<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 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
(619) 858-8500
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
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 [_] No [X]
The number of shares outstanding of the issuer's common stock, $.0001 par
value, as of July 31, 1999 was 23,268,988.
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1999 and
December 31, 1998 2
Condensed Statements of Operations for the three and six
months ended June 30, 1999 and 1998 3
Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 4
Condensed Statement of Stockholders' Equity for the six
months ended June 30, 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 25
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $101,135 $ 7,631
Short-term investments 5,635 10,898
Accounts receivable 15,516 8,026
Inventory 6,251 4,668
Other current assets 1,315 476
-------- --------
Total current assets 129,852 31,699
Property and equipment, net 5,294 3,214
Other assets 1,397 1,296
-------- --------
Total assets $136,543 $ 36,209
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 7,222 $ 4,371
Accrued liabilities 6,416 2,219
Current portion of obligations under capital leases
and equipment notes payable 984 783
-------- --------
Total current liabilities 14,622 7,373
Obligations under capital leases and equipment
notes payable, less current portion 1,572 1,965
Other accrued 68 28
Stockholders' equity:
Convertible preferred stock -- 44,502
Common stock 23 3
Notes receivable from stockholders (41) (41)
Paid in capital 149,222 15,669
Deferred compensation (6,702) (9,762)
Accumulated deficit (22,221) (23,528)
-------- --------
Total stockholders' equity 120,281 26,843
-------- --------
$136,543 $ 36,209
Total liabilities and stockholders' equity ======== ========
</TABLE>
See accompanying notes to condensed financial statements
2
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenue $ 22,890 $ 1,281 $ 36,106 $ 1,598
Cost of revenue 10,815 795 17,199 1,012
----------------- ----------------- ----------------- -----------------
Gross profit 12,075 486 18,907 586
Operating expenses:
Research and development 3,274 1,788 5,838 3,561
Sales and marketing 3,319 954 5,900 1,679
General and administrative 1,336 721 2,463 1,256
Amortization of deferred stock
compensation 1,601 568 3,294 1,003
----------------- ----------------- ----------------- -----------------
Total operating expenses 9,530 4,031 17,495 7,499
----------------- ----------------- ----------------- -----------------
Income (loss) from operations 2,545 (3,545) 1,412 (6,913)
Other income (expense):
Interest and other income 722 62 923 175
Interest expense (65) (62) (121) (95)
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes 3,202 (3,545) 2,214 (6,833)
Provision for income taxes 859 ---- 907 ----
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 2,343 $ (3,545) $ 1,307 $ (6,833)
================= ================= ================= =================
Basic net income (loss) per share $ 0.17 $ (2.88) $ 0.16 $ (5.66)
================= ================= ================= =================
Diluted net income (loss) per share $ 0.09 $ (2.88) $ 0.06 $ (5.66)
================= ================= ================= =================
Basic common equivalent shares 13,567 1,230 7,954 1,208
================= ================= ================= =================
Diluted common equivalent shares 25,595 1,230 23,687 1,208
================= ================= ================= =================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,307 $ (6,833)
Adjustments to reconcile net income (loss)
to net cash provided by (used) in operating
activities:
Depreciation and amortization 1,091 523
Non-cash compensation 3,301 1,005
Changes in operating assets and liabilities:
Accounts receivable (7,490) (348)
Inventory (1,583) (1,371)
Other current assets and other assets (951) (80)
Accounts payable and accrued liabilities 7,088 263
---------------------- ----------------------
Net cash provided by (used in) operating activities 2,763 (6,841)
---------------------- ----------------------
Cash flows from investing activities:
Purchases of short-term investments, net 5,263 ----
Purchases of property and equipment (3,160) ----
---------------------- ----------------------
Net cash provided by investing activities 2,103 ----
---------------------- ----------------------
Cash flows from financing activities:
Proceeds from issuance of equipment notes payable 82 455
Payments on capital lease obligations (130) (253)
Payments on equipment notes payable (144) ----
Proceeds from issuance of common stock 88,830 23
---------------------- ----------------------
Net cash provided by financing activities 88,638 225
---------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 93,504 (6,616)
Cash and cash equivalents at beginning of period 7,631 9,517
---------------------- ----------------------
Cash and cash equivalents at end of period $ 101,135 $ 2,901
====================== ======================
Supplemental information:
Interest paid $ 114 $ 87
====================== ======================
Stock issued (forfeited) for notes receivable $ ----- $ (16)
====================== ======================
Issuance of stock for consulting services $ 7 $ 2
====================== ======================
</TABLE>
See accompanying notes to condensed financial statements
4
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ----------------
Stockholder
Number of Number of Notes Paid in Deferred
Shares Amount Shares Amount Receivable Capital Compensation
--------- ------ --------- ------ ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 10,223 $ 44,502 2,517 $ 3 $ (41) $ 15,669 $(9,762)
Conversion of preferred
to common stock (10,223) (44,502) 15,335 15 -- 44,487 --
Issuance of common stock -- -- 4,600 4 -- 88,669 --
Stock grants for consulting
services -- -- -- -- -- 7 --
Deferred compensation
related to the grant of
stock options -- -- -- -- -- 234 (234)
Amortization related to
deferred stock compensation -- -- -- -- -- -- 3,294
Exercise of warrant to
purchase common stock -- -- 20 -- -- -- --
Exercise of options to
purchase common stock -- -- 791 1 -- 156 --
Net income -- -- -- -- -- -- --
----------- --------- ------- ------ ---------- --------- --------
Balance at June 30, 1999 -- $ -- 23,263 $ 23 $ (41) $149,222 $(6,702)
=========== ========= ======= ====== ========== ========= ========
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- -------------
<S> <C> <C>
Balance at December 31, 1998 $ (23,528) $ 26,843
Conversion of preferred to
common stock -- --
Issuance of common stock -- 88,673
Stock grants for consulting
services -- 7
Deferred compensation
related to the grant of
stock options -- --
Amortization related to
deferred stock compensation -- 3,294
Exercise of warrant to
purchase common stock -- --
Exercise of options to
purchase common stock -- 157
Net income 1,307 1,307
----------- ----------
Balance at June 30, 1999 $ (22,221) $ 120,281
=========== ==========
</TABLE>
See accompanying notes to condensed financial statements
5
<PAGE>
NOTE 1 - Basis of Presentation
The accompanying condensed balance sheet as of June 30, 1999, the condensed
statements of operations for the three and six month periods ended June 30, 1999
and 1998, and the condensed statements of cash flows for the six month periods
ended June 30, 1999 and 1998 and the statement of stockholders' equity for the
six months ended June 30, 1999 have been prepared by Copper Mountain Networks,
Inc. (the "Company"), and have not been audited. These financial statements, in
the opinion of management, include all adjustments consisting only of normal and
recurring adjustments, necessary to state fairly the financial information set
forth therein, in accordance with generally accepted accounting principles.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1998 included in
the Company's Registration Statement on Form S-1 (File No.333-73153). Interim
operating results are not necessarily indicative of operating results for the
full year.
NOTE 2 - Completion of Initial Public Offering
On May 18, 1999, the Company completed its initial public offering for the sale
of 4.6 million shares of common stock at a price to the public of $21 per share,
which resulted in net proceeds to the Company of $89.8 million after payment of
the underwriters' commissions but before deduction of 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 15.3 million shares of common stock.
NOTE 3 - 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.
NOTE 4 - Earnings 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
during the period including any dilutive common stock equivalents.
Common stock equivalents of 12,028,083 and 15,733,232 shares for the three and
six months ending June 30, 1999 were used to calculate diluted earnings per
share. Common stock equivalents of 12,611,718 and 12,567,166 shares for the
three and six months ending June 30, 1998 were excluded from the calculation of
diluted earnings per share because of the anti-dilutive effect.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98,
common shares issued in each of the periods presented for nominal consideration,
if any, would be included in the per share calculations as if they were
outstanding for all periods presented. No such shares have been issued.
6
<PAGE>
NOTE 5 - Composition of Certain Balance Sheet Captions (in thousands)
June 30, December 3
1999 1998
--------------- -----------
(Unaudited)
Inventory:
Raw materials $2,812 $2,582
Work in process 2,133 790
Finished goods 1,306 1,296
------ ------
$6,251 $4,668
====== ======
Accrued liabilities:
Accrued compensation $1,748 $ 621
Accrued warranty 1,108 418
Income taxes payable 907 ----
Accrued vacation 656 493
Other 1,997 687
------ ------
$6,416 $2,219
====== ======
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 prospectus 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
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 our initial line cards
and our CopperRocket DSL customer premise equipment, or DSL CPE. Since
inception, we have incurred significant losses and as of June 30, 1999, we had
an accumulated deficit of $22.2 million.
Our revenue is generated primarily from sales of our central office based
equipment: our CopperEdge 200 DSL access concentrators, or CE200, the related
wide area network cards, line cards and, to a lesser extent, from sales of our
DSL CPE. Additionally, we plan to sell network management software which
provides monitoring and management capabilities for the CE200, revenues from
which have not been material to date. For the year ended December 31, 1998,
sales to our two largest customers accounted for approximately 79% of our
revenue, of which sales to NorthPoint Communications, Inc. accounted for
approximately 61% of our revenue and sales to Rhythms NetConnections Inc.
accounted for approximately 18% of our revenue. This concentration of revenue
has continued during the six months ended June 30, 1999, with Rhythms and
NorthPoint accounting for approximately 48% and 37% 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, to a lesser extent, through strategic original equipment
manufacturers and distributors. Currently we derive the majority of our revenue
from sales made directly to telecommunications service providers. With the
strategic original equipment manufacturer agreements with Lucent Technologies
Inc. and 3Com Corporation, entered into at the end of 1998, we expect to
generate increasing original equipment manufacturer revenue in the future.
We outsource most of our manufacturing and supply chain management operations
to Flextronics International, LTD., and we conduct manufacturing engineering,
quality assurance, program management, documentation control and product repairs
at our manufacturing facility in San Diego, California. Accordingly, a
significant portion of our cost of revenue consists of payments to Flextronics
International Ltd.
8
<PAGE>
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, 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 market 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 over four years. We recorded total deferred
stock compensation of $1.8 million, $2.4 million, $11.1 million and $0.2 million
in 1996, 1997, 1998 and the six months ended June 30, 1999, respectively, and
amortized $0.2 million, $1.4 million, $3.9 million and $3.3 million in 1996,
1997, 1998 and six months ended June 30, 1999, respectively, leaving
approximately $6.7 million to be amortized in future periods.
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
income data for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------
1999 1998 1999 1998
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 47.3 62.1 47.6 63.3
------------ ----------- ---------- ---------
Gross profit 52.7 37.9 52.4 36.7
Operating expenses:
Research and development 14.3 139.6 16.2 222.8
Sales and marketing 14.5 74.4 16.3 105.0
General and administrative 5.8 56.3 6.9 78.5
Amortization of deferred stock
compensation 7.0 44.3 9.1 62.8
------------ ----------- ---------- ---------
Total operating expenses 41.6 314.6 48.5 469.1
------------ ----------- ---------- ---------
Income (loss) from operations 11.1 (276.7) 3.9 (432.4)
Other Income, net 2.9 --- 2.2 4.9
------------ ----------- ---------- ---------
Income (loss) before income taxes 14.0 (276.7) 6.1 (427.5)
Provision for income taxes 3.8 --- 2.5 ---
------------ ----------- ---------- ---------
Net income (loss) 10.2 (276.7) 3.6 (427.5)
============ =========== ========== =========
</TABLE>
9
<PAGE>
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
Net Revenue. Net revenue increased from $1.3 million for the three months
ended June 30, 1998 to $22.9 million in the three months ended June 30, 1999.
This increase was due to increased sales of our CE200 DSL access concentrators
and related DSL CPE. Sales to our two largest customers, NorthPoint and Rhythms,
increased from $0.6 million and $0.1 million, respectively, for the three months
ended June 30, 1998 to $8.5 million and $11.1 million, respectively, for the
three months ended June 30, 1999.
Gross Profit. Our gross profit increased from $0.5 million for the three
months ended June 30, 1998 to $12.1 million in the three months ended June 30,
1999. The increase in gross profit occurred primarily because of the increase in
net revenue for the period. Gross profit percentages also increased on a year
over year basis, from 37.9% for the quarter ended June 30, 1998 to 52.7% for the
quarter ended June 30, 1999. This increase in gross profit was primarily due to
the increase in unit volumes, and to a lesser extent due to the decreased unit
costs associated with improved overhead absorption and a favorable product mix.
Research and Development. Our research and development expenses increased
from $1.8 million for the quarter ended June 30, 1998 to $3.3 million for the
quarter ended June 30, 1999. This increase was due to an increase in personnel
expenses related to an increase in our engineering staff, quality and technical
support costs, and higher depreciation. Research and development expenses as a
percentage of net revenue decreased from 139.6% for the quarter ended June 30,
1998 to 14.3% for the quarter ended June 30, 1999. This decrease in research and
development expense as a percentage of net revenue was primarily the result of
an increase in our net revenue during the stated periods.
Sales and Marketing. Our sales and marketing expenses increased from $1.0
million for the quarter ended June 30, 1998 to $3.3 million for the quarter
ended June 30, 1999. This increase was due to an increase in personnel expenses
for sales and marketing staff, increased sales commissions associated with
higher net revenue, and increased trade show and other promotional expenses
during the stated periods. Sales and marketing expenses as a percentage of net
revenue decreased from 74.4% of net revenue for the quarter ended June 30, 1998
to 14.5% for the quarter ended June 30, 1999. This decrease was principally the
result of an increase in our net revenue.
General and Administrative. Our general and administrative expenses increased
from $0.7 million for the quarter ended June 30, 1998 to $1.3 million for the
quarter ended June 30, 1999. This increase was due to increased staffing for
finance and accounting and management information systems personnel, and growth
in recruiting and human resources expenses. General and administrative expenses
as a percentage of net revenue decreased from 56.3% for the quarter ended June
30, 1998 to 5.8% for the quarter ended June 30, 1999. This decrease was
primarily the result of an increase in our net revenue.
Interest and Other income. Other income increased from $62,000 for the
quarter ended June 30, 1998 to $0.7 million for the quarter ended June 30, 1999.
This increase was primarily due to an increase in interest income as a result of
higher average cash balances in the quarter ended June 30, 1999 which was
primarily attributable to the proceeds from our initial public offering
completed in May of 1999.
Interest Expense. Our interest expense increased from $62,000 for the quarter
ended June 30, 1998 to $65,000 for the quarter ended June 30, 1999.
Provision for Income Taxes. We did not incur any provision for income taxes
for the quarter ended June 30, 1998, while our provision for the quarter ended
June 30, 1999 was $0.9 million. The provision for income taxes for the three
months ended June 30, 1999 is based on an estimate of the effective tax rate for
the entire 1999 fiscal year.
10
<PAGE>
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Net Revenue. Net revenue increased from $1.6 million for the six months ended
June 30, 1998 to $36.1 million in the six months ended June 30, 1999. This
increase was due to increased sales of our CE200 DSL access concentrators and
related DSL CPE. Sales to our two largest customers, NorthPoint and Rhythms,
increased from $0.9 million and $0.1 million, respectively, for the six months
ended June 30, 1998 to $13.3 million and $17.5 million, respectively, for the
six months ended June 30, 1999.
Gross Profit. Our gross profit increased from $0.6 million for the six
months ended June 30, 1998 to $18.9 million for the six months ended June 30,
1999. The increase in gross profit occurred primarily because of the increase in
net revenue for the period. Gross profit percentages also increased on a year
over year basis, from 36.7% for the six months ended June 30, 1998 to 52.4% for
the six months ended June 30, 1999. This increase in gross profit was primarily
due to the increase in unit volumes, and to a lesser extent due to the decreased
unit costs associated with improved overhead absorption and a favorable product
mix.
Research and Development. Our research and development expenses increased
from $3.6 million for the six months ended June 30, 1998 to $5.8 million for the
six months ended June 30, 1999. This increase was due to an increase in
personnel expenses related to more full-time engineering staff, quality and
technical support costs, and higher depreciation. Research and development
expenses as a percentage of net revenue decreased from 222.8% for the six months
ended June 30, 1998 to 16.2% for the six months ended June 30, 1999. This
decrease in research and development expense as a percentage of net revenue was
primarily the result of an increase in our net revenue during the stated
periods.
Sales and Marketing. Our sales and marketing expenses increased from $1.7
million for the six months ended June 30, 1998 to $5.9 million for the six
months ended June 30, 1999. This increase was due to an increase in personnel
expenses for sales and marketing staff, increased sales commissions associated
with higher net revenue and increased trade show and other promotional expenses
during the stated periods. Sales and marketing expenses as a percentage of net
revenue decreased from 105.0% of net revenue for the six months ended June 30,
1998 to 16.3% for the six months ended June 30, 1999. This decrease was
principally the result of an increase in our net revenue.
General and Administrative. Our general and administrative expenses increased
from $1.3 million for the six months ended June 30, 1998 to $2.5 million for the
six months ended June 30, 1999. This increase was due to increased staffing for
finance and accounting and management information systems personnel, and growth
in recruiting and human resources expenses. General and administrative expenses
as a percentage of net revenue decreased from 78.5% for the six months ended
June 30, 1998 to 6.9% for the six months ended June 30, 1999. This decrease was
primarily the result of an increase in our net revenue.
Interest and Other income. Other income increased from $175,000 for the six
months ended June 30, 1998 to $0.9 million for the six months ended June 30,
1999. This increase was primarily due to an increase in interest income as a
result of higher average cash balances in the six months ended June 30, 1999
which was primarily attributable to the proceeds from our initial public
offering completed in May of 1999.
Interest Expense. Our interest expense increased from $95,000 for the six
months ended June 30, 1998 to $122,000 for the six months ended June 30, 1999.
Provision for Income Taxes. We did not incur any provision for income taxes
for the six months ended June 30, 1998, while our provision for the six months
ended June 30, 1999 was $0.9 million. The provision for income taxes for the six
months ended June 30, 1999 is based on an estimate of the effective tax rate for
the entire 1999 fiscal year.
11
<PAGE>
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of equity securities. Through 1998, we raised approximately $44.5 million,
net of fees and expenses, through the sale of preferred stock offerings. In May
1999, we closed our initial public offering with proceeds to us of approximately
$90.0 million. Additionally, we have received loans for the purchase of capital
equipment.
At June 30, 1999, we had cash and cash equivalents of $101.1 million and
short-term investments of $5.6 million. We have a $4.0 million line of credit
agreement with a bank which allows us to borrow an amount equal to 80% of
eligible accounts receivable plus the lesser of 25% of our eligible inventory or
$500,000. There were no amounts outstanding under the line of credit at June 30,
1999. As of June 30, 1999 we had $2.6 million outstanding under various
equipment financing arrangements
Cash provided by/(used for) operating activities for the six months ended June
30, 1999 and 1998 was $2.8 million and $(6.8) million, respectively. This
increase was primarily the result of an increase in net income, depreciation and
non-cash compensation.
Cash provided by investing activities for the six months ended June 30, 1999
and 1998 was $2.1 million and zero, respectively. This increase was the result
of net sales of short-term investments, which was partially offset by the
purchase of computers and other equipment.
Cash provided by financing activities for the six months ended June 30, 1999
and 1998 was $88.6 million and $0.2 million, respectively. This increase was
primarily due to the proceeds from our initial public offering.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. 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
investments, funds available under our existing line of credit and any cash
generated from operations will be sufficient to satisfy our cash requirements
for at least the next twelve months. Our management intends to invest our cash
in excess of current operating requirements in short-term, interest-bearing,
investment-grade securities.
Impact of Year 2000
Many computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches, and are commonly referred to as the "Year 2000 Problem."
We implemented a compliance plan to identify and remediate Year 2000 problems
for our products, internal infrastructure and technology based office equipment.
We have completed the testing of our products and believe that they are Year
2000 compliant. As we develop and design new products we will continue to test
them for Year 2000 compliance. We have completed our Year 2000 compliance
testing for our critical internal systems and we believe that we have identified
all potential problem areas. We expect
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to complete the remediation of our internal systems by the end of September
1999. We do not anticipate that the remaining modifications to our internal
systems will have a material impact on our operating results. We have also
completed our Year 2000 compliance testing on our office equipment and believe
that we are substantially year 2000 compliant and in any case we do not expect
that these systems will require material modifications.
We estimate that the total cost of completing our Year 2000 compliance program
including all required modifications, upgrades or replacements of our internal
systems will not exceed $100,000, most of which we expect to incur during
calendar 1999. This estimate is being monitored, and we will revise it as
additional information becomes available.
As part of our Year 2000 plan, we contacted third-party suppliers of
components and our key subcontractors used in the delivery of our products to
identify and, to the extent possible, resolve issues involving the Year 2000
Problem. However, we have limited or no control over the actions of these third-
party suppliers and subcontractors. Thus, while we expect that we will be able
to resolve any significant Year 2000 Problems with these third parties, there
can be no assurance that these suppliers will resolve any or all Year 2000
Problems before the occurrence of a material disruption to the operation of our
business. Any failure of these third parties to timely resolve Year 2000
Problems with their systems could have a material adverse effect on our
business, financial condition and results of operations.
We are developing contingency plans to be implemented if our efforts to
identify and correct Year 2000 Problems affecting our internal systems are not
effective. Our implementation of any contingency plans could have a material
adverse effect on our business, financial condition and results of operations.
The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. The Company believes that its
products and critical systems will be Year 2000 compliant by the end of
September 1999. However, there is no guarantee that these results will be
achieved. Our ability to achieve Year 2000 compliance, and the level of
incremental costs associated therewith, could be adversely affected by, among
other things, the availability and cost of contract personnel and external
resources, third-party suppliers' ability to modify proprietary software, and
unanticipated problems not identified in the ongoing compliance review.
Risk Factors That May Affect Results of Operations and Financial Condition
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 had accumulated losses of $22.2 million since its
inception and may continue to incur net losses in the future. We anticipate
continuing to incur significant sales and marketing, product development and
general and administrative expenses and, as a result, we will need to generate
significantly higher revenues to achieve and sustain profitability on an annual
basis. Although our revenue has grown in recent quarters, on an annual basis, we
cannot be certain that our revenue growth will continue or increase in the
future or that we will realize sufficient revenues to achieve and sustain annual
profitability.
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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 two largest customers accounted for
approximately 85% of our total net revenues for the six months ended June 30,
1999. Sales to our most significant customers, Rhythms NetConnections, Inc. and
NorthPoint Communications, Inc., accounted for approximately 48% and 37% of
Copper Mountain's net revenues, respectively, for the six months ended June 30,
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
Copper Mountain has a very limited operating history. We were incorporated in
March 1996 and have generated only limited revenues. 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 timely and effectively introduce new products and product enhancements;
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:
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. 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 attain and maintain production volumes and quality levels
for our products;
. the mix of products sold and the mix of distribution channels through which
they are sold;
. 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 products 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 Telecommunications
Act of 1996 (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
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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 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, services that 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, and we are not able to compensate for such expenses,
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, co-brand and/or 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 any revenue will be derived from strategic arrangements.
If any of our strategic partners breaches or terminates its agreement or fails
to perform its obligations under its
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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 January 1999, shortly after we entered into our original equipment
manufacturer agreement with Lucent, Lucent announced an agreement to acquire
Ascend Communications, Inc., a competitor of ours which offers a competing DSL
solution. As a result, Lucent may seek to reduce the marketing and/or sales of
our products in favor of competitive products manufactured by Ascend.
Intense Competition in the Market for Telecommunications Equipment Could
Prevent Copper Mountain From Increasing or Sustaining Revenue and Prevent Copper
Mountain From Achieving or Sustaining Annual Profitability
The market for telecommunications equipment is highly competitive. We compete
directly with the following companies: Cisco Systems, Inc., Lucent Technologies,
Inc., Alcatel S.A., Nokia Corporation and Paradyne Corporation. We also compete
with other DSL equipment providers. 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 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 consolidation
involving these parties could reduce the demand for our products and otherwise
harm our business prospects.
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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 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 Access 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;
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. our successful development, introduction and market acceptance of new and
enhanced products that address customer requirements;
. product introductions or announcements by our competitors;
. price competition in our industry and between DSL and competing
technologies; and
. technological change.
Copper Mountain's Limited Ability to Protect Its Intellectual Property May
Adversely Affect Its Ability to Compete
Copper Mountain's success and ability to compete is dependent in part upon its
proprietary technology. Any infringement of our proprietary rights could result
in significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
We rely on a combination of copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We presently have no patents, although we have
one patent application pending which we intend to pursue but which is not
central to our current business. 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.
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 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 accounting 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.
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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 1998, we increased the number of employees
from 56 to 111 and during the first six months of 1999 we added 74 additional
employees bringing the total to 185. 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 18 months, including a number of
key managerial, technical and operations personnel who we have not yet fully
integrated. 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.
We operate 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 two key components from vendors for which there are currently no
substitutes: a semiconductor chip, 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 six 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.
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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
manufacturers are unable or unwilling to continue manufacturing our components
in required volumes, we will have to identify acceptable alternative
manufacturers, which could take in excess of six months. 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.
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 significantly 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.
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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 sales and marketing and other factors. If capital 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 term of such debt could impose restrictions
on our operations. Additional financing may not be available when needed on
terms favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, 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.
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.
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.
22
<PAGE>
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. While we have no current agreements or
negotiations underway with respect to any such acquisitions, 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;
. 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.
23
<PAGE>
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 own approximately 45% of the outstanding shares of common
stock. 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 or prevent our
stockholders from realizing a premium over the market prices for their shares of
common stock.
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;
. 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 multiples
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 June 30, 1999, we have
23,263,238 shares of common stock outstanding, of which approximately 4,600,000
shares are freely transferable without restriction or registration under the
Securities Act of 1933, unless such shares are held by our affiliates, as that
term is defined in Rule 144 under the Securities Act. The officers and directors
and all of our existing stockholders have agreed with Morgan Stanley & Co.
Incorporated or have otherwise agreed with us not to sell or otherwise dispose
of any of their until November 9, 1999.
24
<PAGE>
However, Morgan Stanley & Co. Incorporated may, in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-up
agreements. Sales of common stock by existing stockholders in the public market,
or the availability of such shares for sale, could adversely affect the market
price of the common stock.
In June 1999 we filed a registration statement on Form S-8 with the Securities
and Exchange Commission covering the 7,195,587 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. On November 9, 1999 at least 1,235,369 shares will be
subject to immediately exercisable options (based on options outstanding on June
30, 1999). Sales of a large number of shares could have an adverse effect on
the market price for our common stock.
Holders of 15,670,530 shares of common stock (including shares issuable upon
exercise of warrants) will have certain rights with respect to registration of
such shares for sale to the public. If such holders, by exercising their
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for our common stock. If we were to include in a company-initiated
registration shares held by such holders pursuant to the exercise of their
registration rights, such sales may have an adverse effect on our ability to
raise needed capital.
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 3. 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 June 30, 1999.
25
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended June
30, 1999.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Copper Mountain Networks, Inc.
Date: August 6, 1999 /s/ Richard S. Gilbert
------------------
Richard S. Gilbert
President
Chief Executive Officer
/s/ John A. Creelman
----------------
John A. Creelman
Vice President of Finance
Chief Financial Officer
Secretary
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 101,135
<SECURITIES> 5,635
<RECEIVABLES> 15,616
<ALLOWANCES> 100
<INVENTORY> 6,251
<CURRENT-ASSETS> 129,852
<PP&E> 8,150
<DEPRECIATION> (2,856)
<TOTAL-ASSETS> 136,543
<CURRENT-LIABILITIES> 14,622
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 120,258
<TOTAL-LIABILITY-AND-EQUITY> 136,543
<SALES> 36,106
<TOTAL-REVENUES> 36,106
<CGS> 17,199
<TOTAL-COSTS> 17,199
<OTHER-EXPENSES> 17,495
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> 2,214
<INCOME-TAX> 907
<INCOME-CONTINUING> 1,307
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,307
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.06
</TABLE>
