strain on our
managerial and operational resources. Most of our existing senior management
personnel joined us within the last two years, including a number of key
managerial, technical and operations personnel. We expect to add additional key
personnel in the near future, including direct sales and marketing personnel. To
manage the expected growth of our operations and personnel, we will be required
to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. install new management information systems; and
. train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.
. expand our physical infrastructure and facilities to accommodate growth in
our headcount.
21
As of December 31, 1999 we operated our business from facilities in Palo
Alto, California and San Diego, California. We face challenges related to
effectively and efficiently coordinating our operations between these
facilities. If we are unsuccessful in meeting these challenges, our business and
operating results may be adversely affected.
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 three key components from vendors for which there are currently no
substitutes: two semiconductor chips, and a system control module. We are
evaluating alternate source vendors for each of these key components, but any
alternate 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.
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 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. Recently we entered into a formal manufacturing
agreement with Flextronics International, Ltd. located in Freemont California.
Flextronics is our main source of independent manufacturing. If our current
manufacturers are unable or unwilling to continue manufacturing our components
in required volumes, it could take up to eight 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.
Moreover, since all of our final assembly and tests are performed in one
location, any fire or other disaster at our assembly facility would 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
22
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.
23
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which May Result in Operating Losses for Copper Mountain
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which May Result in Operating Losses for Copper Mountain
Copper Mountain's customers tend to be larger than Copper Mountain and are able
to exert a high degree of influence over Copper Mountain. They 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, often taking up to
one year. Accordingly, we are continually submitting successive versions of our
products as well as new products to our customers for approval. The length of
the approval process can vary and is affected by a number of factors, including
customer priorities, customer budgets and regulatory issues affecting
telecommunication service providers. Delays in the product approval process
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, such approvals and the ensuing sales of such
products 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 result in operating
losses and cause our results of operations to vary significantly 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 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 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 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.
Copper Mountain May Not Be Able to Obtain Additional Capital to Fund Its
Operations When Needed
Our capital requirements depend on several factors, including the rate of
market acceptance of our products, the ability to expand our client base, the
growth of our product lines and other factors. If capital
24
requirements vary materially from those currently planned, we may require
additional financing sooner than anticipated. 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
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 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 develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures, which could materially adversely affect our business, financial
condition or 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, preclude all potential claims resulting from a
defect in 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.
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;
25
. 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 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 Plan to Expand Our Operations into International Markets. Our Failure to
Effectively Manage Our International Operations Could Harm Our Business.
We believe that international market opportunities for our products may be
significant and we plan to enter markets outside the United States in 2000.
Entering new international markets may require significant management attention
and expenditures and could adversely affect our operating margins and earnings.
In order to commence and expand our international operations, we will need to
hire additional personnel and develop relationships with potential international
customers. To the extent that we are unable to do so on a timely basis, 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 building and managing foreign operations;
. difficulties in enforcing agreements and collecting receivables
through foreign legal systems and addressing other legal issues;
. longer payment cycles;
. taxation issues;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or
political changes.
Control by a Small Number of Stockholders May Limit the Ability of Other
Stockholders to Influence the Outcome of Director Elections and Other Matters
Requiring Stockholder Approval
Copper Mountain's executive officers, directors and principal stockholders and
their affiliates beneficially own approximately 22% of the outstanding shares of
common stock as of January 31, 2000. These stockholders, if acting together,
would be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions. This concentration of ownership could
have the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could have a material adverse effect on the market price of the common
stock
26
or prevent our stockholders from realizing a premium over the market prices for
their shares of common stock.
27
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;
. additions or departures of key personnel;
. announcements or loss of strategic relationships with third parties or
telecommunications equipment providers by us or our competitors;
. sales of common stock; 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 are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and equity
valuations may not be sustained. 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. Such litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources, which would materially adversely affect our business,
financial condition and results of operations.
Substantial Future Sales of Copper Mountain's Common Stock 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 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, 1999, we had 47.7
million shares of common stock outstanding. We filed a registration statement on
Form S-8 with the Securities and Exchange Commission covering the 14.4 million
shares of common stock reserved for issuance under our 1996 Equity Incentive
Plan, 1999 Non-Employee Directors' Stock Option Plan and 1999 Employee Stock
Purchase Plan and for options issued outside such plans. As of December 31, 1999
at least 1.9 million shares are subject to immediately exercisable options.
Sales of a large number of shares could have an adverse effect on the market
price for our common stock.
28
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 upon the closing of this offering, 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 5,000,000 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 an approximately 14,000 square foot facility in Palo Alto, California
for administrative, sales and marketing purposes. The lease for this facility
expires in April 2001. We also lease an approximately 86,000 square foot
facility in San Diego, California, which is used for manufacturing, engineering,
and administration. The current lease for this facility expires in July 2005. In
addition, we lease an approximately 11,000 square foot facility in San Diego,
California which we are currently attempting to sublease. The lease for this
facility expires in August 2003.
The Company is currently seeking additional facilities to meet the
requirements projected in its business plan.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
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, 1999.
29
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 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.
1999 High Low
--------------- ---------------
Second Quarter (Subsequent to May 13, 1999) $39.75 $25.25
Third Quarter 67.50 34.63
Fourth Quarter 54.75 35.28
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 17, 2000, there were 855 holders of record of
the Common Stock.
______________________________________
On May 13, 1999, the Company completed its initial public offering of its
common stock. The managing underwriters in the offering were Morgan Stanley Dean
Witter, BancBoston Robertson Stephens and Dain Rauscher Wessels. The shares of
common stock sold in the offering were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-1 (Reg. No. 333-73153)
(the "Registration Statement") that was declared effective by the Securities
and Exchange Commission on May 12, 1999. All 4,600,000 shares of common stock
registered under the Registration Statement, including shares covered by an
over-allotment option, were sold at a price to the public of $21.00 per share.
The offering resulted in gross proceeds of $96,600,000, of which $6,762,000 was
applied toward commissions to the underwriters. Expenses related to the offering
were estimated to be approximately $1,165,000. After deduction of the
underwriters' commissions and the expenses of the offering, the Company received
net proceeds of approximately $88,673,000.
As of December 31, 1999, the Company had used the net proceeds from the
offering to (i) pay for research and development expenses (approximately $11.5
million), (ii) expand its sales and marketing activities (approximately $12.1
million), and (iii) pay for general and administrative expenses and for working
capital (approximately $49.9 million). Other than payments of salaries and
bonuses to officers of the Company, the amounts of which are described in the
Proxy Statement related to the Company's 2000 Annual Meeting, none of the
proceeds from the offering were paid, directly or indirectly, to directors or
officers of the Company or their associates, to persons owning 10 percent or
more of any class of the Company's equity securities or to any affiliates of the
Company. Pending its use of the remaining net proceeds from the offering, the
Company has invested such sums (approximately $15.2 million) in short-term,
interest bearing, investment grade securities.
30
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, 1999, 1998, and 1997 and for the period March 11, 1996
(inception) to December 31, 1996. When you read this summary historical
financial data, it is important that you read along with it the historical
financial statements and related notes included herein (in thousands, except per
share data).
Period From
March 11, 1996
Year Ended (inception) through
December 31, December 31,
------------------------------------------- ----------------------
1999 1998 1997 1996
------------- ------------- ------------- ----------------------
Statement of Operations Data:
Net revenue $112,723 $ 21,821 $ 211 $ ---
Cost of revenue 53,002 12,400 1,717 ---
-------- -------- -------- -------
Gross profit (loss) 59,721 9,421 (1,506) ---
Operating expenses:
Research and development 15,523 7,225 4,753 1,483
Sales and marketing 16,158 5,363 1,510 ---
General and administration 5,998 3,428 1,928 553
Amortization of deferred stock
compensation 5,431 3,929 1,490 189
-------- -------- -------- -------
Total operating expenses 43,110 19,945 9,681 2,225
-------- -------- -------- -------
Income (loss) from operations 16,611 (10,524) (11,187) (2,225)
Interest and other income 4,385 406 268 47
Interest expense (289) (213) (97) (3)
-------- -------- -------- -------
Income (loss) before income taxes 20,707 (10,331) (11,016) (2,181)
Provision for income taxes 8,490 --- --- ---
-------- -------- -------- -------
Net income (loss) $ 12,217 $(10,331) $(11,016) $(2,181)
======== ======== ======== =======
Basic net income (loss) per share (1) $ .39 $ (3.87) $ (7.81) $ (5.84)
======== ======== ======== =======
Diluted net income (loss) per share (1) $ .23 $ (3.87) $ (7.81) $ (5.84)
======== ======== ======== =======
Shares used in basic per share
calculations (1) 31,289 2,666 1,410 374
======== ======== ======== =======
Shares used in diluted per share
calculations (1) 52,282 2,666 1,410 374
======== ======== ======== =======
As of December 31,
------------------------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
Balance Sheet Data:
Cash, cash equivalents and
short-term marketable investments $117,169 $18,529 $ 9,517 $3,406
Working capital 132,187 24,326 7,653 366
Total assets 165,775 36,209 12,332 4,056
Long-term debt and capital lease
obligation, less current portion 4,044 1,965 735 262
Total stockholders' equity 143,321 26,843 9,069 749
___________________
(1) 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.
31
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, 1999, sales to our three largest customers
accounted for approximately 88% of our revenue, of which sales to NorthPoint
Communications, Inc., Rhythms NetConnections Inc., and Lucent Technologies, Inc.
accounted for approximately 37%, 28% and 23% 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.
We market and sell our products directly to telecommunications service
providers and through strategic original equipment manufacturers and
distributors. We generally recognize revenue from product sales upon shipment if
collection of the resulting receivable is probable and product returns are
reasonably estimated. 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, we have not
generated any revenues from international sources.
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 CE200 systems shipped in prior periods. Additionally,
our gross margin may fluctuate due to changes in our mix of distribution
channels. Currently, we derive the majority of our revenue from sales made
directly to telecommunications service providers. A significant increase in our
original equipment manufacturer revenue would adversely impact or reduce our
gross margin.
To date, gross margin on sales of our CE200 and related wide area network and
line cards, typically sold as a combined system, has been higher than gross
margin on sales of DSL CPE. Furthermore, combined systems are not generally
fully-populated (i.e., less than the eight line cards which each system can
support or a capacity of 192 subscribers) 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. As the
telecommunications service providers that purchase our products make their
services broadly available to their customers, we expect our product mix to
continue to shift more heavily toward sales of the Copper Edge family and the
related line cards. We expect gross margin for our CE200 systems and follow-on
line cards to improve due to lower component costs and improved costs from our
subcontractors as our revenue
32
from these products increases. However, we cannot be sure that we will achieve
or maintain the revenue volumes required for these increases in gross margin.
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 consists
of payments to our current contract manufacturer, Flextronics International Ltd.
We selected Flextronics as our manufacturing partner with the goal of lowering
per unit product costs as a result of manufacturing economies of scale. However,
we cannot assure you 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.
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 expense all research and development expenses as
incurred. We believe that continued investment in research and development is
critical to attaining our strategic product and cost-reduction 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. We intend to invest
in marketing, business development activities, selling and promotional programs,
and therefore we expect expenses related to these programs to continue to
increase substantially in absolute dollars in the future. In addition, we expect
to substantially expand our field sales operations and customer support
organizations, which would also result in an increase in sales and marketing
expenses.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance, human resources, and administrative personnel,
recruiting expenses, professional fees and other general corporate expenses. We
expect general and administrative expenses to increase in absolute dollars as we
add personnel and incur additional costs related to the growth of our business
and operation as a public company.
Amortization of deferred stock compensation resulted from the granting of
stock options to employees with exercise prices per share determined to be below
the deemed fair values per share for financial reporting purposes of our common
stock at dates of grant. 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. We recorded total deferred stock
compensation of $1.8 million, $2.4 million, $11.1 million and $234,000 in 1996,
1997, 1998, and 1999, respectively, and amortized $189,000, $1.5 million, $3.9
million, and $5.4 million in 1996, 1997, 1998 and 1999, respectively, leaving
approximately $4.6 million to be amortized in future periods.
33
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,
---------------------------------------------
1999 1998 1997
-------------- ------------- --------------
Net revenue 100.0% 100.0% 100.0%
Cost of revenue 47.0 56.8 813.7
----- ------ ---------
Gross profit (loss) 53.0 43.2 (713.7)
Operating expenses:
Research and development 13.8 33.1 2,252.6
Sales and marketing 14.3 24.6 715.6
General and administration 5.4 15.7 913.8
Amortization of deferred stock compensation 4.8 18.0 706.2
----- ------ ---------
Total operating expenses 38.3 91.4 4,588.2
----- ------ ---------
Income (loss) from operations 14.7 (48.2) (5,301.9)
Interest and other income 3.9 1.9 127.0
Interest expense (.3) (1.0) (46.0)
----- ------ ---------
Income (loss) before income taxes 18.3 (47.3) (5,220.9)
Provision for income taxes 7.5 --- ---
----- ------ ---------
Net income (loss) 10.8% (47.3)% (5,220.9)%
----- ------ ---------
Years Ended December 31, 1998 and 1999
Net Revenue. Our revenue increased from $21.8 million in 1998 to $112.7
million in 1999. 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 $56.4 million of
the increase with the remaining $34.5 million of the increase being derived from
new customer relationships. Sales to our three largest customers, NorthPoint,
Rhythms and Lucent, increased from $13.2 million, $4.0 million and zero,
respectively, for the year ended December 31, 1998 to $42.2 million, $32.0
million and $25.4 million, respectively, for the year ended December 31, 1999.
Gross Profit (Loss). Our gross profit increased from $9.4 million in 1998 to
$59.7 million in 1999. The increase in gross profit was primarily the result of
an increase in net revenue for the period. Gross profit percentages also
increased on a year-over-year basis, from 43.2% for the year ended December 31,
1998 to 53.0% for the year ended December 31, 1999. The increase in gross profit
as a percentage of sales was primarily due to an increase in unit volumes, a
favorable product mix, and decreased unit costs associated with improved
overhead absorption.
Research and Development. Our research and development expenses increased
from $7.2 million in 1998 to $15.5 million in 1999. 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 33.1% in 1998 to 13.8% in 1999. 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 1999. We intend to increase expenditures
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.
34
Sales and Marketing. Our sales and marketing expenses increased from $5.4
million in 1998 to $16.2 million in 1999. 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 1999.
General and Administrative. Our general and administrative expenses increased
from $3.4 million in 1998 to $6.0 million in 1999. This increase was primarily
the result of increased staffing for finance, management information systems,
and human resources, and growth in recruiting and facility related expenses.
General and administrative expenses as a percentage of net revenue decreased
from 15.7% for 1998 to 5.4% for 1999. This decrease was primarily the result of
an increase in our net revenue in 1999.
Interest and Other Income. Interest and other income increased from $406,000
in 1998 to $4.4 million in 1999. This increase reflects an increase in interest
income generated from higher average cash balances and investments in marketable
securities in 1999, which included the proceeds from our initial public offering
completed in May of 1999.
Income taxes. Our effective income tax rate for 1999 was 41%, which
approximates the combined federal and California (net of federal benefit)
statutory rate. During 1999, our utilization of net operating loss and tax
credit carryforwards was limited under sections 382 and 383 of the Internal
Revenue Code. We have previously not recorded a tax provision (benefit) due to
our historical net losses. Additionally, the realization of our carryforwards is
considered uncertain and as a result a full valuation allowance has been
established which offsets these deferred tax assets for all periods presented.
Years Ended December 31, 1997 and 1998
Net Revenue. Our revenue increased from $211,000 in 1997 to $21.8 million in
1998. This increase was primarily due to the successful transition from
development of our products to commencement of commercial operations and the
general release of our products. In 1998, we successfully introduced our 24 port
SDSL line card, our 24 port IDSL line card, our frame relay-based wide area
networks card and our IDSL CPE.
Gross Profit (Loss). Our gross profit increased from a loss of $1.5 million in
1997 to a profit of $9.4 million in 1998. The increase in gross profit was
primarily the result of the absorption of overhead associated with greater unit
volumes and increased economies of scale. As a result, our gross margin in 1998
improved substantially over 1997.
Research and Development. Our research and development expenses increased from
$4.8 million in 1997 to $7.2 million in 1998. This increase in our research and
development expenses was related to increases in personnel and personnel related
costs, prototype material expenses, contract development expense as well as
expenses related to the completion and commercial release of our initial
products.
Sales and Marketing. Our sales and marketing expenses increased from $1.5
million in 1997 to $5.4 million in 1998. This increase was primarily a result of
an increase in personnel and personnel-related costs, including increases in
staffing for marketing program management, product marketing, account
management, customer support and direct sales as well as a substantial increase
in sales commissions. To a lesser extent, the increase resulted from higher
trade show and marketing communications expenses.
General and Administrative. Our general and administrative expenses increased
from $1.9 million in 1997 to $3.4 million in 1998. This increase is a result of
an increase in personnel costs for executive officers and support staff, legal,
accounting and consulting fees. The increase in our general and
35
administrative staffing, was required to support the growth in our operations,
commercial activities and customer base.
Interest and Other Income. Interest and other income increased from $268,000
in 1997 to $406,000 in 1998. This increase reflects an increase in interest
income generated from higher average cash balances and investments in marketable
securities in 1998.
Liquidity and Capital Resources
From our inception through April 1999, we have financed our operations
primarily through the sale of preferred equity securities. In total, we raised
approximately $44.5 million, net of fees and expenses, through the sale of
preferred equity. In May 1999, we closed our initial public offering with
proceeds, net of underwriting fees, of approximately $89.9 million. We have also
utilized available financing for the purchase of capital equipment.
At December 31, 1999, we had cash and cash equivalents of $25.4 million,
short-term marketable investments of $91.8 million and long-term marketable
investments of $5.1 million. We have a $5.0 million financing agreement with a
bank which allows us to finance the purchase of capital equipment. As of
December 31, 1999 we had utilized $4.7 million of the available credit under the
financing agreement.
Cash provided by or (used in) operating activities for the years ended
December 31, 1999, 1998 and 1997 was $20.3 million, ($14.3) million and ($8.0)
million, respectively. The relative increase in cash provided by operating
activities for the year ended December 31, 1999 compared to the prior year was
primarily the result of the change in net income to $12.2 million in 1999
compared to a net loss of loss of $10.3 million in 1998. Additionally, the
company's provision for income tax for 1999 does not include $9.4 million of tax
benefits generated in 1999 as a result of sales of Copper Mountain stock by
employees in disqualifying disposition transactions. The relative increase in
cash used for operating activities for the year ended December 31, 1998 compared
to the prior year was primarily due to increases in accounts receivable,
inventory and other assets, as a result of the introduction of and growth in
demand for our products. This increase was partially offset by increases in
accounts payable and other accruals, as well as a $685,000 decrease in the net
loss.
Cash used in investing activities for the years ended December 31, 1999, 1998
and 1997 was $92.6 million, $12.1 million and $1.5 million, respectively. The
relative increase in cash used for investing activities for the year ended
December 31, 1999 compared to the prior period was the result of net purchases
of marketable investments, and to a lesser extent, the purchase of computers and
other equipment. The relative increase in cash used for investing activities for
the year ended December 31, 1998 compared to the prior year was primarily due to
the purchase of $10.9 million in short-term marketable investments, which was
partially offset by a decrease in the amount of equipment purchased.
Cash provided by financing activities for the years ended December 31, 1999,
1998 and 1997 was $90.0 million, $24.5 million and $15.6 million, respectively.
The relative increase in cash provided by financing activities for the year
ended December 31, 1999 compared to the prior year was primarily due to the
receipt of the proceeds from our initial public offering. The relative increase
in cash provided from financing activities for the year ended December 31, 1998
compared to the prior year was primarily due to $24.1 million in net proceeds
from an equity financing in October 1998.
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. As of December 31, 1999, the full amount of funds
available under the equipment loan had been utilized. As of December 31, 1999,
the Company had $316,000 available for future borrowings under the capital lease
agreement. The borrowings under the
36
equipment loans and the capital lease agreement are to be repaid in 48 equal
monthly installments and accrue interest at 10.8%. Both obligations are secured
by the related equipment. All borrowings under the capital lease agreement must
be completed by March 31, 2000.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. See Notes 5, 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
expansion of our marketing efforts. We expect to continue to expend significant
amounts on property and equipment related to the expansion of facility
infrastructure, computer equipment and for research and development laboratory
and test equipment to support on-going research and development operations.
In future periods, we generally anticipate significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product revenue. In conjunction with the expected increase in revenue, we expect
higher relative levels of inventory and accounts receivable. While we also
expect an increase in accounts payable and other liabilities, we do not expect
that they will offset the increases in inventory and accounts receivable.
We believe that our cash and cash equivalents balances, short-term marketable
investments and funds available under our existing credit facilities will be
sufficient to satisfy our cash requirements for at least the next 12 months. Our
management intends to invest our cash in excess of current operating
requirements in interest-bearing, investment-grade securities.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $100,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, it internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
37
Summarized Quarterly Data (Unaudited)
The following tables present unaudited quarterly financial information, for
the eight quarters ended December 31, 1999. We believe this information reflects
all adjustments (consisting only of normal recurring adjustments) 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 Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------- ---------------- ---------------- ----------------
1999
Net revenue $13,217 $22,890 $32,016 $44,601
Gross profit 6,833 12,075 16,999 23,815
Income (loss) from operations (1,135) 2,545 6,189 9,011
Net income (loss) (1,036) 2,343 4,646 6,264
Basic net income (loss) per share (1) (0.24) 0.09 0.10 0.13
Diluted net income (loss) per share (1) (0.24) 0.05 0.08 0.11
1998
Net revenue $ 317 $ 1,281 $ 5,556 $14,667
Gross profit 100 486 2,197 6,638
Loss from operations (3,367) (3,545) (3,210) (402)
Net loss (3,287) (3,545) (3,257) (242)
Basic net loss per share (1) (1.54) (1.44) (1.16) (0.07)
Diluted net loss per share (1) (1.54) (1.44) (1.16) (0.07)
_____________
(1) 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 and Note 7 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, secondarily, 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, 1999.
Item 8. Financial Statements
The Company's financial statements at December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999, and the Report of
Ernst & Young LLP, Independent Auditors, are included in this Report on pages F-
1 through F-19.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
38
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 2000 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."
39
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, 1999 and 1998 F-2
Statements of Operations for 1999, 1998 and
1997 F-3
Statements of Stockholders' Equity for 1999,
1998 and 1997 F-4
Statements of Cash Flows for 1999, 1998 and
1997 F-6
Notes to Financial Statements F-7
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
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.(1)
4.2 Specimen Stock Certificate.(1)
10.1 Amended and Restated 1996 Equity Incentive Plan (the "1996
Plan").(1)
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 Comdisco, Inc., dated
October 29, 1997.(1)
40
Exhibit
Number Description of Document
------ -----------------------
10.16 Warrant Agreement between the Company and Comdisco, Inc., dated
April 27, 1998.(1)
10.17 Warrant Agreement between the Company and Intel Corporation,
dated January 14, 1997.(1)
10.18 Warrant Agreement between the Company and Silicon Valley Bank,
dated August 14, 1998.(1)
10.19 Amended and Restated Investors' Rights Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.(1)
10.20 Right of First Refusal and Co-Sale Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.(1)
10.21 Voting Agreement by and among the Company and certain
stockholders of the Company, dated October 9, 1998.(1)
10.22 Founder Stock Purchase Agreement between the Company and Joseph
D. Markee, dated March 11, 1996.(1)
10.23 First Amendment to Founder Stock Purchase Agreement between the
Company and Joseph D. Markee, dated June 12, 1998.(1)
10.24 Founder Stock Purchase Agreement between the Company and Mark J.
Handzel, dated March 11, 1996.(1)
10.25 First Amendment to Founder Stock Purchase Agreement between the
Company and Mark J. Handzel, dated January 27, 1999.(1)
+10.26 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)
+10.27 OEM Purchase and Development Agreement between the Company an
3COM Corporation, dated November 24, 1998.(1)
+10.28 Development, Manufacturing and Supply Agreement between the
Company and Netopia, Inc., dated May 19, 1998.(1)
10.29 Warrant Agreement between the Company and Intel Corporation,
dated January 14, 1997.(1)
10.30 1999 Non-Employee Directors' Stock Option Plan.(1)
10.31 Form of Nonqualified Stock Option for use with 1999 Non-Employee
Directors' Stock Option Plan.(1)
10.32 Form of Indemnification Agreement(1)
+10.33 Equipment Purchase Agreement between the Company and NorthPoint
Communications, Inc. dated April 8, 1999.(1)
+10.34 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)
+10.35 Equipment Purchase Agreement between the Company and NorthPoint
Communications, Inc. dated July 21, 1999. (2)
+10.36 Equipment Purchase Agreement between the Company and Rhythms
NetConnections, Inc. dated December 10, 1999.*
10.37 Software License Agreement between the Company and Rhythms
NetConnections, Inc. dated December 10, 1999.*
+10.38 Customer Technical Support Services Agreement between the Company
and Rhythms NetConnections, Inc. dated December 10, 1999.*
10.39 Employment Agreement between the Company and Joseph D. Markee,
dated March 12, 1999.(1)
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
24.1 Power of Attorney.
27 Financial Data Schedule.*
___________________________________________________________________________
(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
41
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.
* Filed Herewith
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
42
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 17, 2000
Copper Mountain Networks, Inc.
By: /s/ RICHARD S. GILBERT
------------------------------
Richard S. Gilbert
President and Chief Executive
Officer
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.
Signature Title Date
--------- ----- ----
/s/ RICHARD S. GILBERT President, Chief Executive March 17, 2000
- -----------------------------
Richard S. Gilbert Officer and Director (Principal
Executive Officer)
/s/ JOHN A. CREELMAN Vice President of Finance, Chief March 17, 2000
- -----------------------------
John A. Creelman Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ JOSEPH D. MARKEE Chief Technical Officer and March 17, 2000
- -----------------------------
Joseph D. Markee Chairman of the Board
/s/ ROBERT L. BAILEY Director March 17, 2000
- -----------------------------
Robert L. Bailey
/s/ TENCH COXE Director March 17, 2000
- -----------------------------
Tench Coxe
/s/ ROGER EVANS Director March 17, 2000
- -----------------------------
Roger Evans
/s/ RICHARD H. KIMBALL Director March 17, 2000
- -----------------------------
Richard H. Kimball
/s/ RAYMOND V. THOMAS Director March 17, 2000
- -----------------------------
Raymond V. Thomas
/s/ ANDREW W. VERHALEN Director March 17, 2000
- -----------------------------
Andrew W. Verhalen
43
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, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Diego, California
January 28, 2000,
except for Note 12, as
to which the date is
February 29, 2000
F-1
COPPER MOUNTAIN NETWORKS, INC.
BALANCE SHEETS
(in thousands, except per share data)
December 31,
1999 1998
-------------------- --------------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 25,405 $ 7,631
Short-term marketable investments 91,764 10,898
Accounts receivable, net 18,992 8,026
Inventory 12,801 4,668
Other current assets 1,530 476
-------- --------
Total current assets 150,492 31,699
Property and equipment, net 8,825 3,214
Marketable investments 5,139 ---
Other assets 1,319 1,296
-------- --------
Total assets $165,775 $ 36,209
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 7,887 $ 4,371
Accrued liabilities 8,800 2,219
Current portion of obligations under capital leases
and equipment notes payable 1,618 783
-------- --------
Total current liabilities 18,305 7,373
Obligations under capital leases and equipment
notes payable, less current portion 4,044 1,965
Other accrued 105 28
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares
authorized, none issued and outstanding as of December 31, 1999
and 1998, respectively ---- ----
Convertible preferred stock, no par value, zero and
10,223 shares issued and outstanding at December 31,
1999 and 1998, respectively ---- 44,502
Common stock, $.001 par value, 100,000 shares
authorized, 47,662 and 5,034 shares issued and
outstanding at December 31, 1999 and 1998, respectively 48 5
Notes receivable from stockholders ---- (41)
Additional paid in capital 159,149 15,667
Deferred compensation (4,565) (9,762)
Accumulated deficit (11,311) (23,528)
-------- --------
Total stockholders' equity 143,321 26,843
-------- --------
Total liabilities and stockholders' equity $165,775 $ 36,209
======== ========
See accompanying notes to financial statements
F-2
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended
December 31,
-----------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Net revenue $112,723 $ 21,821 $ 211
Cost of revenue 53,002 12,400 1,717
--------------- --------------- ---------------
Gross profit (loss) 59,721 9,421 (1,506)
Operating expenses:
Research and development 15,523 7,225 4,753
Sales and marketing 16,158 5,363 1,510
General and administrative 5,998 3,428 1,928
Amortization of deferred stock compensation 5,431 3,929 1,490
--------------- --------------- ---------------
Total operating expenses 43,110 19,945 9,681
--------------- --------------- ---------------
Income (loss) from operations 16,611 (10,524) (11,187)
Other income (expense):
Interest and other income 4,385 406 268
Interest expense (289) (213) (97)
--------------- --------------- ---------------
Income (loss) before income taxes 20,707 (10,331) (11,016)
Provision for income taxes 8,490 ---- ----
--------------- --------------- ---------------
Net income (loss) $ 12,217 $(10,331) $(11,016)
=============== =============== ===============
Basic net income (loss) per share $ 0.39 $ (3.87) $ (7.81)
=============== =============== ===============
Diluted net income (loss) per share $ 0.23 $ (3.87) $ (7.81)
=============== =============== ===============
Basic common equivalent shares 31,289 2,666 1,410
=============== =============== ===============
Diluted common equivalent shares 52,282 2,666 1,410
=============== =============== ===============
See accompanying notes to financial statements
F-3
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Preferred Stock Common Stock
------------------- ------------------
Notes
Receivable Additional
Number of Number of From Paid in
Shares Amount Shares Amount Stockholders Capital
--------- -------- --------- ------ ------------ ----------
Balance at December 31, 1996 2,723 $ 2,723 3,929 $4 (69) $ 1,896
Issuance of Series B convertible preferred stock
at $3.39 per share for cash and conversion of
convertible bridge note payable, net 1,850 6,196 ---- ---- ---- ----
Issuance of Series C convertible preferred stock
at $4.75 per share for cash 2,422 11,506 ---- ---- ---- ----
Exercise of options to purchase common stock ---- ---- 477 ---- ---- 16
Stock grants for consulting services 2 ---- 55 ---- ---- 15
Issuance of warrants to purchase convertible
preferred stock in connection with technology
agreement, notes payable, and consulting
services ---- ---- ---- ---- ---- 113
Deferred compensation related to the grant of
stock options ---- ---- ---- ---- ---- 2,429
Amortization related to deferred stock
compensation ---- ---- ---- ---- ---- ----
Net loss ---- ---- ---- ---- ---- ----
--------- -------- --------- ------ ------------ ----------
Balance at December 31, 1997 6,997 20,425 4,461 4 (69) 4,469
Exercise of options to purchase common stock ---- ---- 1,030 1 ---- 60
Stock grants for consulting services ---- ---- 19 ---- ---- 5
Deferred compensation related to the grant of
stock options ---- ---- ---- ---- ---- 11,128
Amortization related to deferred stock
compensation ---- ---- ---- ---- ---- ----
Stock forfeited by employee ---- ---- (476) ---- 16 (16)
Repayment of note receivable from stockholder ---- ---- ---- ---- 12 ----
Issuance of Series C convertible preferred stock
warrants in connection with a financing
agreement ---- ---- ---- ---- ---- 21
Issuance of Series D convertible preferred stock
at $7.75 per share for cash, net 3,226 24,077 ---- ---- ---- ----
Net loss ---- ---- ---- ---- ---- ----
--------- -------- --------- ------ ------------ ----------
Balance at December 31, 1998 10,223 $44,502 5,034 $5 $(41) $15,667
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------ ----------- -------------------
Balance at December 31, 1996 $ (1,624) $ (2,181) $ 749
Issuance of Series B convertible preferred stock
at $3.39 per share for cash and conversion of
convertible bridge note payable, net ---- ---- 6,196
Issuance of Series C convertible preferred stock
at $4.75 per share for cash ---- ---- 11,506
Exercise of options to purchase common stock ---- ---- 16
Stock grants for consulting services ---- ---- 15
Issuance of warrants to purchase convertible
preferred stock in connection with technology
agreement, notes payable, and consulting
services ---- ---- 113
Deferred compensation related to the grant of
stock options (2,429) ---- ----
Amortization related to deferred stock
compensation 1,490 ---- 1,490
Net loss ---- (11,016) (11,016)
------------ ----------- -------------------
Balance at December 31, 1997 (2,563) (13,197) 9,069
Exercise of options to purchase common stock ---- ---- 61
Stock grants for consulting services ---- ---- 5
Deferred compensation related to the grant of
stock options (11,128) ---- ----
Amortization related to deferred stock
compensation 3,929 ---- 3,929
Stock forfeited by employee ---- ---- ----
Repayment of note receivable from stockholder ---- ---- 12
Issuance of Series C convertible preferred stock
warrants in connection with a financing
agreement ---- ---- 21
Issuance of Series D convertible preferred stock
at $7.75 per share for cash, net ---- ---- 24,077
Net loss ---- (10,331) (10,331)
------------ ----------- -------------------
Balance at December 31, 1998 $ (9,762) $(23,528) $ 26,843
See accompanying notes to financial statements
F-4
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CON'T)
(in thousands, except per share data)
Preferred Stock Common Stock
---------------------- -----------------
Notes
Receivable Additional
Number of Number of from Paid in
Shares Amount Shares Amount Stockholders Capital
--------- --------- --------- ------ ------------ ----------
Conversion of preferred to common stock (10,223) $(44,502) 30,670 $31 $ ---- $ 44,471
Issuance of common stock, net ---- ---- 9,200 9 ---- 88,664
Stock grants for consulting services ---- ---- 1 ---- ---- 7
Repayment of notes receivable from stockholders ---- ---- ---- ---- 41 ----
Deferred compensation related to the grant of stock options ---- ---- ---- ---- ---- 234
Amortization related to deferred stock compensation ---- ---- ---- ---- ---- ----
Net exercise of warrant to purchase common stock ---- ---- 235 ---- ---- ----
Tax benefit from the exercise of stock options ---- ---- ---- ---- ---- 9,389
Exercise of options to purchase common stock ---- ---- 2,522 3 ---- 717
Net income ---- ---- ---- ---- ---- ----
--------- --------- --------- ------ ------------ ----------
Balance at December 31, 1999 ---- $ ---- 47,662 $48 $ ---- $159,149
========= ========= ========= ====== ============ ==========
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------- --------- ------------
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 (234) ---- ----
Amortization related to deferred stock compensation 5,431 ---- 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 12,217
--------- --------- ---------
Balance at December 31, 1999 $ (4,565) $ (11,311) $ 143,321
========= ========= =========
See accompanying notes to financial statements
F-5
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 31,
----------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
Cash flows from operating activities:
Net income (loss) $ 12,217 $(10,331) $(11,016)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,089 1,231 511
Non-cash compensation 5,438 3,934 1,503
Loss on disposal of equipment 193 ---- ----
Tax benefit from the sale of stock options 9,389 ---- ----
Changes in operating assets and liabilities:
Accounts receivable (10,966) (7,843) (183)
Inventory (8,133) (4,285) (383)
Other current assets and other assets (1,095) (1,469) (155)
Accounts payable and accrued liabilities 10,174 4,435 1,735
--------- -------- --------
Net cash provided by (used in) operating activities 20,306 (14,328) (7,988)
--------- -------- --------
Cash flows from investing activities:
Purchases of marketable investments (113,416) (11,140) ----
Maturities of marketable investments 27,411 242 ----
Purchases of property and equipment (6,572) (1,171) (1,515)
--------- -------- --------
Net cash used in investing activities (92,577) (12,069) (1,515)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of equipment notes payable 2,464 921 615
Payments on capital lease obligations (429) (293) (18)
Payments on equipment notes payable (1,424) (267) (201)
Proceeds from issuance of preferred stock ---- 24,077 15,202
Repayment of shareholders notes receivable 41 ---- ----
Proceeds from issuance of common stock 89,393 73 16
--------- -------- --------
Net cash provided by financing activities 90,045 24,511 15,614
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 17,774 (1,886) 6,111
Cash and cash equivalents at beginning of year 7,631 9,517 3,406
--------- -------- --------
Cash and cash equivalents at end of year $ 25,405 $ 7,631 $ 9,517
========= ======== ========
Supplemental information:
Interest paid $ 289 $ 150 $ 74
========= ======== ========
Capital lease obligations entered into for equipment $ 2,303 $ 1,307 $ 327
========= ======== ========
Conversion of convertible bridge note payable to
preferred stock $ ---- $ ---- $ 2,500
========= ======== ========
Stock forfeited for notes receivable $ ---- $ (16) $ ----
========= ======== ========
Issuance of convertible preferred stock warrants $ ---- $ 21 $ 113
========= ======== ========
Issuance of stock for consulting services $ 7 $ 5 $ 13
========= ======== ========
See accompanying notes to financial statements
F-6
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.
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. 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.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable investments,
accounts receivable, accounts payable, accrued liabilities, short-term bank
borrowings and notes payable approximates fair value.
Investments
At December 31, 1999, the Company held investments in investment grade debt
securities with various maturities through January 2001. 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, 1999 totaled
$106.7 million. The Company has included $9.8 million of these securities in
cash and cash equivalents, as of December 31, 1999, as they have original
maturities of less than 90 days. The remaining debt securities totaling $91.8
million and $5.1 million as of December 31, 1999 have been classified as short-
term and long-term marketable investments, respectively. The Company has
designated all of its investments as held to maturity.
F-7
Concentration of Credit Risk
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.
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, 1999 include sales to three significant customers totaling $42.2
million, $32.0 million and $25.4 million. The Company's revenues for the year
ended December 31, 1998 include sales to two significant customers totaling
$13.2 million and $4.0 million.
The Company performs ongoing credit evaluations of its customers and generally
requires no collateral. The Company had significant accounts receivable balances
due from four customers individually representing 39%, 24%, 12% and 10% of total
accounts receivable at December 31, 1999.
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 experienced any
significant losses on its cash equivalents or marketable investments.
Inventory
Inventory is stated at the lower of cost, principally standard costs, which
approximate actual costs on a first-in, first-out basis, or market. The Company
recorded charges to reduce the carrying costs of inventory totaling $750,000,
$504,000 and $315,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The reduction in the value of the inventory was primarily due to
the discontinuance of certain products, which was the result of the development
and introduction of new products. For the year ended December 31, 1997, the
Company also incurred a loss on purchase commitments totaling $582,000 to
purchase inventory used in the production of the discontinued products which had
not yet been received by December 31, 1997. All such reductions to inventory
value and losses on revenue commitments for the years ended December 31, 1999
and 1998 are included in cost of revenues.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from two to five years, using the straight-
line method.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment or, in some
cases, on customer receipt if collection of the resulting receivable is probable
and product returns can be reasonably estimated. Sales returns are estimated
based on historical experience and management's expectations and are recorded at
the time product revenue is recognized.
F-8
Revenue from service and support arrangements is recognized ratably as
services are performed. Annual service and support arrangements can be purchased
by customers for products no longer under warranty and are billed quarterly.
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.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
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. The Company has identified no such impairment losses.
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).
F-9
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.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share has been computed in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," using the weighted-average number of shares of common stock outstanding
and common stock equivalents during the period. Options, warrants, and preferred
stock were not included in the computation of diluted net loss per share for the
years ended December 31, 1998 and 1997 because the effect would be anti-
dilutive.
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,
-----------------------------------------
1999 1998 1997
------------- ------------ ------------
Weighted average common shares outstanding 31,289 2,666 1,410
Dilutive effect of preferred shares 11,091 ---- ----
Dilutive effect of stock options 8,585 ---- ----
Dilutive effect of restricted shares 708 ---- ----
Dilutive effect of warrants 609 ---- ----
------ ----- -----
Shares used in computing diluted net income (loss) per
common share 52,282 2,666 1,410
====== ===== =====
Dilutive securities include options, warrants, preferred stock as if converted
and restricted stock subject to vesting. Potentially dilutive securities
totaling 40.9 million and 27.6 million for the years ended December 31, 1998 and
1997, 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.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. The Company will be required to
adopt FAS 133 for
F-10
fiscal year 2001. This statement establishes a new model for accounting for
derivatives and hedging activities. Under FAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value. The Company has
not completed its determination of the impact of the adoption of this new
accounting standard on its financial position or results of operations.
2. Completion of Initial Public Offering
On May 13, 1999, the Company completed its initial public offering for the
sale of 9.2 million shares 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.
3. Composition of Certain Balance Sheet Captions
December 31,
--------------------------------
1999 1998
------------- --------------
(in thousands)
Accounts receivable:
Trade receivables $19,132 $ 8,026
Allowance for doubtful accounts (140) ----
------- -------
$18,992 $ 8,026
======= =======
Inventory:
Raw materials $ 6,003 $ 2,582
Work in process 3,148 790
Finished goods 3,650 1,296
------- -------
$12,801 $ 4,668
======= =======
Property and equipment:
Laboratory equipment and software $ 8,590 $ 2,265
Computer equipment and software 3,294 1,885
Office furniture and fixtures 1,669 840
------- -------
13,553 4,990
Less accumulated depreciation and amortization (4,728) (1,776)
------- -------
$ 8,825 $ 3,214
======= =======
Accrued liabilities:
Accrued compensation $ 2,293 $ 621
Accrued warranty 1,930 418
Accrued vacation 1,385 493
Other 3,192 687
------- -------
$ 8,800 $ 2,219
======= =======
F-11
4. Investments
At December 31, 1999 and 1998, investments consisted of the following (in
thousands):
Current Noncurrent
-------------------------------- --------------------------------
December 31, December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Held to maturity:
Commercial paper $31,856 $ 995 $ ---- $----
U.S. government securities 33,514 9,903 ---- ----
Corporate medium-term notes 26,394 ---- 5,139 ----
------- ------- ------ -----
$91,764 $10,898 $5,139 $----
======= ======= ====== =====
At December 31, 1999, non-current held-to-maturity debt securities of $5.1
million had maturities of less than fourteen months.
5. Short-Term Bank Borrowings
In August 1998, the Company entered into a $4.0 million line of credit
agreement with a bank which allows it to borrow an amount equal to 80% of
eligible accounts receivable plus the lesser of 25% of the Company's eligible
inventory or $500,000. Interest accrued at the bank's prime rate plus .25% (8.0%
at December 31, 1998). There were no borrowings outstanding as of December 31,
1999 and the line of credit expired on August 13, 1999.
In connection with this financing agreement, the Company granted warrants to
the bank to purchase an aggregate of 25,000 shares of Series C convertible
preferred stock at $4.75 per share. The warrants are exercisable for five years
from the date of issuance. The estimated fair value of the warrants was
approximately $21,000, which has been capitalized as debt issuance costs and was
amortized over the life of the financing agreement. These warrants were
exercised in 1999 and converted into 75,000 shares of common stock.
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. As of December 31, 1999, the full amount of
funds available under the equipment loan had been utilized. As of December 31,
1999, the Company had $316,000 available for future borrowings under the capital
lease agreement. 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%. Both obligations are secured by the related equipment. All borrowings
under the capital lease agreement must be completed by March 31, 2000.
In August 1998, the Company entered into an equipment line of credit with a
bank that allows the Company to borrow up to $1.0 million for the purchase of
equipment. The Company used a portion of the equipment loans entered into in
August 1999 to repay all amounts outstanding under this equipment line.
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, 1999 the full amount of funds available under the equipment
financing agreement was 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 40,000 warrants were
exercised in 1999 and converted into 120,000 shares of
F-12
common stock. The warrants are 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 has been capitalized
as debt issuance costs and is being amortized over the life of the equipment
financing agreement.
In December 1996, the Company received $2.5 million in connection with a
convertible bridge note that accrued interest at 8.0% per annum. During 1997,
the note was converted into Series B convertible preferred stock at a rate of
$3.39 per share.
A summary of the notes payable is as follows:
December 31,
------------------------------
1999 1998
-------------- --------------
(in thousands)
Bank installment loan, with a various maturity dates through October
2003, total monthly payments of $57,000, bearing interest at $2,254 $ ----
10.8%, collateralized by equipment
Bank and leasing company installment loans, with various maturity
dates through December 2000, total monthly payments of $27,000
with interest rates ranging between 8.99% and 9.76%, collateralized
by equipment 212 504
Bank installment loan, with a maturity date of August 2002, interest
only payments until August 1999 with a variable interest rate at the
bank prime rate plus 0.25%, collateralized by equipment ---- 921
------ ------
2,466 1,425
Less current portion (753) (395)
------ ------
$1,713 $1,030
====== ======
At December 31, 1999, future aggregate annual principal payments on the notes
payable are $753,000, $513,000, $571,000 and $629,000 for 2000, 2001, 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% to 10% and maturing
March 12, 2000. The Company has 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. Shares issued under these agreements generally vest over four years.
As of December 31, 1999 all amounts outstanding under the remaining promissory
notes had been repaid by the founders. At December 31, 1999, 195,000 shares of
common stock are subject to repurchase by the Company.
F-13
1996 Equity Incentive Plan
In August 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"). A total of 7.9 million shares of common stock are currently
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 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, 1999, 70,000
shares are 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 has 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 was 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, 1999, 360,000 stock
options have been granted under the Directors Plan.
F-14
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, 1996 2,321 $ .04
Granted 2,140 $ .12
Exercised (477) $ .04
Cancelled (231) $ .04
------
Balance at December 31, 1997 3,753 $ .08
Granted 6,173 $ .33
Exercised (1,029) $ .06
Cancelled (366) $ .12
------
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
======
As of December 31, 1999, 1998, and 1997 there were 1.9 million, 1.3 million
and 1.2 million options, respectively, exercisable at weighted average exercise
prices of $1.22, $.08 and $.04, respectively.
The following table summarizes all options outstanding and exercisable by
price range as of December 31, 1999 (in thousands, except per share data):
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life-Years Price Exercisable Price
---------------- ----------- ----------- -------- ----------- --------
$ .03 - 0.11 856 7.30 $ 0.09 248 $0.08
0.16 - 0.16 3,716 8.43 0.16 1,065 0.16
0.27 - 3.50 2,218 8.90 1.77 304 1.17
4.25 - 10.50 2,514 8.67 6.42 300 6.00
30.19 - 60.50 1,452 9.68 46.84 ---- ----
------ -----
$ 0.03 - 60.50 10,756 8.66 $ 8.25 1,917 $1.22
====== =====
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 options
granted
F-15
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,
$10.0 million and $234,000 during the four fiscal years ended December 31, 1999.
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,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Net income (loss) as reported $12,217 $(10,331) $(11,016)
Pro forma net loss under SFAS No. 123 (2,064) (10,884) (11,161)
Pro forma basic and diluted net loss per share
under SFAS No. 123 (0.07) (4.07) (7.92)
The fair value of each option grant subsequent to the Company's initial public
offering in May 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 1999, 1998 and 1997 was $14.01, $0.08 and $0.03 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.
A total of 600,000 shares of common stock has been reserved for issuance under
the purchase plan. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. Under the purchase plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the commencement of the purchase plan. The initial offering under the
purchase plan commenced on May 13, 1999 and terminates on July 31, 2000.
Unless otherwise determined by the Board, employees are eligible to
participate in the purchase plan only if they are employed by us or one of our
subsidiaries designated by the Board of Directors 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.
F-16
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 has been
capitalized as an intangible asset and was amortized over the two-year term of
the agreement. The warrant is convertible into 442,202 shares of common stock.
Common Shares Reserved for Future Issuance
At December 31, 1999, common shares reserved for future issuance consist of
the following (in thousands):
Warrants 472
Shares reserved for future option exercises 10,756
------
11,228
======
8. Commitments
The Company leases its facilities under noncancelable operating leases
expiring in 2005. The leases contain renewal options and are subject to cost
increases. Rent expense totaled $1.6 million, $501,000 and $219,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum payments under the noncancelable operating leases and equipment
under capital leases consist of the following at December 31, 1999 (in
thousands):
Operating Capital
Leases Leases
------------ -------------
Year ending December 31,
2000 $ 2,668 $1,138
2001 2,522 1,124
2002 2,330 792
2003 2,259 820
2004 2,194 ----
Thereafter 1,306 ----
------- ------
Total minimum lease payments $13,279 3,874
======= (678)
Less amount representing interest ------
Total present value of minimum payments 3,196
Less current portion (865)
------
Non-current portion $2,331
======
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, 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 has been capitalized as debt issuance costs and is being
amortized over the life of the financing agreement.
F-17
Equipment held under the capital leases totaled $4.1 million and $1.7 million
and the related accumulated amortization totaled $1.4 million and $559,000 at
December 31, 1999 and 1998, respectively. The obligations under the capital
leases are secured by the related equipment.
9. Income Taxes
Significant components of the provision for income taxes are as follows (in
thousands):
Year Ended
December 31,
-----------------------------
1999 1998
-------------- -------------
Current provision:
Federal $ ---- $ ----
State ---- ----
------- -------
Total current: ---- ----
Deferred provision:
Federal 822 ----
State 329 ----
------- -------
Total deferred: 1,151 ----
Benefit of net operating loss carryforwards (2,050)
Stock options - benefit to additional paid in capital 9,389 ----
------- -------
$ 8,490 $ ----
======= =======
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,
-----------------------------
1999 1998
------------- --------------
Tax at U.S. statutory rate $7,237 $(3,616)
State income taxes, net of federal benefit 1,190 (620)
Net change in valuation allowance and other 63 4,236
------ -------
$8,490 $ ----
====== =======
A valuation allowance of $13.3 million has been recorded at December 31, 1999
to offset the net deferred tax assets as realization is uncertain. Significant
components of the Company's deferred tax assets and liabilities as of December
31, 1999 and 1998 are shown below (in thousands):
December 31,
--------------------------------
1999 1998
--------------- ---------------
Deferred tax liability:
Depreciation $ ---- $ (12)
Deferred tax assets:
Net operating loss carryforwards 5,562 5,757
Tax credit carryforwards 2,993 1,185
Accruals and reserves 1,957 351
Deferred compensation 1,747 ----
Inventory reserves 927 500
Other, net 153 ----
-------- -------
Total deferred tax assets 13,339 7,793
Valuation allowance (13,339) (7,793)
-------- -------
Net deferred tax assets $ ---- $ ----
======== =======
F-18
The Company had federal and California tax net operating loss carryforwards
at December 31, 1999 of approximately $14.5 million and $14.9 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 $5.0 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 $2.0
million and $1.5 million, respectively, which will begin to expire in 2011
unless previously utilized.
Pursuant to Internal Revenue Service Code Sections 382 and 383, use 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 will have a material
impact on the Company's ability to use these carryforwards.
10. Employee Savings Plan
The Company has a 401(k) plan, which allows participating employees to
contribute up to 15% 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 during the year
ending December 31, 2000. The Board has not approved any previous matching
contributions.
11. Related Party Transactions
At December 31, 1999, 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 officer's residence 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.
12. Recent Events
In February 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 1.3
million shares of Copper Mountain common stock and Copper Mountain stock
options. The acquisition was accounted for as a purchase transaction.
F-19
Schedule II
COPPER MOUNTAIN NETWORKS, INC.
Valuation and Qualifying Accounts
Additions
-----------
Balance at Charged to Balance at
Beginning Costs and End of
Allowance for Doubtful Accounts: of Year Expenses Deductions Year
------------ ----------- ----------- -----------
Year ended December 31, 1999.............. $ ------- 140,000 ------- $140,000
NOTE: The Company had no activity in allowance for doubtful accounts prior
to 1999.
Additions
----------
Balance at Charged to Balance at
Beginning Costs and End of
Inventory Reserves: of Year Expenses Deductions Year
------------ ----------- ----------- ------------
Year ended December 31, 1997.............. $ ------- 897,000 ------- $ 897,000
Year ended December 31, 1998.............. $ 897,000 504,000 229,000 $1,172,000
Year ended December 31, 1999.............. $1,172,000 750,000 1,094,000 $ 828,000
Additions
----------
Balance at Charged to Balance at
Beginning Costs and End of
Accrued Warranty: of Year Expenses Deductions Year
------------ ----------- ----------- ------------
Year ended December 31, 1997.............. $------- 2,000 ------- $ 2,000
Year ended December 31, 1998.............. $ 2,000 426,000 10,000 $ 418,000
Year ended December 31, 1999.............. $418,000 1,779,000 267,000 $1,930,000
II-1