<PAGE>
Filed Pursuant to Rule 424(b)(4)
File Number 333-73153
PROSPECTUS
4,000,000 Shares
[LOGO OF COPPER MOUNTAIN]
COMMON STOCK
----------------
COPPER MOUNTAIN NETWORKS, INC. IS OFFERING 4,000,000 SHARES OF ITS COMMON
STOCK. THIS IS OUR INITIAL PUBLIC OFFERING.
----------------
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "CMTN."
----------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
----------------
PRICE $21 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND COPPER
PUBLIC COMMISSIONS MOUNTAIN
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................... $21.00 $1.47 $19.53
Total........................................ $84,000,000 $5,880,000 $78,120,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Copper Mountain has granted the underwriters the right to purchase up to an
additional 600,000 shares to cover any over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares of common stock to purchasers on
May 18, 1999.
----------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
a division of
Dain Rauscher
Incorporated
May 12, 1999
<PAGE>
[INSIDE FRONT COVER PAGE]
PHOTOGRAPHS, DESCRIPTIONS AND CAPTIONS
1. Top Caption: Copper Mountain Networks is a Leading Supplier of DSL
Communications Products
2. Top: Color photo of CopperEdge DSL access concentrator, one of our
products. Caption: CopperEdge DSL Access Concentrators. CopperEdge DSL
Access Concentrators enable Competitive Local Exchange Carriers (CLECs),
Incumbent Local Exchange Carriers (ILECs), Internet service providers and
multi-tenant unit service providers to deploy high-speed Internet and
remote LAN access services at competitive rates using ordinary copper
telephone wiring. CopperEdge allows DSL users to access network services at
speeds ranging from 128 kbps to 1.544 Mbps.
3. Center: Color photo of CopperRocket DSL access device, one of our products.
Caption: CopperRocket DSL Devices. CopperRocket customer premise equipment
(CPE) is used by teleworkers, small and medium businesses and other DSL
users. The CopperRocket provides high-performance, always-on, dedicated
Internet and LAN access. Users improve productivity while obtaining more
affordable telecommunications costs. Multiple speeds from 128 kbps to 1.544
Mbps fit today's budget and bandwidth needs.
4. Bottom: Color photo of a computer monitor. Caption: CopperView Network
Management Tools. CopperView network management tools allow carriers to
easily configure, diagnose and monitor their DSL networks end-to-end from
one site, match service offerings to the budget and bandwidth needs of each
customer and--with the touch of a button--migrate a user to a higher-speed
service in real time.
<PAGE>
[INTERIOR FOLD-OUT OF FRONT COVER PAGE]
IMAGES, DIAGRAM, DIAGRAM DESCRIPTIONS AND CAPTIONS
1. Left side: Captions describing four key benefits of Copper Mountain's
solution:
. Support for Business Applications: Our products enable
telecommunications service providers to deliver business services
such as high-speed Internet access, corporate networking,
teleworking and remote PBX extension.
. Full Coverage DSL: Our SDSL and IDSL-based products allow our
telecommunications service provider customers the flexibility and
range to reach their targeted customers.
. Multi-Vendor CPE Interoperability: We have partnered with third-
party DSL CPE manufacturers through the CopperCompatible(TM) program
to develop a broad line of modems, routers and other innovative CPE
which are compatible with our CopperEdge DSL Access Concentrators.
. Trouble-Free Operations: Our products are designed to reduce
installation and support requirements for our customers while
allowing large scale central-office based deployment of DSL
solutions with a zero-installation "plug and play" DSL CPE that
eliminates complex configuration issues for the end user.
2. Center: Diagram of a communications network of a metropolitan CLEC's DSL
deployment with a CLEC metro office, multiple ILEC central offices with
CopperEdge DSL access concentrators, multi-tenant building with a
CopperEdge DSL access concentrator, and multiple small office, home office
and residential subscribers with access devices and corporate, Internet
service provider and Internet data services. Caption: CLEC Metropolitan DSL
Network Enabled by Copper Mountain Networks.
3. Right side: Color logos of the following customers of Copper Mountain:
NorthPoint Communications, Inc.; UUNET, a subsidiary of MCI WorldCom, Inc.;
ICG Communications, Inc.; Rhythms NetConnections Inc.; InterAccess; JATO
Communications Corporation; Pacific Crest Networks, Inc.; and OnSite Access
LLC. Caption: Copper Mountain's CLEC Customers Deploy DSL Nationwide.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Operating
Results................................................................. 24
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business................................................................... 34
Management................................................................. 46
Certain Transactions....................................................... 55
Principal Stockholders..................................................... 57
Description of Capital Stock............................................... 60
Shares Eligible for Future Sale............................................ 62
Underwriters............................................................... 64
Legal Matters.............................................................. 66
Experts.................................................................... 66
Additional Information..................................................... 66
Index to Financial Statements.............................................. F-1
</TABLE>
We are a Delaware corporation. Our principal executive offices are located
at 2470 Embarcadero Way, Palo Alto, California 94303, and our telephone number
is (650) 858-8500. Our fiscal year ends on December 31. We maintain a
worldwide web site at www.coppermountain.com. The reference to our worldwide
web address does not constitute incorporation by reference of the information
contained at this site. CopperThrottle and the Copper Mountain logo are
registered trademarks of Copper Mountain. Copper Mountain, CopperEdge,
CopperView, CopperCompatible, CopperCraft and CopperRocket are unregistered
trademarks of Copper Mountain. All other brand names or trademarks appearing
in this prospectus are the property of their respective holders.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
Except as otherwise noted, all information in this prospectus assumes (1)
the conversion of all outstanding shares of our preferred stock into common
stock on a three-for-two basis upon the completion of this offering, and (2)
no exercise of the underwriters' over-allotment option. In addition, all
common share numbers and common per share data in this prospectus reflect a
three-for-two stock split effected on November 25, 1998.
UNTIL JUNE 6, 1999 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information and
financial statements and notes appearing elsewhere in this prospectus. You
should carefully consider, among other things, the matters set forth in "Risk
Factors."
THE COMPANY
Copper Mountain is a leading supplier of high-speed digital subscriber line,
or DSL, based communications products. Our solutions enable telecommunications
service providers to provide high-speed, cost-effective connectivity over the
existing copper wire telephone infrastructure to the business, multi-tenant
unit and residential markets. We believe there is significant demand for high-
speed data access services, especially among business users who have found
current solutions to be inadequate or too expensive. Therefore, Copper Mountain
has initially focused on producing equipment that supports practical, large-
scale deployment of DSL services to businesses and their associated
teleworkers.
The emergence of 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. While there are a number of alternatives to deliver high-
bandwidth connectivity, we believe that none has the cost, performance and
coverage advantages of using the existing copper wire telephone infrastructure.
DSL is a technology that was developed to enable telecommunications service
providers to exploit this existing infrastructure to provide guaranteed,
dedicated bandwidth at a low cost to virtually all businesses and homes in the
United States.
Telecommunications service providers are seeking vendors that have
effectively incorporated DSL into communications equipment solutions enabling
them to offer cost-effective, full-coverage, high-bandwidth data access
services. Our flexible, scalable solution consists of the following products:
CopperEdge DSL access concentrators, CopperRocket DSL customer premise
equipment, and CopperView network management tools. Our products offer the
following benefits:
. Support for Business Applications. Our products enable
telecommunications service providers to deliver business services such
as high-speed Internet access, corporate networking, teleworking and
packet-based voice solutions.
. Full Coverage DSL. Our symmetric DSL and ISDN DSL-based products allow
our telecommunications service provider customers the flexibility and
range to reach their targeted customers.
. Multi-Vendor Customer Premise Equipment Interoperability. We have
partnered with third-party DSL customer premise equipment manufacturers
through our CopperCompatible program to develop a broad line of modems,
routers and other innovative customer premise equipment that is
compatible with our CopperEdge DSL access concentrators.
. Trouble Free Operations. Our products are designed to reduce
installation and support requirements for our customers while allowing
large scale central-office based deployment of DSL solutions with a
zero-installation "plug and play" DSL customer premise equipment that
eliminates complex configuration issues for the end user.
Our objective is to be the leading supplier of DSL solutions to
telecommunications service providers. We will focus on expanding our presence
in the business and multi-tenant building markets. In addition, we will address
the emerging opportunities we expect to develop in the residential market as
telecommunications service providers seek to offer DSL services to residential
subscribers seeking high-speed access. Our products are designed to support
future services and technology, and we are currently developing the capability
required to support additional services, such as virtual private networking and
voice-over-packet, as well as additional DSL variants, to meet evolving
telecommunications service provider and subscriber requirements. Finally, we
are working to drive interoperability of DSL technology to facilitate faster
and broader market acceptance.
We sell our products through a direct sales force and selected original
equipment manufacturers and distributors to telecommunications service
providers. As of March 31, 1999, we have sold over 1,300 CopperEdge DSL access
concentrators. We have also formed strategic relationships with Lucent
Technologies Inc. and 3Com Corporation to allow us to expand our distribution
and market presence. In addition, to facilitate faster and broader market
acceptance of our solutions, we have promoted a "CopperCompatible" program
through which we offer licenses of our DSL customer premise equipment
technology to other manufacturers of customer premise equipment. We were
incorporated in California in 1996 and reincorporated in Delaware in 1999. Our
principal executive offices are located at 2470 Embarcadero Way, Palo Alto,
California 94303, and our telephone number is (650) 858-8500.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered............................... 4,000,000 shares
Common stock to be outstanding after the offering.. 22,387,005 shares
Use of proceeds.................................... We intend to use the net
proceeds from the offering
for general corporate
purposes, including
working capital and
capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............. CMTN
</TABLE>
The above information about the offering is based upon the number of shares
of common stock outstanding as of March 31, 1999. It excludes, as of March 31,
1999, (1) 6,585,372 shares of common stock reserved for issuance under our 1996
Equity Incentive Plan and 360,000 shares of common stock reserved for issuance
under our 1999 Non-Employee Directors' Stock Option Plan, of which 4,582,225
shares and 180,000 shares, respectively, were subject to outstanding options at
weighted average exercise prices of $2.22 per share and $12.00 per share,
respectively; (2) 355,706 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.08 per share;
and (3) 200,000 shares of common stock issuable upon exercise of outstanding
non-qualified stock options at a weighted average exercise price of $12.00 per
share. See "Description of Capital Stock," "Management--1996 Equity Incentive
Plan" and "Management--1999 Non-Employee Directors' Stock Option Plan."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The "as adjusted" column in the Balance Sheet Data table below reflects our
sale of shares of common stock offered by this prospectus (at an initial public
offering price of $21.00 per share) and the application of our net proceeds
from the offering, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, as described in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 11, 1996 THREE MONTHS
(INCEPTION) YEAR ENDED ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue................ $ -- $ 211 $21,821 $ 317 $13,217
Gross profit (loss)........ -- (1,506) 9,421 100 6,833
Loss from operations....... (2,225) (11,187) (10,524) (3,367) (1,135)
Net loss................... (2,181) (11,016) (10,331) (3,287) (1,036)
Pro forma basic and diluted
net loss per share(1)..... $ (.62) $ (.06)
Shares used in computing
pro forma basic and
diluted net loss per
share(1).................. 16,668 17,544
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $18,507 $ 95,877
Working capital........................................... 23,805 101,175
Total assets.............................................. 37,393 114,763
Long-term debt and capital lease obligations, less current
portion.................................................. 1,828 1,828
Total stockholders' equity................................ 27,585 104,955
</TABLE>
- --------
(1) Pro forma basic and diluted per share calculations reflect the conversion
upon the closing of the offering of all outstanding shares of preferred
stock into 15,334,824 shares of common stock.
5
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus 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, EXPECTS FUTURE LOSSES AND MAY NOT
ACHIEVE OR SUSTAIN ANNUAL PROFITABILITY
Copper Mountain has had accumulated losses of $24.6 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. Copper Mountain has incurred net losses of approximately $2.2
million for the period from inception through December 31, 1996, approximately
$11.0 million for fiscal year 1997 and approximately $10.3 million for fiscal
year 1998. As of December 31, 1998, we had an accumulated deficit of
approximately $23.5 million. Although our revenue has grown in recent
quarters, on a year to year 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 profitability.
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 79% of our total net revenues for the twelve months ended
December 31, 1998. Sales to our most significant customers, NorthPoint
Communications, Inc. and Rhythms NetConnections, Inc., accounted for
approximately 61% and 18% of Copper Mountain's total revenues, respectively,
for the twelve months ended December 31, 1998. 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.
ICG Communications, Inc., which was a significant customer in 1998, recently
signed an agreement to sell its digital subscriber line, or DSL, assets,
including those already deployed or scheduled for delivery, to NorthPoint
Communications and to designate NorthPoint Communications as its preferred DSL
provider. As a result, ICG Communications may reduce, or even eliminate, the
completion of its own DSL network, and consequently reduce or cease its
purchases of our products. For the twelve months ended December 31, 1998,
Copper Mountain's total revenues from ICG Communications accounted for
approximately 9% of its total revenues.
6
<PAGE>
COPPER MOUNTAIN HAS A LIMITED OPERATING HISTORY UPON WHICH TO BASE YOUR
INVESTMENT DECISION
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:
. 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
7
<PAGE>
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 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.
8
<PAGE>
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. The Company recorded charges totaling $897,000 and $504,000
for the years ended December 31, 1997 and 1998, respectively, to take into
consideration excess inventory levels and obsolete inventory. We also recorded
charges for purchase commitments related to obsolete inventory not yet
received by December 31, 1997 of approximately $582,000. 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 recently signed 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
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. For a
further discussion of our strategic relationships with Lucent and 3Com please
refer to "Business--Strategic Relationships and Interoperability
Partnerships."
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., Ascend
(acquisition by Lucent pending), Alcatel S.A., Diamond Lane Communications
Corporation (acquisition by Nokia Corporation pending) 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.
9
<PAGE>
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, as exemplified by the recently announced
acquisitions of Ascend by Lucent and Diamond Lane by Nokia. 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.
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
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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 resources 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
. 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, and in particular on
Richard S. Gilbert, President and Chief Executive Officer; Joseph
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Markee, Chief Technology Officer; Steven Hunt, Vice President of Engineering;
and Michael Kelly, Vice President of Sales. Except for agreements with Mr.
Gilbert, Mr. Markee and Mr. Hunt, 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.
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 three
months of 1999 we added 43 additional employees. This expansion is placing a
significant strain on our managerial, operational and financial 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. Moreover, we currently fully occupy our existing
facilities in San Diego, and we have secured a new facility to replace them.
To the extent we are unsuccessful in our efforts to build-out and move into
larger facilities in San Diego, our ability to add new personnel and expand
our operations in San Diego will be adversely affected.
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We may not be able to complete this move in a timely or cost effective manner,
and there may be disruptions related to such move that could materially
adversely affect our business, financial condition and results of operations.
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, many 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: a semiconductor chip, a power supply 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.
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. We have historically subcontracted
substantially all of our manufacturing to one company, SMS Technology, located
in San Diego, California. We recently entered into a letter of intent with
Flextronics International Ltd., located in San Jose, California and expect to
have a formal agreement in place by April 30, 1999. Under the letter of
intent, Flextronics will be our main source of independent manufacturing. The
transition from SMS Technology to Flextronics may result in delays,
interruptions or quality problems, and we may not effectively manage the
transition. 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
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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. For additional background on recent
legislation affecting the telecommunications industry please refer to
"Business--Industry Background."
COPPER MOUNTAIN MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND ITS
OPERATIONS WHEN NEEDED
Copper Mountain expects to use the net proceeds of this offering primarily
to continue investments in product development, to expand sales and marketing
activities and to make capital expenditures. We believe that such proceeds,
together with our existing capital resources, will be sufficient to meet our
capital requirements for at least the next twelve months. However, 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
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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.
IF COPPER MOUNTAIN OR ITS KEY SUPPLIERS FAIL TO BE YEAR 2000 COMPLIANT, COPPER
MOUNTAIN'S BUSINESS MAY BE SEVERELY DISRUPTED AND ITS RESULTS OF OPERATIONS
MAY BE MATERIALLY ADVERSELY AFFECTED
As is true for most companies, the Year 2000 problem creates a risk for
Copper Mountain. If systems do not correctly recognize date information when
the year changes to 2000, there could be an adverse impact on our operations.
The risk exists primarily in four areas:
. potential warranty or other claims from our customers, which may result
in significant expense to Copper Mountain;
. failures of systems we use to run our business, which could disrupt our
business operations;
. systems used by our suppliers, which could delay or affect the quality
of our manufacturing of products; and
. the potential for failures of our products, particularly our central
office-based systems, due to Year 2000 problems associated with products
manufactured by other equipment vendors used in conjunction with our
products, which may require that we replace any such products and
potentially incur significant unexpected expenses.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting a comprehensive inventory and evaluation
of the information systems used to run our business. Systems which are
identified as non-compliant will be upgraded or replaced. For the Year 2000
non-compliance issues identified to date, the cost of remediation is not
expected to be material to our operating results. However, if implementation
of replacement systems is delayed, or if significant new non-compliance issues
are identified, our business, financial condition or results of operations
could be materially adversely affected.
We intend to contact our critical suppliers and contract manufacturers to
determine whether their operations and the products and services they provide
are Year 2000 compliant. Where practicable, we will attempt to
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mitigate our risks with respect to the failure of our suppliers and contract
manufacturers to be prepared for any Year 2000 problems. However, such
failures remain a possibility and could have a material adverse impact on our
business, financial condition or results of operations.
Although we believe our products are Year 2000 compliant, because all
customer situations cannot be anticipated, we may see an increase in warranty
and other claims as a result of the Year 2000 transition. In addition,
litigation regarding Year 2000 compliance issues is expected to escalate. For
these reasons, the impact of customer claims could have a material adverse
impact on 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. 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.
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We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could have a material adverse effect on our business, financial
condition and results of operations.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL
Upon completion of this offering, Copper Mountain's executive officers,
directors and principal stockholders and their affiliates will own 10,197,372
shares or approximately 45.6% of the outstanding shares of common stock (44.4%
if the underwriters' over-allotment option is exercised in full). 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. For information about the ownership of
common stock by our executive officers, directors and principal stockholders
please refer to "Principal Stockholders."
COPPER MOUNTAIN'S STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO
RESELL SHARES AT OR ABOVE THE OFFERING PRICE
There has previously not been a public market for Copper Mountain's common
stock. We cannot predict the extent to which investor interest in Copper
Mountain will lead to the development of a trading market or how liquid that
market might become. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
Underwriters and may not be indicative of prices that will prevail in the
trading market. The trading price of our common stock could be subject to wide
fluctuations in response to factors such as:
. 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.
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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 after this offering or the perception that such sales could
occur could cause the market price of its common stock to drop. Upon
completion of this offering, we will have approximately 22,387,005 shares of
common stock outstanding, of which approximately 4,000,000 shares
(approximately 4,600,000 shares if the underwriters' over-allotment option is
exercised in full) will be 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 shares for 180 days after the date
of this prospectus. 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 addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the 7,445,372 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 the date 180 days after the effective date of this
offering, at least 1,475,555 shares will be subject to immediately exercisable
options (based on options outstanding on March 31, 1999). Sales of a large
number of shares could have an adverse effect on the market price for our
common stock.
After this offering, the holders of 15,690,530 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.
18
<PAGE>
COPPER MOUNTAIN HAS NO SPECIFIC PLAN FOR ANY SIGNIFICANT PORTION OF PROCEEDS
AND ITS INVESTMENT OF THE NET PROCEEDS MAY NOT YIELD A FAVORABLE RETURN
Copper Mountain currently has no specific plans for any significant portion
of the net proceeds of the offering. As a consequence, our management will
have the discretion to allocate the net proceeds of this offering to uses the
stockholders may not deem desirable. We may not be able to invest these
proceeds to yield a significant return. Substantially all of the proceeds of
the offering will be invested in short-term, interest-bearing, investment
grade securities for an indefinite period of time.
THE PURCHASERS IN THE OFFERING WILL IMMEDIATELY EXPERIENCE SUBSTANTIAL
DILUTION IN NET TANGIBLE BOOK VALUE
Because Copper Mountain's common stock has in the past been sold at prices
substantially less than the initial public offering price that you will pay,
you will suffer immediate dilution of $16.31 per share in pro forma net
tangible book value. The exercise of outstanding options and warrants may
result in further dilution. See "Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus 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. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risks Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
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.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Copper Mountain from the sale of
4,000,000 shares of common stock in this offering are estimated to be
$77,370,000 ($89,088,000 if the underwriters exercise their over-allotment
option in full), at an initial public offering price of $21.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses of $750,000 payable by Copper Mountain.
We expect to use the net proceeds for general corporate purposes, including
working capital and other corporate purposes, such as expansion of sales and
marketing activities and our overall operations. The amounts we actually
expend for such working capital and other purposes may vary significantly and
will depend on a number of factors, including the amount of our future
revenues and the other factors described under "Risk Factors." Accordingly,
our management will retain broad discretion in the allocation of the net
proceeds of this offering. A portion of the net proceeds may also be used to
acquire or invest in complimentary businesses, technologies, product lines or
products. We have no current plans, agreements or commitments with respect to
any such acquisition, and we are not currently engaged in any negotiations
with respect to any such transaction. Pending such uses, the net proceeds of
this offering will be invested in short term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. In addition, our loan and security
agreement with a commercial bank prohibits the payment of dividends. Any
future determination to pay cash dividends will be at the discretion of the
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business condition and such other
factors as the board of directors may deem relevant.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the conversion upon the closing of the
offering of all outstanding shares of preferred stock into 15,334,824
shares of common stock; and
. on a pro forma basis as adjusted to reflect the sale of the common stock
offered hereby at an initial public offering price of $21.00 per share
and the receipt of the net proceeds therefrom, after deducting the
underwriting discounts and commissions and estimated expenses payable by
Copper Mountain.
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Long-term debt, less current portion(1)........ $ 1,828 $ 1,828 $ 1,828
Stockholders' equity:
Convertible preferred stock, no par value,
10,602,464 shares authorized, 10,223,230
shares issued and outstanding actual; $.001
par value, 5,000,000 shares authorized, no
shares issued and outstanding pro forma and
pro forma as adjusted....................... 44,502 -- --
Common stock, $.001 par value,
29,397,536 shares authorized, 3,052,181
shares issued and outstanding actual,
18,387,005 shares issued and outstanding pro
forma; 100,000,000 shares authorized,
22,387,005 shares issued and outstanding pro
forma as adjusted(2)........................ 3 18 22
Notes receivable from stockholders........... (41) (41) (41)
Paid-in capital.............................. 15,988 60,475 137,841
Deferred compensation........................ (8,303) (8,303) (8,303)
Accumulated deficit.......................... (24,564) (24,564) (24,564)
-------- -------- --------
Total stockholders' equity................. 27,585 27,585 104,955
-------- -------- --------
Total capitalization..................... $ 29,413 $ 29,413 $106,783
======== ======== ========
</TABLE>
- --------
(1) See Notes 3 and 4 of Notes to Financial Statements.
(2) Excludes: (1) 6,585,372 shares of common stock reserved for issuance under
our 1996 Equity Incentive Plan and 360,000 shares of common stock reserved
for issuance under our 1999 Non-Employee Directors' Stock Option Plan, of
which 4,582,225 shares and 180,000 shares, respectively, were subject to
outstanding options at weighted average exercise prices of $2.22 per share
and $12.00 per share, respectively; and (2) 355,706 shares of common stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $2.08 per share; and (3) 200,000 shares of common stock
issuable upon exercise of outstanding non-qualified stock options at a
weighted average exercise price of $12.00 per share. See "Description of
Capital Stock," "Management--1996 Equity Incentive Plan" and "Management--
1999 Non-Employee Directors' Stock Option Plan."
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$27.5 million or $1.50 per share of common stock. Pro forma net tangible book
value represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding, assuming
conversion of all outstanding shares of preferred stock into common stock.
Without taking into account any other changes in the net tangible book value
after March 31, 1999, other than to give effect to our sale of the 4,000,000
shares of common stock offered hereby at an initial public offering price of
$21.00 per share, and our receipt of the estimated net proceeds therefrom, our
as adjusted pro forma net tangible book value as of March 31, 1999 would have
been approximately $104.9 million or $4.69 per share. This represents an
immediate increase in net tangible book value of $3.19 per share to existing
stockholders and an immediate dilution of $16.31 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $21.00
Pro forma net tangible book value per share before this
offering....................................................... $1.50
Increase per share attributable to new investors................ 3.19
-----
As adjusted pro forma net tangible book value per share after this
offering......................................................... 4.69
------
Dilution per share to new investors............................... $16.31
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with
respect to the number of shares of common stock purchased from Copper
Mountain, the total consideration paid and the average price per share paid,
before deducting the underwriting discounts and commissions and estimated
offering expenses payable by Copper Mountain.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 18,387,005 82.1% $ 45,739,000 35.3% $ 2.49
New investors................. 4,000,000 17.9 84,000,000 64.7 21.00
---------- ----- ------------ -----
Total....................... 22,387,005 100.0% $129,739,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of March 31, 1999. As of March 31, 1999, there were
options outstanding to purchase a total of 4,962,225 shares of common stock
with a weighted average exercise price of $2.97 per share and warrants
outstanding to purchase a total of 355,706 shares of common stock with a
weighted average exercise price of $2.08 per share. To the extent that any of
these options or warrants are exercised, there will be further dilution to new
investors.
22
<PAGE>
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
period March 11, 1996 (inception) to December 31, 1996, the years ended
December 31, 1997 and 1998, and the three month periods ended March 31, 1998
and 1999. The financial statements for the period March 11, 1996 (inception)
to December 31, 1996 and the years ended December 31, 1997 and 1998 have been
audited by Ernst & Young LLP, independent auditors. The financial statements
for the three-month periods ended March 31, 1998 and 1999 have not been
audited.
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 in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11, 1996
(INCEPTION) THROUGH YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------------- ------------------ --------------------
1996 1997 1998 1998 1999
------------------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $ -- $ 211 $ 21,821 $ 317 $ 13,217
Cost of revenue......... -- 1,717 12,400 217 6,384
------- -------- -------- --------- ---------
Gross profit (loss)..... -- (1,506) 9,421 100 6,833
Operating expenses:
Research and
development.......... 1,483 4,753 7,225 1,773 2,564
Sales and marketing... -- 1,510 5,363 724 2,581
General and
administrative....... 553 1,928 3,428 535 1,130
Amortization of
deferred stock
compensation......... 189 1,490 3,929 435 1,693
------- -------- -------- --------- ---------
Total operating
expenses........... 2,225 9,681 19,945 3,467 7,968
------- -------- -------- --------- ---------
Loss from operations.... (2,225) (11,187) (10,524) (3,367) (1,135)
Interest income......... 47 268 406 113 202
Interest expense........ (3) (97) (213) (33) (55)
------- -------- -------- --------- ---------
Loss before income
taxes.................. (2,181) (11,016) (10,331) (3,287) (988)
Provision for income
taxes.................. -- -- -- -- 48
------- -------- -------- --------- ---------
Net loss................ $(2,181) $(11,016) $(10,331) $ (3,287) $ (1,036)
======= ======== ======== ========= =========
Basic and diluted net
loss per share(1)...... $(11.67) $ (15.62) $ (7.75) $ (3.08) $ (.47)
======= ======== ======== ========= =========
Shares used to compute
basic and diluted net
loss per share(1)...... 187 705 1,333 1,068 2,209
======= ======== ======== ========= =========
Pro forma basic and
diluted net loss per
share(2)............... $ (.62) $ (.06)
======== =========
Shares used in computing
pro forma basic and
diluted net loss per
share(2)............... 16,668 17,544
======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $3,406 $ 9,517 $18,529 $18,507
Working capital.............................. 366 7,653 24,326 23,805
Total assets................................. 4,056 12,332 36,209 37,393
Long-term debt and capital lease obligation,
less current portion........................ 262 735 1,965 1,828
Total stockholders' equity................... 750 9,069 26,843 27,585
</TABLE>
- --------
(1) See Note 1 of Notes to the Financial Statements for a description of the
computation of basic and diluted net loss per share and the number of
shares used to compute basic and diluted net loss per share.
(2) Pro forma per share calculations reflect the conversion upon the closing
of the offering of all outstanding shares of preferred stock into
15,334,824 shares of common stock.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
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 March 31, 1999, we
had an accumulated deficit of $24.6 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 three months ended March 31, 1999, with NorthPoint
and Rhythms accounting for approximately 36% and 48% of our revenue,
respectively, during the quarter. 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. 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, 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. With the recent strategic original equipment manufacturer
agreements with Lucent Technologies Inc. and 3Com Corporation, we expect to
generate increasing original equipment manufacturer revenue in the future. A
significant increase in our original equipment manufacturer revenue, while not
certain, could further 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., eight line cards per system which can support
up to 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 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 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.
24
<PAGE>
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
manufacturing facility in San Diego, California. Accordingly, a significant
portion of our cost of revenue consists of payments to our current contract
manufacturer, SMS Technologies, Inc. We expect to transition to a new
independent manufacturer, Flextronics International Ltd., during the second
quarter of 1999. We selected Flextronics as our new 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, 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 $1,813,000, $2,429,000, $11,128,000 and
$234,000 in 1996, 1997, 1998 and the three months ended March 31, 1999,
respectively, and amortized $189,000, $1,490,000, $3,929,000 and $1,693,000 in
1996, 1997, 1998 and the three months ended March 31, 1999, respectively,
leaving approximately $8,303,000 to be amortized in future periods.
Despite growing revenues, we have not been profitable on a fiscal-year
basis, and we may continue to incur net losses. In addition to the customer
concentration we have experienced, we also have a lengthy sales cycle for our
products, and there is often a significant delay between the time we incur
expenses and the time we realize the related revenue. To the extent that
future revenues do not increase significantly in the same periods in which
operating expenses increase, our operating results would be adversely
affected. On March 31, 1999 we entered into a lease for a new facility in San
Diego, California which expires in July 2005. As a result, we expect to
combine our two offices in San Diego in this new facility which we expect will
provide us room for future expansion.
25
<PAGE>
QUARTERLY OPERATING RESULTS
The following tables present unaudited quarterly operating results, in
dollars and as a percentage of net revenue, for the five quarters ended March
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.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenue................ $ 317 $ 1,281 $ 5,556 $14,667 $13,217
Cost of revenue............ 217 795 3,359 8,029 6,384
-------- ------- ------- ------- -------
Gross profit............... 100 486 2,197 6,638 6,833
Operating expenses:
Research and development.. 1,773 1,788 1,765 1,899 2,564
Sales and marketing....... 724 954 1,377 2,308 2,581
General and
administrative........... 535 721 971 1,201 1,130
Amortization of deferred
stock compensation....... 435 568 1,294 1,632 1,693
-------- ------- ------- ------- -------
Total operating
expenses................ 3,467 4,031 5,407 7,040 7,968
-------- ------- ------- ------- -------
Loss from operations....... (3,367) (3,545) (3,210) (402) (1,135)
Interest income............ 113 62 18 213 202
Interest expense........... (33) (62) (65) (53) (55)
-------- ------- ------- ------- -------
Loss before income taxes... (3,287) (3,545) (3,257) (242) (988)
Provision for income
taxes..................... -- -- -- -- 48
-------- ------- ------- ------- -------
Net loss................... $ (3,287) $(3,545) $(3,257) $ (242) $(1,036)
======== ======= ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF NET REVENUE
----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue............ 68.5 62.1 60.5 54.7 48.3
-------- ------- ------- ------- -------
Gross profit............... 31.5 37.9 39.5 45.3 51.7
Operating expenses:
Research and development.. 559.3 139.6 31.7 12.9 19.4
Sales and marketing....... 228.4 74.4 24.8 15.8 19.5
General and
administrative........... 168.8 56.3 17.5 8.2 8.5
Amortization of deferred
stock compensation....... 137.2 44.3 23.3 11.1 12.8
-------- ------- ------- ------- -------
Total operating
expenses................ 1,093.7 314.6 97.3 48.0 60.2
-------- ------- ------- ------- -------
Loss from operations....... (1,062.2) (276.7) (57.8) (2.7) (8.5)
Interest income............ 35.7 4.8 0.3 1.5 1.5
Interest expense........... (10.4) (4.8) (1.2) (0.4) (0.4)
-------- ------- ------- ------- -------
Loss before income taxes... (1,036.9) (276.7) (58.7) (1.6) (7.4)
Provision for income
taxes..................... -- -- -- -- 0.4
-------- ------- ------- ------- -------
Net loss................... (1,036.9)% (276.7)% (58.7)% (1.6)% (7.8)%
======== ======= ======= ======= =======
</TABLE>
26
<PAGE>
FIVE QUARTERS ENDED MARCH 31, 1999
Net Revenue. Our revenue increased in each of the three quarters ended
December 31, 1998. Revenue in the quarter ended March 31, 1999 was $1.5
million less than in the quarter ended December 31, 1998 primarily due to a
decline in our shipments to NorthPoint which were partially offset by an
increase in our shipments to Rhythms. The increase in revenue in each of the
prior three quarters reflected the commercial acceptance of our CE200, the
successive release of various DSL line cards for the CE200 systems, release of
our DSL CPE, investments made in our marketing and direct sales organization
and the increased commercial acceptance of DSL technology.
Gross Profit. Our gross profit increased in each of the four quarters ended
March 31, 1999. The increases were due to operating efficiencies including
favorable product mix, decreased unit costs and improved overhead absorption.
We include warranty reserves, which are accrued monthly under our warranty
policy, in our cost of revenue figures. These warranty reserves are taken in
connection with the repair and replacement of certain products.
Research and Development. Our research and development expenses increased in
each of the four quarters ended March 31, 1999 except for the quarter ended
September 30, 1998 where expenses decreased slightly because of temporary
reductions in expenses for prototype material. These expenses have generally
increased because of increases in our personnel costs, quality and technical
support expenses, depreciation expense and costs of outside services. Expenses
for prototype materials fluctuated, on a quarter to quarter basis, due to the
timing of commercial releases of our products, and we may also continue to
experience fluctuations in prototype material expenses in the future. Research
and development expenses as a percentage of revenue declined in each of the
three quarters ended December 31, 1998 due to increases in our net revenue in
each such quarter. Research and development expenses as a percentage of
revenue increased in the quarter ended March 31, 1999 compared to the prior
quarter due to a substantial increase in the expenses and a reduction in net
revenue.
Sales and Marketing. Our sales and marketing expenses increased in each of
the four quarters ended March 31, 1999 due to general increases in personnel
costs, sales commissions, public relations expenses, and other variable
marketing expenses. Additionally, we have continued to increase our co-
marketing efforts and expenditures with vendors supplying Copper Mountain
compatible DSL CPE, strategic original equipment manufacturers and customers.
We expect these expenses, including costs of trade show participation, costs
of sponsorship of industry forums and expenses for prototype products, to
continue to increase in the future. Sales and marketing expenses as a
percentage of revenue declined in each of the three quarters ended December
31, 1998 due to increases in our net revenue in each such quarter. Sales and
marketing expense as a percentage of revenue increased in the quarter ended
March 31, 1999 as compared to the prior quarter due to an increase in these
expenses and a reduction of net revenue.
General and Administrative. Our general and administrative costs increased
in each of the three quarters ended December 31, 1998 due to increased
personnel and facilities related expenses. The decrease in our general and
administrative expenses in the quarter ended March 31, 1999 was due to lower
expenses for bonuses and relocation of employees. General and administrative
expenses as a percentage of revenue declined in each of the three quarters
ended December 31, 1998 due to increases in our net revenue in each such
quarter. General and administrative expense as a percentage of revenue
increased in the quarter ended March 31, 1999 as compared to the prior quarter
due to a reduction of net revenue and an increase in these expenses.
Interest Income (Expense). Our quarterly interest income fluctuated over the
last four quarters due to changes in our cash balances related to the timing
of the sale of our series D preferred stock in October 1998. Our quarterly
interest expense has also fluctuated over the last four quarters, due
primarily to varying interest expenses associated with our line of credit.
Provision for Income Taxes. The Company had not recorded any provision for
income taxes except for the quarter ended March 31, 1999 which is based on an
estimate of the effective tax rate for the entire fiscal year 1999.
27
<PAGE>
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. Because of these and other
factors, our 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. We may not be able to
increase our revenues in future periods or be able to sustain our existing
level of revenues or our rate of revenue growth on a quarterly or annual
basis. In addition, our annual or quarterly operating results may not meet the
expectations of securities analysts and investors. If this happens, the
trading price of our common stock could significantly decline.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
statement of operations data for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------- ----------------------
1997 1998 1998 1999
-------- ----- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue.......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue...................... 813.7 56.8 68.5 48.3
-------- ----- ---------- -------
Gross profit (loss).................. (713.7) 43.2 31.5 51.7
Operating expenses:
Research and development........... 2,252.6 33.1 559.3 19.4
Sales and marketing................ 715.6 24.6 228.4 19.5
General and administrative......... 913.8 15.7 168.8 8.5
Amortization of deferred stock
compensation...................... 706.2 18.0 137.2 12.8
-------- ----- ---------- -------
Total operating expenses......... 4,588.2 91.4 1,093.7 60.2
-------- ----- ---------- -------
Loss from operations................. (5,301.9) (48.2) (1,062.2) (8.5)
Interest income...................... 127.0 1.9 35.7 1.5
Interest expense..................... (46.0) (1.0) (10.4) (0.4)
-------- ----- ---------- -------
Loss before income taxes............. (5,220.9) (47.3) (1,036.9) (7.4)
Provision for income taxes........... -- -- -- 0.4
-------- ----- ---------- -------
Net loss............................. (5,220.9)% (47.3)% (1,036.9)% (7.8)%
======== ===== ========== =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Net Revenue. Net revenue increased from $317,000 for the three months ended
March 31, 1998 to $13.2 million in the three months ended March 31, 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 $279,000 and zero, respectively, for the three months ended
March 31, 1998 to $4.8 million and $6.4 million, respectively, for the three
months ended March 31, 1999. For each of the quarters ended March 31, 1998 and
1999, we generated no revenue from international sales.
Gross Profit. Our gross profit increased from $100,000 for the three months
ended March 31, 1998 to $6.8 million in the three months ended March 31, 1999.
This increase in gross profit occurred because the increase in net revenue for
the respective periods was greater than the increase in cost of revenue for
the respective periods. Gross margin percentages also increased on a year over
year basis, from 31.5% for the quarter ended March 31, 1998 to 51.7% for the
quarter ended March 31, 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 March 31, 1998 to $2.6 million for the
quarter ended March 31, 1999. This increase was due to an
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increase in personnel expenses related to more full-time engineering staff,
prototype materials expenses, quality and technical support costs,
depreciation and costs of other outside services. Research and development
expenses as a percentage of revenue decreased from 559.3% for the quarter
ended March 31, 1998 to 19.5% for the quarter ended March 31, 1999. This
decrease in research and development expense as a percentage of 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
$724,000 for the quarter ended March 31, 1998 to $2.6 million for the quarter
ended March 31, 1999. This increase was due to an increase in sales
commissions associated with higher net revenue, higher personnel expenses for
sales and marketing staff, trade show and other promotional expenses and
expenses for prototype products during the stated periods. Sales and marketing
expenses as a percentage of revenue decreased from 228.4% of revenue for the
quarter ended March 31, 1998 to 19.5% for the quarter ended March 31, 1999.
This decrease was principally the result of an increase in our net revenue.
General and Administrative. Our general and administrative expenses
increased from $535,000 for the quarter ended March 31, 1998 to $1.1 million
for the quarter ended March 31, 1999. This increase was due to increased
staffing for finance and accounting and management informations systems
personnel, an increase in legal expenses, and growth in recruiting and human
resources expenses. General and administrative expenses as a percentage of
revenue decreased from 168.8% for the quarter ended March 31, 1998 to 8.5% for
the quarter ended March 31, 1999. This decrease was primarily the result of an
increase in our net revenue.
Interest Income (Expense). Our interest income increased from $113,000 for
the quarter ended March 31, 1998 to $202,000 for the quarter ended March 31,
1999. This increase was due to higher average cash balances in the quarter
ended March 31, 1999 which are attributable to the our series D preferred
stock financing which was concluded in the quarter ended December 31, 1998.
Our interest expense increased from $33,000 for the quarter ended March 31,
1998 to $55,000 for the quarter ended March 31, 1999. This increase was due to
a greater utilization of equipment lease financing for the quarter ended March
31, 1999.
Provision for Income Taxes. We did not incur any provision for income taxes
for the quarter ended March 31, 1998, while our provision for the quarter
ended March 31, 1999 was $48,000. The provision for income taxes for the three
months ended March 31, 1999 is based on an estimate of the effective tax rate
for the entire 1999 fiscal year.
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 $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 and as well as expenses related to the completion and commercial
release of our initial products. 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.
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,
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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
administrative staffing, was required to support the growth in our operations,
commercial activities and customer base.
Interest Income (Expense). Net interest income increased by $22,000, from
$171,000 in 1997 to $193,000 in 1998. This increase reflects an increase in
interest income generated from higher average cash balances in 1998. The
increases in interest income were partially offset by lesser increases, from
1997 to 1998, in interest expense associated with our equipment loans and our
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
sale of preferred equity securities and more recently through the use of loans
for the purchase of capital equipment. We have raised an aggregate of $44.5
million, net of offering expenses, through the sale of preferred stock
offerings.
At March 31, 1999, we had cash and cash equivalents of $8.5 million and
short-term investments of $10.0 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
March 31, 1999. In addition, we have secured equipment financing with three
lenders which terms allow us to borrow $3.7 million. As of March 31, 1999,
$2.7 million remained outstanding under these arrangements. See Notes 3 and 4
of Notes to Financial Statements.
Cash provided from operations for the three months ended March 31, 1999 was
$1.4 million. Cash provided from operations was primarily related to income
and depreciation. Cash used in operating activities for the periods ended
December 31, 1996, 1997 and 1998 was $1.5 million, $8.0 million and $14.3
million, respectively. The relative increase in cash used for operating
activities for the year ended December 31, 1997 compared to the prior period
was primarily due to an increase in net loss of $8.8 million which was
partially offset by an increase in accounts payable and other accruals. 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
inventory, accounts receivable 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 quarter ended March 31, 1999 was
$644,000. Cash used in investing activities for the periods ended December 31,
1996, 1997 and 1998 was $682,000, $1.5 million and $12.1 million,
respectively. The relative increase in cash used for investing activities for
the year ended December 31, 1997 compared to the prior period was primarily
due to an $833,000 increase in 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 investments, which was partially offset by a
decrease in the amount of equipment purchased.
Cash provided from financing for the three months ended March 31, 1999 was
$61,000. Cash provided by financing activities for the periods ended December
31, 1996, 1997 and 1998 was $5.6 million, $15.6 million and $24.5 million,
respectively. The relative increase in cash provided by investing activities
for the year ended December 31, 1997 compared to the prior period was
primarily due to $15.2 million in net proceeds from our issuance of series B
and series C preferred stock. 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 our
issuance of series D preferred stock.
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We have no material commitments other than obligations under our credit
facilities and operating and capital leases. See Notes 3, 4 and 6 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
investments and funds available under our existing line of credit 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 short-term, interest-bearing, investment-grade securities.
INTEREST RATE 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 effect the fair value of
interest sensitive financial instruments at December 31, 1998.
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."
General Readiness Assessment. The Year 2000 Problem affects the computers,
software and other equipment that we use, operate or maintain for our
operations. As a result, we have formalized our Year 2000 compliance plan (the
"Plan"), to be implemented by a team of employees, led by our internal
information technology staff, responsible for monitoring the assessment and
remediation status of our Year 2000 projects and reporting such status to the
Audit Committee of our Board of Directors. This project team is currently
assessing the potential effect and costs of remediating the Year 2000 Problem
for our internal systems. To date, we have not obtained verification or
validation from any independent third parties of our processes to assess and
correct any of our Year 2000 Problems or the costs associated with these
activities.
Assessment of Copper Mountain's Software and Products. Beginning in 1998, we
began assessing the ability of our software and products to operate properly
in the year 2000. We believe that our current products are Year 2000
compliant. Additionally, as we design and develop new products, we subject
them to testing for Year 2000 compliance and the ability to distinguish
between various date formats. We expect to continue to test our software and
products for Year 2000 compliance and compliance when used with other standard
operating systems or computer platforms, including those developed by
companies such as Microsoft Corporation and Sun MicroSystems, Inc.
Assessment of Internal Infrastructure. We believe that we have identified
most of the major computers, software application, and related equipment used
in connection with our internal operations that will need to be evaluated to
determine if they must be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. We are currently
assessing the potential impact of the Year 2000 problem on such
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applications and equipment. Upon completion of such evaluation, which we
expect to occur by the end of June 1999, we expect to commence the process of
modifying, upgrading, and replacing major systems that have been assessed as
adversely affected. We expect to complete this process before the occurrence
of any material disruption of our business.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices
may be affected by the Year 2000 Problem. We are currently assessing the
potential effect and costs of remediating the Year 2000 Problem on our office
equipment and our facilities in San Diego, California and Palo Alto,
California.
Costs of Remediation. We estimate the total cost to us of completing any
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.
Based on the activities described above, we do not believe that the Year
2000 Problem will have a material adverse effect on our business or operating
results. In addition, we have not deferred any material information technology
projects, nor equipment purchases, as a result of our Year 2000 Problem
activities.
Suppliers. As part of our Year 2000 plan, we intend to contact 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.
Most Likely Consequences of Year 2000 Problems. We expect to identify and
resolve all Year 2000 Problems that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all Year 2000 Problems affecting us have been
identified or corrected. The number of devices and systems that could be
affected and the interactions among these devices and systems are too numerous
to address. In addition, no one can accurately predict which Year 2000
Problem-related failures will occur or the severity, timing, duration, or
financial consequences of these potential failures. As a result, we believe
that the following consequences are possible:
. a significant number of operational inconveniences and inefficiencies
for us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
. possible business disputes and claims, including claims under product
warranty, due to Year 2000 Problems experienced by our customers and
incorrectly attributed to our products or performance, which we believe
will be resolved in the ordinary course of business; and
. a few serious business disputes alleging that we failed to comply with
the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
Contingency Plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct Year 2000 Problems
affecting our internal systems are not effective. We expect to complete our
contingency plans by the end of June 1999. Depending on the systems affected,
these plans could include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of backup equipment and software or other
redundant systems;
. increased work hours for our personnel or the hiring of additional
information technology staff; and
. the use of contract personnel to correct, on an accelerated basis, any
Year 2000 Problems that arise or to provide interim alternate solutions
for information system deficiencies.
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Our implementation of any of these contingency plans could have a material
adverse effect on our business, financial condition and results of operations.
Disclaimer. The discussion of our efforts and expectations relating to Year
2000 compliance are forward-looking statements. 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.
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BUSINESS
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 access services to their customers. Copper Mountain Networks
designs, manufactures, sells and supports these products and believes the
demand for higher speed access solutions which are enabled by such products is
significant and will continue to grow as the Internet and corporate networking
applications become increasing pervasive.
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 69 million in 1997 and is forecasted to grow to approximately
320 million by 2002. International Data Corporation also estimates that the
value of goods and services sold worldwide through the Internet will increase
from $12 billion in 1997 to over $400 billion in 2002. 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
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advances in semiconductor technology and industry standardization have
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-1990's, 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. However, deployments of ADSL have
been limited because of its cost and a variety of technical issues.
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. 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.
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,
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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 Access 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 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 between 128 Kbps and 1.5 Mbps
to subscribers up to and beyond 20,000 feet from the central office. We also
offer ISDN-based DSL, or IDSL, which is the only variant of DSL that can reach
the approximately 17% of U.S. subscribers connected through existing remote
digital loop carriers without requiring an upgrade of these remote systems. In
addition to symmetrical bandwidth and long reach, our SDSL and IDSL products
are based on a communications protocol that is already widely deployed
throughout the access network ensuring compatibility with other network
elements. We intend to develop products, including new DSL implementations, to
enable our customers to deliver new services to subscribers.
Multi-Vendor CPE Interoperability. We have partnered with third-party DSL
customer premise equipment manufacturers through the CopperCompatible program
to develop a broad line of modems, routers and other innovative customer
premise equipment, or CPE, which are compatible with our CopperEdge DSL access
concentrators. This program delivers more innovation in CPE products to
address subscriber requirements than any single vendor could on its own, and
gives telecommunications service providers multiple sources of compatible CPE.
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. CPE
vendors which currently have or are developing CopperCompatible CPE include
3Com Corporation, ADC Kentrox, a subsidiary of ADC Telecommunications, Inc.,
Netopia, Inc., Cayman Systems, Inc., Escalate Networks, Inc., FlowPoint
Corporation and Ramp Networks, Inc., among others.
Trouble-Free Operations. Our products are designed to reduce installation
time and support requirements for our telecommunications service provider
customers. Our CopperEdge 200 DSL access 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.
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
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focused on the business market, including well-financed CLECs and other
telecommunications service providers. To date, our major customers include
NorthPoint Communications, Inc., Rhythms NetConnections Inc., ICG
Communications, Inc. and UUNET, a subsidiary of 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.
Enhance Service Offerings. We intend to continue to add functionality and
services to increase the usefulness and performance of our products. We
believe that our core product offerings can be enhanced to offer better value
to service providers and business subscribers. Our products are designed to
support future services and technology. Currently, we are developing
additional quality of service capabilities to enable virtual private
networking and voice-over-packet services, such as remote PBX extension, to
meet evolving subscriber requirements. In addition, we are developing new
offerings with DSL technologies such as HDSL-2 and UADSL, 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. We expect these relationships to allow us to gain
greater distribution and market presence. Lucent has agreed to resell our
product line as a co-branded sale. Additionally, it is our hope that we will
work together to integrate our products with Lucent's complementary networking
products. Under the original equipment manufacturer and development agreement
with 3Com, they will offer our CPE products through their distribution
channels. We intend to leverage 3Com's broad distribution network in the
commercial and retail markets. We believe that our original equipment
manufacturer and development relationships will enhance our market position,
and we expect to continue to leverage these relationships and seek additional
collaborations.
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 begun deploying
DSL concentrators in commercial office buildings and apartment and condominium
buildings. We believe that this market, known as the multi-tenant unit market,
will significantly expand the deployment of DSL technology. While we believe
that our current product offerings are well suited to this market, we are
developing new products that will allow carriers to reduce the cost of high-
speed data access to tenants in these types of properties. 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. This
allows service providers easier deployment, as they can use a number of
different CPE products with our central office or multi-tenant equipment, and
gives subscribers the ability to choose their own premise equipment.
Additionally, interoperability 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 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 introduce new offerings that leverage both our
technology and our relationships with service providers. For example, we are
evaluating voice-over-packet and residential DSL alternatives.
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
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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 using current 56.6 Kbps analog
modems. Our products are scalable to enable carriers to serve a small number
of end users in a particular region on a cost-effective basis as well as an
entire metropolitan area with a high-performance manageable solution. Our
products are designed to support a variety of service provider network
architectures, such as ATM and Frame Relay. Our solution consists of the
following product lines:
. CopperEdge DSL access concentrators: Telecommunications service
providers install CopperEdge products in ILEC central offices and multi-
tenant buildings to deliver services to potential end users. This
product line was introduced commercially in 1997.
. CopperRocket DSL CPE: Subscriber connection to the service provider
network is provided at the subscriber's premises with CopperRocket DSL
modems. In addition, we license our DSL CPE technology to third-party
vendors to create additional CPE that are compatible with our CopperEdge
DSL access concentrators. This product line was introduced commercially
in 1997.
. 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. This product line was introduced commercially in 1998.
Because of the large scale deployment by our CLEC customers, DSL access
concentrators have accounted for substantially all of our revenue to date.
[A diagram containing pictures of the Company's CopperEdge, CopperRocket and
CopperView products depicting the locations and usage of these products within
the telecommunications infrastructure.]
CopperEdge DSL Access Concentrators
Our DSL access concentrator, the CopperEdge 200, or CE200, is a carrier-
class platform designed specifically for central office environments, and
meets or exceeds industry standards, and applicable regulatory requirements.
The CE200 can be deployed in ILEC central offices and 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;
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. 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.
. up to 8 line cards containing DSL interfaces which connect to the
subscriber DSL equipment.
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.
COPPERROCKET CUSTOMER PREMISE EQUIPMENT
The CopperRocket family of CPE products consists of SDSL and IDSL modems.
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 to configure.
Copper Mountain's ZIP! feature enables the CopperRocket to identify itself to
a CopperEdge DSL access concentrator and automatically download all
configuration parameters to immediately begin full operation.
The CopperRocket operates over ordinary copper telephone wire and provides
dedicated, full-duplex throughput at multiple speeds to support network
activities like 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 at no additional
investment 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 access concentrator networks,
individual concentrators and simple on-site or remote management. Because the
CopperEdge DSL access concentrator also manages CopperRocket modems by proxy,
CopperView allows carriers to manage their DSL networks end-to-end from one
site.
. The CopperView DSL Access Management System provides global management
of large networks of CopperEdge DSL access concentrators with a simple,
intuitive user interface.
. The CopperView Element Management System provides a graphical user
interface which allows precise configuration and management of a single
CopperEdge DSL access concentrator and its CPE.
. The CopperCraft text based interface provides a simple interface for on-
site technicians and for remote access to a DSL access concentrator.
PRODUCT DEPLOYMENT
We sell our products for deployment into both central offices and multi-
tenant buildings. A particular telecommunications service provider may deploy
in either or both of these environments in order to reach its target market in
the most effective manner.
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Central Office-Based DSL Service Deployment. ILECs or CLECs may install our
CopperEdge DSL access concentrator product in a central office in order to
offer service to any telephone service subscriber served by that wiring center
(within the distance limitations of DSL service). The diagram below shows how
a CLEC can install a CopperEdge DSL access concentrator in a collocation cage
within the ILEC central office. Typically, the CLEC leases from the ILEC a
high-bandwidth trunk, usually a 45 Mbps DS-3 circuit, in order to connect the
DSL access 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.
[A diagram depicting the telecommunications infrastructure, including a high
capacity trunk line that links the collocation cage in a ILEC's central office
to a CLEC's metropolitan office, and how these offices are linked to different
CPE through either copper wire telephone lines alone or through T-1 lines that
lead to copper wire telephone lines.]
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 Access 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.
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CUSTOMERS
In 1998, sales to our top two customers represented approximately 79% of our
revenue. Of these customers, NorthPoint Communications accounted for
approximately 61% of our revenue and Rhythms NetConnections accounted for
approximately 18% of our revenue. This concentration of revenue has continued
during the three months ended March 31, 1999, with NorthPoint and Rhythms
NetConnections accounting for approximately 36% and 48%, of our revenue,
respectively, during the quarter. The loss of a significant customer could
have a material adverse effect on our business.
CASE STUDIES
NorthPoint Communications. NorthPoint Communications is a CLEC that delivers
its NorthPoint DSLSM services to small and mid-sized businesses via wholesale
agreements with service providers nationwide. We have a close working
relationship with NorthPoint and believe that a high percentage of
NorthPoint's equipment purchases are attributable to our products. We recently
entered into an equipment purchase agreement with NorthPoint under which
NorthPoint will purchase certain products from us at specified prices for a
period of one year. NorthPoint has agreed to provide us with monthly forecasts
of its future purchases of our products and also has committed to make certain
minimum purchases of our equipment in each calendar quarter.
Rhythms NetConnections. Rhythms NetConnections is a provider of high-speed
local access networking solutions using DSL technology. Copper Mountain's
products enable Rhythms to offer both IDSL and SDSL services.
MCI WorldCom/UUNET. UUNET, an MCI WorldCom company and a global leader in
Internet communications solutions, selected Copper Mountain's end-to-end DSL
solution to deploy a new SDSL service. Now, Copper Mountain is in more than 50
of UUNET's central offices nationwide, helping to bring their 768 Kbps
dedicated DSL service to small and medium-sized businesses in the United
States.
STRATEGIC RELATIONSHIPS AND INTEROPERABILITY PARTNERSHIPS
We have established several strategic partnerships and licensing agreements
with leading CPE companies to facilitate the deployment of our products and
technology.
. Lucent. Under a recently signed original equipment manufacturer
agreement, Lucent will combine our DSL equipment with its NetCare(R)
installation, network management and customer support professional
services to create turnkey DSL solutions for CLECs. Lucent will co-brand
and market our DSL equipment for a period of up to four years. 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 the new 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 will market our DSL CPE for up to three years. 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.
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 Access 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, FlowPoint Corporation and Ramp Networks,
among others.
. ADC Kentrox. ADC Kentrox, a leading provider of managed frame relay data
service units and channel service units, is developing and will be
introducing an SDSL version of their newest
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innovation, the ServicePoint(TM) service delivery unit. The
ServicePoint(TM) service delivery unit will enable subscribers to use
their pre-existing, non-SDSL routers with our telecommunications service
provider customers' SDSL service. The ServicePoint(TM) service delivery
unit also can be upgraded to provide ADC Kentrox's frame relay
performance and bandwidth usage monitoring, which would enable our
service provider customers to provide the most sophisticated level of
frame relay services, including service level agreements and traffic
management reports.
. Netopia. Through a development and co-marketing contract, Netopia, a
market leader in developing Internet/intranet communication tools,
licensed our DSL networking technology, including integrated DSL
management functionality, to provide business class customer premise
equipment for small-to-medium sized companies. Since June 1998, Netopia
has developed, announced and is shipping three products incorporating
our licensed technology, including an IDSL router and an SDSL router. In
addition, Netopia markets the CopperRocket SDSL modem under Netopia's
own brand name through an original equipment manufacturer reseller
agreement with Copper Mountain.
SALES AND MARKETING
We sell and market our products through a direct sales force. Additionally,
we have relationships with selected original equipment manufacturers and
distributors in order to expand our sales and 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 98% of
our revenue in 1998.
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 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 and Lucent 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.
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As of March 31, 1999, our sales and marketing organization included 29
individuals. We have offices in Palo Alto and San Diego, California.
CUSTOMER SERVICE AND SUPPORT
A high level of continuing service and support is critical to our objective
of developing long-term customer relationships. The majority of our service
and support activities are related to installation support and network
configuration issues. These services are provided by telephone and directly at
customer installations with resources from our customer support group based in
San Diego, California. To date, our revenues from on-site installation and
technical assistance have been immaterial.
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 have been immaterial.
In June 1998, we engaged Lucent NetCare(R), Lucent's data communications
service organization, to provide field installation and maintenance support
for our products. Other than service and support provided by our personnel
located in San Diego, we do not intend to recruit and train our own direct
field service and support organization.
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 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.
We are currently investing significant resources in network management
product enhancements, development of a new chassis for multi-tenant units,
development of line cards delivering UADSL and HDSL2, and enhancements to the
CopperEdge DSL access concentrators enabling packet-based voice traffic.
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 access concentrators
including, Cisco Systems, Inc., Ascend Communications, Inc. (acquisition by
Lucent pending), Alcatel S.A., Diamond Lane
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Communications Corporation (acquisition by Nokia Corporation pending) 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. To the extent we expand into 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;
. price;
. 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 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 have historically
subcontracted substantially all of our manufacturing to one company, SMS
Technology, located in San Diego, California. We recently entered into a
letter of intent with Flextronics International Ltd. located in San Jose,
California and expect to have a formal agreement in place by April 30, 1999.
Under the letter of intent, Flextronics will be the sole source of contract
manufacturing for our products.
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 9002 registration for
quality assurance in production, installation and service. We plan to
strengthen manufacturing capability both in our existing facilities and
through expansion of activities with independent suppliers and manufacturers.
Our future growth will require an extension of existing internal and external
manufacturing resources, hiring of additional technical personnel, improved
coordination of supplier relationships with our inventory ordering and
management practices, and expansion of information systems to accommodate
planned growth across these areas.
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We use a combination of standard parts and components, which are generally
available from more than one vendor, and three key components that are
purchased from sole or single source vendors for which alternative sources are
not currently available: a semi-conductor chip, a power supply 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. We presently have no patents, although we do
have one patent application pending which we intend to pursue but which is not
central to our business. 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.
PROPERTIES
We lease an approximately 11,000 square foot facility in Palo Alto,
California for executive offices and for administrative, sales and marketing
purposes. The lease for this facility expires in April 2001. We also lease an
approximately 17,000 square foot facility in San Diego, California, which
serves as our principal engineering and product development facility as well
as for executive offices. The current lease for this facility expires in
October 2001. In addition, we lease an approximately 11,000 square foot
facility in San Diego, California which is used primarily for manufacturing.
The lease for this facility expires in August 2003. On March 31, 1999 we
entered into a lease for a new facility in San Diego which expires in July
2005. As a result, we intend to combine our existing San Diego offices into
this new larger facility in order to accommodate our growth.
EMPLOYEES
As of March 31, 1999 we employed approximately 154 full-time employees,
including 29 in sales and marketing, 23 in manufacturing, 70 in engineering,
23 in finance and administration and 9 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.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Copper Mountain, the positions held
by them and their ages as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard S. Gilbert...... 46 President, Chief Executive Officer and Director
John A. Creelman........ 42 Vice President of Finance, Chief Financial Officer and Secretary
Joseph D. Markee........ 45 Chief Technical Officer and Chairman of the Board of Directors
Mark Handzel............ 43 Vice President of Quality and Customer Support
Steven Hunt............. 41 Vice President of Engineering
Michael Kelly........... 48 Vice President of Sales
Bryan Long.............. 40 Vice President of Marketing
Michael Staiger......... 34 Vice President of Business Development
Joseph Harrington....... 49 Vice President of Operations
Diana Helfrich.......... 38 Vice President of Marketing Communications
Robert L. Bailey........ 41 Director
Tench Coxe(1)........... 41 Director
Roger Evans(1).......... 53 Director
Richard H. Kimball(2)... 42 Director
Raymond V. Thomas....... 56 Director
Andrew W. Verhalen(2)... 42 Director
</TABLE>
- --------
(1) Member of compensation committee
(2) Member of audit committee
Richard S. Gilbert has served as President and Chief Executive Officer of
Copper Mountain since April 1998, and as a director of Copper Mountain since
August 1998. From July 1992 to April 1998, he worked for ADC
Telecommunications Inc., most recently as Senior Vice President and,
concurrently, as President and General Manager of its subsidiary, ADC Kentrox,
a provider of high-speed access equipment for global networks. Mr. Gilbert
holds an MS in Computer Science from Stanford University and a BA in
Mathematics from the University of California at Berkeley.
John A. Creelman has served as Vice President of Finance and Chief Financial
Officer of Copper Mountain since March 1998 and as Secretary of Copper
Mountain since February 1999. From July 1997 to March 1998, he worked as a
Financial Consultant to DataWorks Corporation, a developer of Enterprise
Resource Planning software. From July 1995 to May 1997, he served as Vice
President Finance and Chief Financial Officer of ESI Software, Inc., a
provider of Internet authoring software and services. From July 1994 to June
1995 he served as Financial Controller at Western Digital Corporation, a
manufacturer of hard disk drives. From February 1992 to June 1994, he served
as Director of Finance at MTI Technology Corporation, a manufacturer of high-
end storage systems. Mr. Creelman holds an MBA and a BA in Social Sciences
from the University of California at Irvine.
Joseph D. Markee co-founded Copper Mountain in March 1996 and has served as
Chief Technical Officer of Copper Mountain since December 1998 and as Chairman
of the board of directors since inception. From Copper Mountain's inception in
March 1996 to April 1998, he served as its President and Chief Executive
Officer and from inception to February 1999, he served as Secretary of Copper
Mountain. In June 1987, he co-founded Primary Access, a remote access server
company acquired by 3Com Corporation. From June 1987 to January 1996, he
served as Vice President of Operations and Vice President of Support of 3Com
Primary Access. Mr. Markee holds a BS in Electrical Engineering from the
University of California at Davis.
Mark Handzel co-founded Copper Mountain in March 1996 and has served as Vice
President of Quality and Customer Support since May 1998. From March 1996 to
May 1998, he served as Vice President of Product
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Management of Copper Mountain. From June 1994 to March 1996, he served as
Director of Marketing and Sales at Orckit Communications, a manufacturer of
advanced DSL modems. From May 1993 to June 1994, he served as Vice President
of Product Development at Coral Systems, a provider of software products for
the wireless telecommunications industry. Mr. Handzel holds an MBA from the
University of California at Irvine, a MS in Computer Science from the
University of California at Los Angeles and a BA in Computer Science from the
State University of New York at Potsdam.
Steven Hunt has served as Vice President of Engineering of Copper Mountain
since August 1996. From June 1980 to August 1996, he held various positions
with AT&T Bell Laboratories, most recently as Department Head of the
Internetworking Technology Department of Paradyne Corporation, which was then
a subsidiary of AT&T. Paradyne is a provider of internetworking product
definition, development and support. While at Paradyne, Mr. Hunt was
responsible for the development of broadband DSL products. Mr. Hunt holds an
MSEE from Stanford University and a BSEE from Drexel University.
Michael Kelly has served as Vice President of Sales of Copper Mountain since
April 1997. From November 1995 to March 1997, he served as Vice President of
Sales at Ramp/Trancell Networks, a developer of small business network
solutions. From September 1994 to October 1995, he served as Vice President of
Sales at CoroNet Systems, a developer of network management software. From
January 1994 to September 1994, Mr. Kelly served as Vice President of Sales at
Brixton Systems, a developer of software. Mr. Kelly holds an MS in Computer
Science from George Washington University, and a BA in General Studies from
the University of Maryland.
Bryan Long has served as Vice President of Marketing of Copper Mountain
since May 1998. From June 1997 to May 1998, he founded and served as marketing
consultant for the Apheta Group, a marketing consultant company. From January
1997 to June 1997, he served as Vice President, Marketing and Customer Support
of Verilink, Inc., a supplier of wide-area network access products. From July
1996 to December 1996, he served as Director, Global Alliance Business
Development of Cisco Systems Inc., a manufacturer of networking products. From
May 1991 until its acquisition by Cisco Systems, Inc. in July 1996, he served
in various positions at StrataCom, Inc., a developer of networking products,
most recently serving as Director, Business Development and previously serving
as Director of Marketing, Channel Development and Product Line Director,
Enterprise Networks. Mr. Long holds an MS in Management from the Massachusetts
Institute of Technology, and a BA in Mathematics from the University of
Colorado.
Michael Staiger has served as Vice President of Business Development of
Copper Mountain since June 1998. From June 1996 to June 1998, he worked at
Shiva Corporation, a provider of direct-dial business access solutions,
serving most recently as Vice President of Business Development and previously
as Senior Director of Business Development. From its inception in August 1993
until its acquisition by Shiva Corporation in June 1996, he served as a co-
founder and Vice President of Business Development of AirSoft, Inc., a
developer of remote access software. Mr. Staiger holds an MBA from the
University of Chicago Graduate School of Business and a BA in English from the
University of Michigan.
Joseph Harrington has served as Vice President of Operations of Copper
Mountain since October 1998. From February 1996 to October 1998, he served as
Director of Operations of the Corollary Division of Intel Corporation, a
manufacturer of symmetric multi-processing computers and network
communications equipment. From June 1995 to February 1996, Mr. Harrington
served as Director of Production of the Symtak Division of Aetrium, Inc., a
manufacturer of handlers and test equipment for the integrated circuit
industry. From September 1992 to August 1994, he served as Manufacturing
Manager of IDT/Alston, a manufacturer of magnetic tape units and digital
emulation systems for the telecommunications industry.
Diana Helfrich has served as Vice President of Marketing Communications of
Copper Mountain since July 1997. From April 1996 to July 1997, she was the
principal of her own direct marketing and management consulting firm. From
November 1991 to March 1996, she served as President and Managing Director of
the
47
<PAGE>
Council on Education in Management, an employment law educator. Ms. Helfrich
holds an MBA from St. Mary's College and a BA in English Literature from the
University of California at Berkeley.
Robert L. Bailey has served as a director of Copper Mountain since March
1999. Mr. Bailey has served as President and Chief Executive Officer of PMC-
Sierra, Inc., formerly Sierra Semiconductor, a leading maker of high speed
internetworking semiconductor products since July 1997. From November 1993 to
July 1997, Mr. Bailey served as President and Chief Executive Officer of PMC-
Sierra Ltd, a predecessor of PMC-Sierra, Inc. Mr. Bailey holds a BSEE from the
University of Bridgeport in Connecticut and an MBA from the University of
Dallas in Texas.
Tench Coxe has served as a director of Copper Mountain since March 1996. Mr.
Coxe joined Sutter Hill Ventures, a venture capital firm, in October 1987 and
is currently a Managing Director of the General Partner of Sutter Hill
Ventures. Mr. Coxe currently serves as a director of Clarus Corporation, Edify
Corporation and NVIDIA Corporation and several privately-held companies. Mr.
Coxe holds an MBA from Harvard University and a BA in Economics from Dartmouth
College.
Roger Evans has served as a director of Copper Mountain since March 1996.
Mr. Evans joined Greylock Management Corporation in 1989 and is currently a
General Partner of Greylock Limited Partnership, Greylock Equity Limited
Partnership and Greylock IX Limited Partnership, each a venture capital firm.
Mr. Evans is a director of Ascend Communications, Maker Communications Inc.
and several privately-held companies. Mr. Evans holds an MA in Economics from
King's College, Cambridge.
Richard H. Kimball has served as a director of Copper Mountain since October
1998. Since 1995, Mr. Kimball has been a founding General Partner of
Technology Crossover Ventures II, L.P. ("Technology Crossover"), a venture
capital firm. Preceding Technology Crossover, Mr. Kimball spent more than ten
years at Montgomery Securities, where he was a Managing Director from 1991
until his departure. He also serves on the board of directors of several
privately-held technology companies. Mr. Kimball holds an MBA from the
University of Chicago and an AB in History from Dartmouth College.
Raymond V. Thomas has served as a director of Copper Mountain since March
1999. Mr. Thomas has served as Vice President, Finance and Chief Financial
Officer of HNC Software Inc., a software company, since February 1995 and as
secretary of HNC Software since May 1995. From May 1993 to February 1995, he
served as Executive Vice President and Chief Financial Officer of Golden
Systems Inc., a power supply manufacturer, and from September 1994 to February
1995 he also served as Chief Operating Officer of Golden Systems. Mr. Thomas
holds a BS degree in industrial management from Purdue University.
Andrew W. Verhalen has served as a director of Copper Mountain since
February 1999. Mr. Verhalen has been a partner of Matrix Partners, a venture
capital firm, since April 1992. He also serves on the board of directors of
several privately-held technology companies. Prior to Matrix Partners, Mr.
Verhalen held senior management positions at 3Com Corporation and Intel
Corporation. Mr. Verhalen holds BSEE, MEng and MBA degrees from Cornell
University.
Messrs. Markee and Handzel are brothers-in-law. There are no other family
relationships between any of the directors or executive officers of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an audit committee and a compensation
committee. The audit committee consists of Andrew W. Verhalen and Richard H.
Kimball. The audit committee makes recommendations to the board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors and
reviews and evaluates our audit and control functions.
48
<PAGE>
The compensation committee consists of Tench Coxe and Roger Evans. The
compensation committee makes recommendations regarding our 1996 Equity
Incentive Plan and makes decisions concerning salaries and incentive
compensation for our employees and consultants.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services on
the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board of
directors and committee meetings. All directors are eligible to participate in
our 1996 Equity Incentive Plan. Non-employee directors are eligible to
participate in our 1999 Non-Employee Director's Plan.
BOARD-COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all
capacities during the fiscal year ended December 31, 1998 by our Chief
Executive Officer and four other most highly compensated executive officers.
The compensation described in this table does not include medical, group life
insurance or other benefits which are available generally to all our salaried
employees and certain perquisites and other personal benefits received which
do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL SALARY BONUS ALL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION ($) ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- ------------------ ------ -------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Richard S. Gilbert...... $185,358 $ 74,330 $ -- 844,645 $65,177(1)
President and Chief
Executive Officer
Michael Kelly........... 130,863 160,000 559,230(2) 150,000 --
Vice President of Sales
Joseph D. Markee........ 157,256 40,000 -- -- --
Chief Technical Officer
and Chairman of the
Board of Directors
Bryan Long.............. 99,840 90,000 -- 338,292 --
Vice President of
Marketing
Steven Hunt............. 138,572 30,000 -- 75,000 --
Vice President of
Engineering
</TABLE>
- --------
(1) Represents relocation expenses.
(2) Represents sales commissions.
49
<PAGE>
STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth certain information regarding options granted
to certain of our executive officers during the fiscal year ended December 31,
1998. The number of shares underlying options granted, and the exercise price
per share, have been adjusted to reflect the three-for-two stock split of our
common stock effective November 25, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
OPTIONS STOCK APPRECIATION
SHARES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM ($)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAME GRANTED (#) YEAR (%) SHARE ($) DATE 5% 10%
- ---- ----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Gilbert...... 844,645 27.4% .32 06/11/08 $ 169,982 $ 430,767
Michael Kelly........... 150,000 4.9 .53 09/23/08 50,312 127,499
Bryan Long.............. 338,292 11.0 .32 06/11/08 68,080 172,528
Steven Hunt............. 75,000 2.4 .53 09/23/08 25,156 63,750
</TABLE>
Twenty-five percent of these options vest on the first anniversary of the
date of hire and the remainder vest in equal installments each month over the
three-year period following the first anniversary of the date of hire. Options
were granted at an exercise price equal to the fair market value of our common
stock, as determined by the board of directors on the date of grant. In making
this determination, the board considered a number of factors, including:
. our historical and prospective future revenue and profitability,
. our cash balance and rate of cash consumption,
. the development and size of the market for our products,
. the status of our financing activities,
. the stability and tenure of our management team, and
. the breadth of our product offerings.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. There can be no assurance provided to any
executive officer or any other holder of our securities that the actual stock
price appreciation over the option term will be at the assumed 5% and 10%
levels or at any other defined level.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information as of December 31, 1998
regarding options held by certain of our executive officers. There were no
stock appreciation rights outstanding at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Gilbert...... -- $ -- -- 844,645 $ -- $3,952,939
Michael Kelly........... -- -- 155,216 200,284 693,298 894,602
Bryan Long.............. -- -- -- 338,292 -- 1,583,207
Steven Hunt............. 15,000 19,000 160,000 200,000 714,667 893,333
</TABLE>
In the table above, the value of unexercised in-the-money options is based on
the fair market value of the Company's common stock, determined by the board
of directors as discussed above to be $5.00 per share on or
50
<PAGE>
about December 31, 1998, minus the per share exercise price multiplied by the
number of shares. The value realized for Mr. Hunt's option exercise is equal
to the fair market value of the purchased shares determined by the board as
described above, on the option exercise date, less the exercise price paid for
such shares.
1996 EQUITY INCENTIVE PLAN
In August 1996, the board of directors adopted our 1996 Equity Incentive
Plan (the "1996 Plan"). A total of 7,873,383 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 least 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 our
directors, officers, key employees, consultants and certain advisors.
The 1996 Plan permits the granting of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 1996 Plan permits the granting of stock appreciation rights in
conjunction with or independently of options, as well as stock bonuses and
rights to purchase restricted stock. No person is eligible to be granted
options and SARs covering more than 500,000 shares of common stock in any
calendar year.
The 1996 Plan is administered by the board of directors or a committee
appointed by the board of directors. Subject to the limitations set forth in
the 1996 Plan, the board of directors has the authority to select the persons
to whom grants are to be made, to designate the number of shares to be covered
by each stock award, to determine whether an option is to be an incentive
stock option or a nonstatutory stock option, to establish vesting schedules,
to specify the option exercise price and the type of consideration to be paid
to us upon exercise and, subject to certain restrictions, to specify other
terms of stock awards.
The maximum term of options granted under the 1996 Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under all such plans
of the Company and its affiliates) may not exceed $100,000, or the options or
portion thereof which exceed such limit (according to the order in which they
are granted) shall be treated as nonstatutory stock options. Incentive stock
options granted under the 1996 Plan generally are non-transferable.
Nonstatutory stock options are generally transferable. Options expire three
months after the termination of an optionee's service. In general, if an
optionee is permanently disabled or dies during his or her service, such
person's options may be exercised up to 12 months following such disability or
18 months following such death.
The exercise price of options granted under the 1996 Plan is determined by
the board of directors in accordance with the guidelines set forth in the 1996
Plan. The exercise price of an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant. Options granted
under the 1996 Plan vest at the rate specified in the option agreement. The
exercise price of incentive stock options granted to any person who at the
time of grant owns stock representing more than 10% of the total combined
voting power of all classes of capital stock must be at least 110% of the fair
market value of such stock on the date of grant and the term of such incentive
stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the 1996
Plan shall be in such form and will contain such terms and conditions as the
board of directors deems appropriate. The purchase price under any restricted
stock purchase agreement will not be less than 85% of the fair market value of
the common stock on the date of grant. Stock bonuses and restricted stock
purchase agreements awarded under the 1996 Plan are generally transferable.
51
<PAGE>
Pursuant to the 1996 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but exercised shares that we repurchase pursuant to a
right of repurchase will not again become available for grant.
Upon certain changes in control, all outstanding stock awards under the 1996
Plan must either be assumed or substituted by the surviving entity. In the
event the surviving entity does not assume or substitute such stock awards,
such stock awards will be terminated to the extent not exercised prior to such
change in control.
As of March 31, 1999, we had issued and outstanding options to purchase
4,582,225 shares of common stock under the 1996 Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In March 1999, we adopted our 1999 Non-Employee Directors' Stock Option 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 360,000 shares of common stock has been reserved for issuance
under the directors' plan. Pursuant to the terms of the directors' plan:
. on the effective date of the Plan, each person who was then a non-
employee director was granted an option to purchase 30,000 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 30,000 shares of common
stock; and
. 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 10,000 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. Options granted under the directors' plan are generally transferable
to family members and trusts under which the director or members of the
director's family are beneficiaries. 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 the date hereof, options to purchase 180,000 shares of common stock have
been granted under the directors' plan.
EMPLOYEE STOCK PURCHASE PLAN
In February 1999, we adopted the 1999 Employee Stock Purchase Plan. A total
of 300,000 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 will commence on the effective date of this offering and terminate 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
52
<PAGE>
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.
In the event of a merger, reorganization, consolidation or liquidation, the
board of directors has discretion to provide that each right to purchase
common stock will be assumed or an equivalent right substituted by the
successor corporation or the board of directors may provide for all sums
collected by payroll deductions to be applied to purchase stock immediately
prior to such merger or other transaction. The board of directors has the
authority to amend or terminate the purchase plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase common
stock.
401(K) PLAN
We have established a tax-qualified employee savings and retirement plan
commonly known as a 401(k) Plan. The 401(k) plan provides that each
participant may contribute up to 10% of his or her pre-tax gross compensation
(up to a statutorily prescribed annual limit of $10,000 in 1999). Employees
must be twenty-one years old to participate and are eligible on the first day
of the first quarter following commencement as an employee. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.
EMPLOYMENT AGREEMENTS
On July 26, 1996, we entered into an employment offer letter with Steven
Hunt, our Vice President, Engineering, pursuant to which Mr. Hunt's annual
compensation was initially set at $130,000. In addition, we granted Mr. Hunt
an option to purchase 300,000 shares of common stock. This option vests 25% on
the first anniversary of the date of hire with the remainder vesting monthly
over the following three years. Pursuant to his employment offer letter, in
the event Mr. Hunt's employment is terminated without cause, he will receive
severance compensation equal to three months salary.
On March 18, 1998, we entered into an employment agreement with Richard S.
Gilbert, our President and Chief Executive Officer. Mr. Gilbert's annual
compensation was initially set at a base salary of $200,000 and an on-target
bonus of $100,000 for the 1998 calendar year, prorated from April 6, 1998. In
addition, we granted Mr. Gilbert an option to purchase 844,645 shares of
common stock. This option vests 25% on the first anniversary of the date of
hire with the remainder vesting monthly over the following three years.
Pursuant to Mr. Gilbert's employment agreement, in the event Mr. Gilbert's
employment is terminated by us without cause or by Mr. Gilbert for good
reason, as defined in his option agreement, following the occurrence of a
change in control, as defined in his option agreement, the vesting of his
option accelerates such that one half of the unvested portion of the option
becomes immediately exercisable. Pursuant to Mr. Gilbert's employment
agreement, we reimbursed Mr. Gilbert for relocation expenses of $65,177, and
we loaned Mr. Gilbert $1 million pursuant to an interest-free promissory note
for the purchase of his principal residence in California. The principal
amount of such note is due on March 30, 2003. The note is secured by a second
trust deed on Mr. Gilbert's residence. Mr. Gilbert's obligation to repay the
note may be accelerated upon the occurrence of certain events, including the
termination of Mr. Gilbert's employment.
On March 12, 1999, we entered into an employment agreement with Joseph D.
Markee, our Chairman of the Board and Chief Technical Officer. Pursuant to the
terms of his agreement, if the board of directors removes him, elects someone
else as Chief Technical Officer, or assigns him to work outside San Diego
County, and he subsequently resigns, Mr. Markee is entitled to certain
severance benefits. These benefits include pay equal to six months of his base
salary and twelve months of accelerated vesting of his unvested stock options.
53
<PAGE>
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND
INDEMNIFICATION
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to
the fullest extent permitted by Delaware law, except with respect to certain
proceedings initiated by such persons. We are also empowered under our bylaws
to enter into indemnification contracts with our directors and executive
officers and to purchase insurance on behalf of any person we are required or
permitted to indemnify. Pursuant to this provision, we have entered into
indemnification agreements with each of our directors and certain of our
executive officers.
In addition, our certificate of incorporation, as it will be amended and
restated upon the close of this offering, provides that our directors will not
be personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to us or our
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under Section 174 of the Delaware General Corporation Law or
. for any transaction from which the director derives an improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
restated certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. The provision does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
54
<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions since inception (March 1996),
to which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements which are otherwise required to
be described under "Management."
In April 1996, we sold 2,723,000 shares of series A preferred stock in a
private placement at a purchase price of $1.00 per share, pursuant to a Series
A Preferred Stock Agreement dated April 10, 1996. See Note 5 of Notes to
Financial Statements for a description of the series A preferred stock. Upon
the closing of this offering, each share of series A preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series A preferred stock pursuant to the
Series A Preferred Stock Agreement.
<TABLE>
<CAPTION>
DIRECTORS / 5% STOCKHOLDERS NO. OF SHARES
- --------------------------- -------------
<S> <C>
Roger Evans/Greylock Equity Limited Partnership................... 1,250,000
Tench Coxe/Entities Affiliated with Sutter Hill Ventures.......... 1,250,000
Joseph D. Markee.................................................. 50,000
Tench Coxe........................................................ 42,350
</TABLE>
In January 1997, we sold 1,850,063 shares of series B preferred stock in a
private placement at a purchase price of $3.39 per share, pursuant to a Series
B Preferred Stock Agreement dated January 14, 1997. See Note 5 of Notes to
Financial Statements for a description of the series B preferred stock. Upon
the closing of this offering, each share of series B preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series B preferred stock pursuant to the
Series B Preferred Stock Agreement.
<TABLE>
<CAPTION>
DIRECTORS / 5% STOCKHOLDERS NO. OF SHARES
- --------------------------- -------------
<S> <C>
Andrew W. Verhalen/Entities Affiliated with Matrix Partners...... 739,725
Roger Evans/Greylock Equity Limited Partnership.................. 368,732
Tench Coxe/Entities Affiliated with Sutter Hill Ventures......... 368,731
Intel Corporation................................................ 294,802
Joseph D. Markee................................................. 50,000
Tench Coxe....................................................... 12,492
</TABLE>
In January 1997, in connection with the execution of an ATM Technology
Agreement with Intel Corporation, we issued Intel a warrant to purchase up to
147,401 shares of series B preferred stock at an exercise price of $3.39 per
share. This warrant expires on January 14, 2004. Upon the closing of this
offering this warrant will become exercisable for common stock at the rate of
one and one-half shares of common stock for each share of series B preferred
stock underlying the warrant.
In October 1997, we sold 2,422,361 shares of series C preferred stock in a
private placement at a purchase price of $4.75 per share, pursuant to a Series
C Preferred Stock Agreement, dated October 29, 1997. See Note 5 of Notes to
Financial Statements for a description of the series C preferred stock. Upon
the closing of this offering, each share of series C preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series C preferred stock pursuant to the
Series C Preferred Stock Agreement.
55
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS / 5% STOCKHOLDERS NO. OF SHARES
- --------------------------- -------------
<S> <C>
Canaan Equity, L.P............................................... 736,843
Entities Affiliated with InterWest Partners VI, L.P.............. 736,843
Roger Evans/Greylock Equity Limited Partnership.................. 242,106
Tench Coxe/Entities Affiliated with Sutter Hill Ventures......... 242,106
Andrew W. Verhalen/Entities Affiliated with Matrix Partners...... 210,527
Intel Corporation................................................ 42,106
Tench Coxe....................................................... 8,059
</TABLE>
In October 1998, we sold 3,225,806 shares of series D preferred stock in a
private placement at a purchase price of $7.75 per share, pursuant to a Series
D Preferred Stock Agreement dated October 9, 1998. See Note 5 of Notes to
Financial Statements for a description of the series D preferred stock. Upon
the closing of this offering, each share of series D preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series D preferred stock pursuant to the
Series D Preferred Stock Agreement.
<TABLE>
<CAPTION>
DIRECTORS / 5% STOCKHOLDERS NO. OF SHARES
- --------------------------- -------------
<S> <C>
Richard H. Kimball/Entities Affiliated with Technology Crossover
Ventures....................................................... 774,194
Roger Evans/Greylock Equity Limited Partnership................. 147,805
Tench Coxe/Entities Affiliated with Sutter Hill Ventures........ 147,805
Intel Corporation............................................... 135,989
Andrew W. Verhalen/Entities Affiliated with Matrix Partners..... 75,478
Entities Affiliated with Canaan Equity, L.P..................... 58,527
Entities Affiliated with InterWest Partners VI, L.P............. 58,527
Tench Coxe/Wells Fargo Bank, Trustee SHV M/P/T FBO Tench Coxe... 4,918
Richard S. Gilbert.............................................. 1,422
</TABLE>
Pursuant to the Amended and Restated Investors' Rights Agreement between us
and certain of our stockholders, the underwriters have reserved for sale to
the holders of our series D preferred stock in this offering, an aggregate of
$2 million worth of shares of Copper Mountain common stock at the price per
share set forth on the cover page of this prospectus.
All of the securities referenced above were sold and purchased at prices
equal to the fair market value of the securities, as determined by our board
of directors, on the date of issuance.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 1999 and as adjusted
to reflect our sale of shares for
. each person who we know to own beneficially more than five percent of
the common stock,
. each of our directors,
. certain of our executive officers, and
. all directors and executive officers as a group.
Except as indicated, and subject to community property laws where applicable,
the persons named have sole voting and investment power with respect to all
shares shown as beneficially owned by them. Percentage of beneficial ownership
is based on 18,387,005 shares of common stock outstanding on an as-converted
basis as of March 31, 1999. This assumes no exercise of the underwriters'
over-allotment option. If the underwriters' over-allotment option is exercised
in full, we will sell up to an aggregate of 4,600,000 shares of common stock
and up to 22,987,005 shares of common stock will be outstanding after the
completion of this offering.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and any shares as to which
the individual or entity has the right to acquire beneficial ownership within
60 days after March 31, 1999 through the exercise of any stock option or other
right. The inclusion herein of such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial owner
of, or receives the economic benefit from, such shares.
Unless otherwise indicated in the table set forth below, each person or
entity named below has an address in care of Copper Mountain's principal
executive offices.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
SHARES -------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Greylock Equity Limited Partnership(1).. 3,042,964 16.5% 13.6%
755 Page Mill Road, Suite A-100
Palo Alto, CA 94304
Roger Evans(2).......................... 3,042,964 16.5% 13.6%
Greylock Equity Limited Partnership
755 Page Mill Road, Suite A-100
Palo Alto, CA 94304
Entities Affiliated with................ 3,042,956 16.5% 13.6%
Sutter Hill Ventures(3)
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Tench Coxe(4)........................... 2,391,455 13.0% 10.7%
Sutter Hill Ventures
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Entities Affiliated with................ 1,568,594 8.5% 7.0%
Matrix Partners IV, L.P. (5)
2500 Sand Hill Road, Suite 113
Menlo Park, CA 94025
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY OWNED
SHARES ------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
Andrew W. Verhalen(6)................... 1,568,594 8.5% 7.0%
Matrix Partners IV, L.P.
2500 Sand Hill Road, Suite 113
Menlo Park, CA 94025
Entities Affiliated with................ 1,193,054 6.5% 5.3%
InterWest Partners VI, L.P.(7)
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Canaan Equity, L.P...................... 1,193,054 6.5% 5.3%
2884 Sand Hill Road, Ste. 115
Menlo Park, CA 94025
Entities Affiliated with................ 1,191,290 6.5% 5.3%
Technology Crossover Ventures (8)
575 High Street, Suite 400
Palo Alto, CA 94301
Richard H. Kimball(9)................... 1,191,290 6.5% 5.3%
Technology Crossover Ventures II, L.P.
575 High Street, Suite 400
Palo Alto, CA 94301
Joseph D. Markee(10).................... 961,739 5.2% 4.3%
Intel Corporation(11)................... 930,446 5.1% 4.2%
2200 Mission College Boulevard
Santa Clara, CA 950520
Mark Handzel(12)........................ 781,635 4.3% 3.5%
Richard Gilbert(13)..................... 230,892 1.2% 1.0%
Steve Hunt(14).......................... 206,250 1.1% *
Mike Kelly(15).......................... 177,986 1.0% *
Raymond V. Thomas(16)................... 30,000 * *
Robert L. Bailey(17).................... 30,000 * *
All directors and officers as a group
(16 persons)(18)....................... 10,799,378 58.0% 47.7%
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Includes 30,000 shares issuable upon exercise of options held by Roger
Evans exercisable within 60 days of March 31, 1999. Mr. Evans, a director
of Copper Mountain, is a general partner of the general partner of
Greylock Equity Limited Partnership.
(2) Includes 3,012,964 shares held by Greylock Equity Limited Partnership and
30,000 shares issuable upon exercise of options held by Mr. Evans
exercisable within 60 days of March 31, 1999. Mr. Evans is a general
partner of the general partner of Greylock Equity Limited Partnership.
(3) Includes 101,728 shares held by or for the benefit of Tench Coxe, a
director of Copper Mountain and a managing director of the general
partner of Sutter Hill Ventures and 30,000 shares issuable upon exercise
of options held by Mr. Coxe exercisable within 60 days of March 31, 1999.
Mr. Coxe shares voting and investing power with four other managing
directors of the general partner of Sutter Hill Ventures. Also includes
624,911 shares held of record by the managing directors of the general
partner of Sutter Hill Ventures and their related family entities, and
26,590 shares held by other individuals associated with Sutter Hill
Ventures.
58
<PAGE>
(4) Includes 2,259,727 shares held by Sutter Hill Ventures, 7,377 shares held
in Mr. Coxe's Keogh account, and 30,000 shares issuable upon exercise of
options held by Mr. Coxe exercisable within 60 days of March 31, 1999.
Mr. Coxe is a managing director of the general partner of Sutter Hill
Ventures.
(5) Of the total shares indicated as beneficially owned, Matrix Partners IV,
L.P. owns 1,461,664 shares, which represent 8.0% and 6.5% of total shares
before and after this offering, respectively. Matrix IV Entrepreneurs
Fund, L.P. owns 76,930 shares which represent less than 1% of total
shares before and after this offering, respectively. Also includes 30,000
shares issuable upon exercise of options held by Mr. Verhalen exercisable
within 60 days of March 31, 1999. Mr. Verhalen, a director, is a general
partner of Matrix Partners IV, L.P.
(6) Includes 1,538,594 shares held by entities affiliated with Matrix
Partners IV, L.P. and 30,000 shares issuable upon exercise of options
held by Mr. Verhalen exercisable within 60 days of March 31, 1999. See
Note 5 above. Mr. Verhalen is a general partner of Matrix Partners IV,
L.P.
(7) Of the total shares indicated as beneficially owned, InterWest Partners
VI, L.P. owns 1,157,261 shares, which represent 6.3% and 5.2% of total
shares before and after this offering, respectively. InterWest Investors
VI, L.P. owns 35,793 shares which represent less than 1% of total shares
before and after this offering, respectively. InterWest Management
Partners VI, LLC is the general partner of both of these partnerships.
The managing directors of InterWest Management Partners VI, LLC are
deemed to beneficially own the shares held by InterWest Partners VI, L.P.
and InterWest Investors VI, L.P.
(8) Includes:
. 18,046 shares held by TCV II, V.O.F., which represent less than 1% of
total shares before and after this offering, respectively;
. 555,531 shares held by Technology Crossover Ventures II, L.P. which
represent 3.0% and 2.5% of total shares before and after this offering,
respectively;
. 427,099 shares held by TCV II (Q), L.P. which represent 2.3% and 1.9%
of total shares before and after this offering, respectively;
. 75,795 shares held by TCV II Strategic Partners, L.P. which represent
less than 1% of total shares before and after this offering,
respectively;
. 84,819 shares held by Technology Crossover Ventures II, C.V. which
represent less than 1% of total shares before and after this offering,
respectively; and
. 30,000 shares issuable upon exercise of options held by Mr. Kimball
exercisable within 60 days of March 31, 1999.
Mr. Kimball, a director of Copper Mountain, is a managing member of the
general partner of each of these entities.
(9) Includes 1,161,290 shares held by the entities listed in note 8 above and
30,000 shares issuable upon exercise of options exercisable within 60
days of March 31, 1999. Mr. Kimball is a managing member of the general
partner of these entities.
(10) Includes 28,437 shares of common stock held by Teresa L. Boley, Mr.
Markee's spouse, 5,000 shares issuable upon exercise of options
exercisable within 60 days of March 31, 1999, and 194,576 shares subject
to repurchase by Copper Mountain as of March 31, 1999.
(11) Includes 221,101 shares of common stock issuable upon the exercise of a
warrant.
(12) Includes 194,576 shares subject to repurchase by Copper Mountain as of
March 31, 1999, and 3,333 shares issuable upon exercise of options
exercisable within 60 days of March 31, 1999.
(13) Includes 228,759 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(14) Includes 18,750 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 31, 1999.
(15) Includes 18,216 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(16) Includes 30,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(17) Includes 30,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(18) Includes 602,006 shares subject to options exercisable within 60 days of
March 31, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
consists of 100,000,000 shares of common stock, $.001 par value, and 5,000,000
shares of preferred stock, $.001 par value.
COMMON STOCK
As of March 31, 1999, there were 18,387,005 shares of common stock
outstanding, after giving effect to the conversion of all outstanding shares
of preferred stock into 15,334,824 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by the
board of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, conversion, subscription or other
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted at a rate of one and one half shares of common stock for
each share of preferred stock into an aggregate of 15,334,824 shares of common
stock. Following the conversion, our certificate of incorporation will be
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 5,000,000 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. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and reduce the likelihood that such holders will receive dividend
payments and payments upon liquidation. Such issuance could have the effect of
decreasing the market price of the common stock. The issuance of preferred
stock could have the effect of delaying, deterring or preventing a change in
control of Copper Mountain. We have no present plans to issue any shares of
preferred stock.
WARRANTS
In October 1996, in conjunction with the execution of an equipment financing
agreement, we issued ten-year warrants to purchase up to 10,000 shares and
40,000 shares of series A preferred stock at an exercise price of $1.00 per
share. In January 1997, in connection with the execution of a license
agreement with Intel, we issued a seven-year warrant to purchase up to 147,401
shares of series B preferred stock at an exercise price of $3.39 per share. In
October 1997 and in April 1998, in connection with the execution of an
equipment financing agreement, we issued ten-year warrants to purchase 8,421
and 6,316 shares of series C preferred stock at an exercise price of $4.75 per
share. In August 1998, in connection with the execution of a loan agreement,
we issued a five-year warrant to purchase up to 25,000 shares of series C
preferred stock at an exercise price of $4.75 per share.
Upon the closing of this offering, all warrants described herein will become
exercisable for common stock at the rate of one and one-half shares of common
stock for each share of preferred stock underlying the warrants.
REGISTRATION RIGHTS
After this offering, the holders of 15,690,530 shares of common stock issued
upon conversion of our preferred stock, including shares issuable upon
exercise of warrants, or their permitted transferees, are entitled to
60
<PAGE>
certain rights with respect to the registration of such shares under the
Securities Act. If we propose to register any of its securities under the
Securities Act for its own account or the account of any of its stockholders
other than the holders of the registrable shares, holders of such registrable
shares are entitled, subject to certain limitations and conditions, to notice
of such registration and are, subject to certain conditions and limitations,
entitled to include registrable shares therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. In addition, commencing
180 days after the effective date of the registration statement of which this
prospectus is a part, we may be required to prepare and file a registration
statement under the Securities Act at its expense if requested to do so by the
holders of at least 25% of the registrable shares, provided the reasonably
expected aggregate offering price will equal or exceed $5,000,000 including
underwriting discounts and commissions. We are required to use its best
efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than two of such stockholder-
initiated registrations. Further, holders of registrable securities may
require us to file additional registration statements on Form S-3, subject to
certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses and
adversely affect any future equity or debt offerings.
DELAWARE ANTI-TAKEOVER LAW
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sale or other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. The statute could have the
effect of delaying, deferring or preventing a change in control of Copper
Mountain.
Our restated certificate, which will become effective upon the effective
date of this offering, provides that any action required or permitted to be
taken by stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing. In
addition, our bylaws provide that special meetings of the stockholders may be
called only by the Chairman of the board of directors, the Chief Executive
Officer, by the board of directors pursuant to a resolution adopted by a
majority of the total number of authorized directors, or by the holders of 10%
of the outstanding voting stock. Our restated certificate also specifies that
the authorized number of directors may be changed only by resolution of the
board of directors and does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a
sufficient percentage of a class of shares may be able to ensure the election
of one or more directors. These and other provisions contained in the restated
certificate and our bylaws could delay or discourage certain types of
transactions involving an actual or potential change in control or its
management (including transactions in which stockholders might otherwise
receive a premium for their shares over then current prices) and may limit the
ability of stockholders to remove current management or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the
public market could adversely affect the market price of the common stock.
Upon completion of this offering, Copper Mountain will have outstanding
22,387,005 shares of common stock, assuming the issuance of 4,000,000 shares
of common stock offered hereby and no exercise of options after March 31,
1999. Of these shares, the 4,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act (whose sales would be subject
to certain limitations and restrictions described below).
We issued and sold the remaining 18,387,005 shares of common stock held by
existing stockholders in reliance on exemptions from the registration
requirements of the Securities Act. All of these shares will be subject to
"lock-up" agreements described below on the effective date of this offering.
Upon expiration of the lock-up agreements 180 days after the effective date of
this offering, all of these shares will become eligible for sale, subject in
most cases to the limitations of Rule 144. In addition, holders of stock
options could exercise such options and sell certain of the shares issued upon
exercise as described below.
<TABLE>
<CAPTION>
SHARES
DAYS AFTER DATE OF ELIGIBLE
THIS PROSPECTUS FOR SALE COMMENT
------------------ ---------- ---------------------------------------------
<C> <C> <S>
Upon Effectiveness 4,000,000 Shares sold in this offering
180 days Lock-up released; saleable shares under Rules
18,387,005 144 and 701
</TABLE>
As of March 31, 1999, there were a total of 4,962,225 shares of common stock
subject to outstanding options under our stock option plans and outside our
stock option plans, 439,177 of which were vested. However, all of these shares
are subject to lock-up agreements. Immediately after the completion of this
offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or
reserved for future issuance under our stock option plans. On the date 180
days after the effective date of this offering, a total of 1,475,555 shares of
common stock subject to outstanding options will be vested. After the
effective date of the registration statement on Form S-8, shares purchased
upon exercise of options granted pursuant to the 1996 Equity Incentive Plan
and Employee Stock Purchase Plan generally would be available for resale in
the public market.
The officers, directors and stockholders of Copper Mountain have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this offering. Morgan Stanley & Co. Incorporated, however,
may in its sole discretion, at any time without notice, release all or any
portion of the shares subject to lock-up agreements.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of
Copper Mountain's common stock for at least one year would be entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of
(a) 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
(b) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about Copper Mountain.
62
<PAGE>
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of Copper
Mountain's "affiliates," as defined in Rule 144, at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years, including the holding period of any prior
owner other than an "affiliate," is entitled to sell such shares without
complying with the manner of sale, notice filing, volume limitation or notice
provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701, any Copper Mountain employee, director, officer,
consultant or advisor who purchases shares from Copper Mountain in connection
with a compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
Rule 701 applies to typical stock options granted by an issuer to employees
and certain consultants and advisers before it becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, along with the
shares acquired upon exercise of such options (including exercises after the
date of this prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by
persons other than "affiliates" (as defined in Rule 144) subject only to the
manner of sale provisions of Rule 144 and by "affiliates" under Rule 144
without compliance with its one-year minimum holding period requirement.
63
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, BancBoston Robertson Stephens, Inc. and Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them an aggregate of 4,000,000 shares of common stock. The number of shares
of common stock that each underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.................................. 1,550,000
BancBoston Robertson Stephens, Inc................................. 775,000
Dain Rauscher Wessels.............................................. 775,000
Hambrecht & Quist LLC.............................................. 100,000
Hoefer & Arnett, Incorporated...................................... 100,000
Edward D. Jones & Co., L.P. ....................................... 100,000
Ladenburg Thalmann & Co. Inc. ..................................... 100,000
NationsBanc Montgomery Securities LLC.............................. 100,000
Brad Peery Inc. ................................................... 100,000
Raymond James & Associates, Inc. .................................. 100,000
U.S. Bancorp Piper Jaffray Inc. ................................... 100,000
Wasserstein Perella Securities, Inc. .............................. 100,000
---------
Total............................................................ 4,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered hereby, other than those covered by the over-
allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.89 a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the representatives
of the underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an aggregate of 600,000 additional shares of common stock at
the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriter's over-allotment option is exercised in
full, the total price to public would be $96,600,000, the total underwriters'
discounts and commissions would be $6,762,000, and the total proceeds to us
would be $89,838,000.
We, the directors, officers, stockholders and certain optionholders of
Copper Mountain have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters,
64
<PAGE>
during the period ending 180 days after the date of this prospectus, we will
not, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock,
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of common stock or such other securities, in cash or
otherwise.
The restrictions described in the previous paragraph do not apply to (a) the
sale to the underwriters of the shares of common stock under the underwriting
agreement, (b) the issuance by Copper Mountain of shares of common stock upon
the exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus which is described in this
prospectus, (c) transactions by any person other than Copper Mountain relating
to shares of common stock or other securities acquired in open market
transactions after the completion of the offering of the shares, or (d)
issuances of certain shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on the
date of this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "CMTN."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
Of the 4,000,000 shares of common stock to be offered in this offering, the
underwriters have reserved for sale, at the price set forth on the cover page
of this prospectus, at the request of the Company, up to 200,000 shares of the
Company's common stock. As a result, the number of shares of common stock
available for sale to the general public will be reduced to the extent of
purchase of the reserved shares. The underwriters will offer to the general
public (on the same basis as the other shares to be sold in this offering) any
reserved shares that are not so purchased.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Morgan Stanley & Co. Incorporated acted as the placement agent of our series
D preferred stock financing, and in connection with that placement, received a
fee for their services. In addition, entities affiliated with Morgan Stanley &
Co. Incorporated purchased an aggregate of 225,806 shares of our series D
preferred stock (338,709 shares on an as converted basis), and an affiliate of
BancBoston Robertson Stephens, Inc. purchased 38,710 shares of our series D
preferred stock (58,065 shares on an as converted basis). Certain of these
entities have agreed for a period of one year from the date of this prospectus
not to sell, transfer, assign, pledge or hypothecate these shares, or the
common stock issuable when this preferred stock converts into common stock on
the closing of this offering.
65
<PAGE>
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares of
common stock was determined by negotiations between us and the representatives
of the underwriters. Among the factors considered in determining the initial
public offering price were our record of operations, our current financial
position and future prospects, the experience of our management, sales,
earnings and certain of our other financial and operating information in
recent periods, the price-earnings ratios, price-sales ratios, market prices
of securities and certain financial and operating information of companies
engaged in activities similar to ours.
LEGAL MATTERS
The legality of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward llp, San Diego, California. Certain legal
matters will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. As of the date of
this prospectus, certain partners and associates of Cooley Godward llp and
certain partners and associates of Wilson Sonsini Goodrich & Rosati
beneficially own an aggregate of approximately 60,943 and 15,790 shares of
common stock, respectively, through investment partnerships.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998 and for the period from March 11,
1996 (inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998, as set forth in their report. We've included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered hereby. As permitted
by the rules and regulations of the SEC, this prospectus, which is a part of
the Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. For further information
pertaining to Copper Mountain and the common stock offered hereby, reference
is made to such registration statement and the exhibits and schedules thereto.
Statements contained in this prospectus as to the contents or provisions of
any contract or other document referred to herein are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement may be inspected without charge at the office of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of all or any part of the registration
statement may be obtained from such offices upon the payment of the fees
prescribed by the SEC. In addition, registration statements and certain other
filings made with the SEC through its Electronic Data Gathering, Analysis and
Retrieval, or EDGAR, system are publicly available through the SEC's Web site
on the Internet's World Wide Web, located at http://www.sec.gov. The
registration statement, including all exhibits thereto and amendments thereof,
was filed with the SEC through EDGAR.
66
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONTENTS
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Stockholders' Equity......................................... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
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, 1997 and 1998, and the related statements of
operations, stockholders' equity and cash flows for the period March 11, 1996
(inception) to December 31, 1996 and for the years ended December 31, 1997 and
1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, and the results of its operations and its
cash flows for the period March 11, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
San Diego, California
February 25, 1999,
except for the sixteenth paragraph of Note 5,
as to which the date is April 23, 1999,
and Note 10, as to which the date is
April 13, 1999
F-2
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
PRO FORMA
STOCKHOLDER'S
1997 1998 1999 EQUITY
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
ASSETS (NOTE 1)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 9,517,000 $ 7,631,000 $ 8,474,000
Short-term
investments........... -- 10,898,000 10,033,000
Accounts receivable.... 183,000 8,026,000 7,262,000
Inventory.............. 383,000 4,668,000 5,067,000
Other current assets... 98,000 476,000 915,000
------------ ------------ ------------
Total current assets.... 10,181,000 31,699,000 31,751,000
Property and equipment,
net.................... 1,905,000 3,214,000 4,239,000
Other assets............ 246,000 1,296,000 1,403,000
------------ ------------ ------------
Total assets............ $ 12,332,000 $ 36,209,000 $ 37,393,000
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....... $ 748,000 $ 4,371,000 $ 3,555,000
Accrued liabilities.... 1,435,000 2,219,000 3,493,000
Current portion of
obligations under
capital leases and
equipment notes
payable............... 345,000 783,000 898,000
------------ ------------ ------------
Total current
liabilities............ 2,528,000 7,373,000 7,946,000
Obligations under
capital leases and
equipment notes
payable, less current
portion................ 735,000 1,965,000 1,828,000
Other accrued........... -- 28,000 34,000
Stockholders' equity:
Convertible preferred
stock, no par value,
10,602,464 shares
authorized, 6,997,424,
10,223,230 and
10,223,230 shares
issued and outstanding
at December 31, 1997,
1998 and March 31,
1999 (unaudited),
respectively; $.001
par value, 5,000,000
shares authorized,
none issued and
outstanding in pro
forma (unaudited)
(liquidation
preference of
$45,508,000 at
December 31, 1998).... 20,425,000 44,502,000 44,502,000 $ --
Common stock, $.001 par
value, 29,397,536
shares authorized,
2,230,679, 2,516,873,
3,052,181 and
18,387,005 shares
issued and outstanding
at December 31, 1997,
1998, March 31, 1999
(unaudited), and pro
forma (unaudited),
respectively.......... 2,000 3,000 3,000 18,000
Notes receivable from
stockholders.......... (69,000) (41,000) (41,000) (41,000)
Paid-in capital........ 4,471,000 15,669,000 15,988,000 60,475,000
Deferred compensation.. (2,563,000) (9,762,000) (8,303,000) (8,303,000)
Accumulated deficit.... (13,197,000) (23,528,000) (24,564,000) (24,564,000)
------------ ------------ ------------ ------------
Total stockholders'
equity................. 9,069,000 26,843,000 27,585,000 $ 27,585,000
------------ ------------ ------------ ============
Total liabilities and
stockholders' equity... $ 12,332,000 $ 36,209,000 $ 37,393,000
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM MARCH YEAR ENDED THREE MONTHS ENDED
11, 1996 DECEMBER 31, MARCH 31,
(INCEPTION) TO -------------------------- ------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ -- $ 211,000 $ 21,821,000 $ 317,000 $13,217,000
Cost of revenue......... -- 1,717,000 12,400,000 217,000 6,384,000
----------- ------------ ------------ ----------- -----------
Gross profit (loss)..... -- (1,506,000) 9,421,000 100,000 6,833,000
Operating expenses:
Research and
development.......... 1,483,000 4,753,000 7,225,000 1,773,000 2,564,000
Sales and marketing... -- 1,510,000 5,363,000 724,000 2,581,000
General and
administrative....... 553,000 1,928,000 3,428,000 535,000 1,130,000
Amortization of
deferred stock
compensation......... 189,000 1,490,000 3,929,000 435,000 1,693,000
----------- ------------ ------------ ----------- -----------
Total operating
expenses........... 2,225,000 9,681,000 19,945,000 3,467,000 7,968,000
----------- ------------ ------------ ----------- -----------
Loss from operations.... (2,225,000) (11,187,000) (10,524,000) (3,367,000) (1,135,000)
Interest income......... 47,000 268,000 406,000 113,000 202,000
Interest expense........ (3,000) (97,000) (213,000) (33,000) (55,000)
----------- ------------ ------------ ----------- -----------
Loss before income
taxes.................. (2,181,000) (11,016,000) (10,331,000) (3,287,000) (988,000)
Provision for income
taxes.................. -- -- -- -- 48,000
----------- ------------ ------------ ----------- -----------
Net loss................ $(2,181,000) $(11,016,000) $(10,331,000) $(3,287,000) $(1,036,000)
=========== ============ ============ =========== ===========
Basic and diluted net
loss per share......... $ (11.67) $ (15.62) $ (7.75) $ (3.08) $ (.47)
=========== ============ ============ =========== ===========
Shares used to compute
basic and diluted net
loss per share......... 186,938 705,236 1,333,036 1,068,260 2,208,833
=========== ============ ============ =========== ===========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (.62) $ (.06)
============ ===========
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 16,667,860 17,543,657
============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE TOTAL
---------------------- ----------------- FROM PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS CAPITAL COMPENSATION DEFICIT EQUITY
---------- ----------- --------- ------ ------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock at
$0.03 per share
for notes
receivable..... -- $ -- 1,556,604 $2,000 $(42,000) $ 40,000 $ -- $ -- $ --
Issuance of
Series A
convertible
preferred stock
at $1.00 per
share for
cash........... 2,723,000 2,723,000 -- -- -- -- -- -- 2,723,000
Issuance of
Series A
convertible
preferred stock
warrants in
connection with
note payable... -- -- -- -- -- 18,000 -- -- 18,000
Issuance of
common stock at
$0.07 per share
for notes
receivable..... -- -- 408,000 -- (27,000) 27,000 -- -- --
Deferred
compensation
related to the
grant of stock
options........ -- -- -- -- -- 1,813,000 (1,813,000) -- --
Amortization
related to
deferred stock
compensation... -- -- -- -- -- -- 189,000 -- 189,000
Net loss........ -- -- -- -- -- -- -- (2,181,000) (2,181,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at
December 31,
1996........... 2,723,000 2,723,000 1,964,604 2,000 (69,000) 1,898,000 (1,624,000) (2,181,000) 749,000
Issuance of
Series B
convertible
preferred stock
at $3.39 per
share for cash
and conversion
of convertible
bridge note
payable, net of
offering
expenses of
$76,000........ 1,850,063 6,196,000 -- -- -- -- -- -- 6,196,000
Issuance of
Series C
convertible
preferred stock
at $4.75 per
share for
cash........... 2,422,361 11,506,000 -- -- -- -- -- -- 11,506,000
Exercise of
options to
purchase common
stock.......... -- -- 238,437 -- -- 16,000 -- -- 16,000
Stock grants for
consulting
services....... 2,000 -- 27,638 -- -- 15,000 -- -- 15,000
Issuance of
warrants to
purchase
convertible
preferred stock
in connection
with technology
agreement,
notes payable,
and consulting
services....... -- -- -- -- -- 113,000 -- -- 113,000
Deferred
compensation
related to the
grant of stock
options........ -- -- -- -- -- 2,429,000 (2,429,000) -- --
Amortization
related to
deferred stock
compensation... -- -- -- -- -- -- 1,490,000 -- 1,490,000
Net loss........ -- -- -- -- -- -- -- (11,016,000) (11,016,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at
December 31,
1997........... 6,997,424 20,425,000 2,230,679 2,000 (69,000) 4,471,000 (2,563,000) (13,197,000) 9,069,000
Exercise of
options to
purchase common
stock.......... -- -- 514,635 1,000 -- 60,000 -- -- 61,000
Stock grants for
consulting
services....... -- -- 9,560 -- -- 5,000 -- -- 5,000
Deferred
compensation
related to the
grant of stock
options........ -- -- -- -- -- 11,128,000 (11,128,000) -- --
Amortization
related to
deferred stock
compensation... -- -- -- -- -- -- 3,929,000 -- 3,929,000
Stock forfeited
by employee.... -- -- (238,001) -- 16,000 (16,000) -- -- --
Repayment of
stockholder
note........... -- -- -- -- 12,000 -- -- -- 12,000
Issuance of
Series C
convertible
preferred stock
warrants in
connection with
a financing
agreement...... -- -- -- -- -- 21,000 -- -- 21,000
Issuance of
Series D
convertible
preferred stock
at $7.75 per
share for cash,
net of offering
expenses of
$923,000....... 3,225,806 24,077,000 -- -- -- -- -- -- 24,077,000
Net loss........ -- -- -- -- -- -- -- (10,331,000) (10,331,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at
December 31,
1998........... 10,223,230 44,502,000 2,516,873 3,000 (41,000) 15,669,000 (9,762,000) (23,528,000) 26,843,000
Exercise of
options to
purchase common
stock
(unaudited).... -- -- 534,933 -- -- 83,000 -- -- 83,000
Stock grants for
consulting
services
(unaudited).... -- -- 375 -- -- 2,000 -- -- 2,000
Deferred
compensation
related to the
grant of stock
options
(unaudited).... -- -- -- -- -- 234,000 (234,000) -- --
Amortization
related to
deferred stock
compensation
(unaudited).... -- -- -- -- -- -- 1,693,000 -- 1,693,000
Net loss
(unaudited).... -- -- -- -- -- -- -- (1,036,000) (1,036,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at March
31, 1999
(unaudited).... 10,223,230 $44,502,000 3,052,181 $3,000 $(41,000) $15,988,000 $(8,303,000) $(24,564,000) $27,585,000
========== =========== ========= ====== ======== =========== =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 11, 1996 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(2,181,000) $(11,016,000) $(10,331,000) $(3,287,000) $ (1,036,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 109,000 511,000 1,231,000 233,000 489,000
Noncash compensation.. 190,000 1,503,000 3,934,000 435,000 1,695,000
Changes in operating
assets and
liabilities:
Accounts receivable.. -- (183,000) (7,843,000) (142,000) 764,000
Inventory............ -- (383,000) (4,285,000) (466,000) (399,000)
Other current assets
and other assets.... (58,000) (155,000) (1,469,000) (194,000) (551,000)
Accounts payable and
accrued
liabilities......... 448,000 1,735,000 4,435,000 (567,000) 464,000
----------- ------------ ------------ ----------- ------------
Net cash provided by
(used in) operating
activities............. (1,492,000) (7,988,000) (14,328,000) (3,988,000) 1,426,000
INVESTING ACTIVITIES
Purchases of short-term
investments, net....... -- -- (10,898,000) -- 865,000
Purchases of property
and equipment.......... (682,000) (1,515,000) (1,171,000) -- (1,509,000)
----------- ------------ ------------ ----------- ------------
Net cash used for
investing activities... (682,000) (1,515,000) (12,069,000) -- (644,000)
FINANCING ACTIVITIES
Proceeds from issuance
of equipment notes
payable................ 367,000 615,000 921,000 566,000 82,000
Proceeds from
convertible bridge note
payable................ 2,500,000 -- -- -- --
Payments on capital
lease obligations...... -- (18,000) (293,000) (40,000) (33,000)
Payments on equipment
notes payable.......... (10,000) (201,000) (267,000) (70,000) (71,000)
Proceeds from issuance
of preferred stock..... 2,723,000 15,202,000 24,077,000 -- --
Proceeds from issuance
of common stock........ -- 16,000 73,000 12,000 83,000
----------- ------------ ------------ ----------- ------------
Net cash provided by
financing activities... 5,580,000 15,614,000 24,511,000 468,000 61,000
----------- ------------ ------------ ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ 3,406,000 6,111,000 (1,886,000) (3,520,000) 843,000
Cash and cash
equivalents at
beginning of the
period................. -- 3,406,000 9,517,000 9,517,000 7,631,000
----------- ------------ ------------ ----------- ------------
Cash and cash
equivalents at end of
the period............. $ 3,406,000 $ 9,517,000 $ 7,631,000 $ 5,997,000 $ 8,474,000
=========== ============ ============ =========== ============
SUPPLEMENTAL SCHEDULE OF
INVESTING AND FINANCING
ACTIVITIES:
Interest paid........... $ -- $ 74,000 $ 150,000 $ 21,000 $ 46,000
=========== ============ ============ =========== ============
Capital lease
obligations entered
into for equipment..... $ -- $ 327,000 $ 1,307,000 $ 832,000 $ --
=========== ============ ============ =========== ============
Conversion of
convertible bridge note
payable to preferred
stock.................. $ -- $ 2,500,000 $ -- $ -- $ --
=========== ============ ============ =========== ============
Stock issued (forfeited)
for notes receivable... $ 69,000 $ -- $ (16,000) $ (16,000) $ --
=========== ============ ============ =========== ============
Issuance of convertible
preferred stock
warrants............... $ 18,000 $ 113,000 $ 21,000 $ -- $ --
=========== ============ ============ =========== ============
Issuance of stock for
consulting services.... $ 1,000 $ 13,000 $ 5,000 $ -- $ 2,000
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 AND PERTAINING TO MARCH 31, 1999
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Copper Mountain Networks, Inc. (the "Company" or "Copper Mountain") was
incorporated in California on March 11, 1996, and 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.
During the period from March 11, 1996 to December 31, 1997, Copper Mountain
was a developmental stage company as defined in Financial Accounting Standards
Board Statement No. 7 "Development Stage Enterprises." Planned principal
operations commenced as of January 1, 1998 and, accordingly, Copper Mountain
is no longer considered a developmental stage company.
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.
Interim Financial Data
The financial statements for the three months ended March 31, 1998 and 1999
are unaudited. The unaudited financial statements have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary to state fairly the financial information set forth
therein, in accordance with generally accepted accounting principles.
The results of operations for the interim period ended March 31, 1999 are
not necessarily indicative of the results which may be reported for any other
interim period or for the year ending December 31, 1999.
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 losses on its cash and cash
equivalents.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, short-term bank
borrowings and notes payable approximates fair value.
F-7
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments
At December 31, 1998, the Company held investments in investment grade debt
securities with various maturities through August 1999. 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,
1998 totaled $12,896,000. The Company has included $1,998,000 of these
securities in cash and cash equivalents, as of December 31, 1998, as they have
original maturities of less than 90 days. The remaining $10,898,000 as of
December 31, 1998 has been classified as short-term investments. The Company
has designated all of its investments as held to maturity.
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, 1998 include sales to two significant customers totaling
$13,227,000 and $3,995,000, respectively. The Company's four largest customers
(by revenues) generated approximately 95% of the Company's total revenues for
the year ended December 31, 1998.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company had significant accounts
receivable balances due from three customers individually representing 63%,
11% and 10% of total accounts receivable at December 31, 1998.
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 short-term 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
$897,000 and $504,000 for the years ended December 31, 1997 and 1998,
respectively. The reduction in the value of the inventory was primarily due to
the discontinuance of certain product lines, which was the result of the
development and introduction of new products. For the year ended December 31,
1997 we also incurred a loss on purchase commitments totaling $582,000 to
purchase inventory used in the production of the discontinued product lines,
which had not yet been received by December 31, 1997. Such commitments are
included in accrued liabilities. All such reductions to inventory value and
losses on revenue commitments for the years ended December 31, 1997 and 1998
are included in cost of revenues.
F-8
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from three to seven 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.
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. Through December 31, 1998, no significant amounts were expended
subsequent to reaching technological feasibility.
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 or discounted estimates of future cash flows. 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 current 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
F-9
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
The provision for income taxes for the three months ending March 31, 1999 is
based on an estimate of the effective tax rate for the entire year.
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 loss and net loss per share as if the fair value method had
been applied in measuring compensation expense (See Note 5). Options or stock
awards issued to non-employees are valued using the fair value method and
expensed over the period services are provided.
Net Loss Per Share and Pro Forma Stockholders' Equity
Historical basic and diluted net 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. Options, warrants, and preferred stock
were not included in the computation of diluted net loss per share because the
effect would be anti-dilutive.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public
offering (using the as-if-converted method). If the offering contemplated by
this Prospectus is consummated, all of the convertible preferred stock
outstanding as of the closing date will automatically be converted into an
aggregate of 15,334,824 shares of common stock based on the shares of
convertible preferred stock outstanding at December 31, 1998. Unaudited pro
forma stockholders' equity at December 31, 1998, as adjusted for the
conversion of the convertible preferred stock, is disclosed on the balance
sheet.
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.
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share attributable to common shareholders
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding................ 186,938 705,236 1,333,036 1,068,260 2,208,833
Adjustment to reflect the
assumed conversion of
outstanding preferred
stock...................... -- -- 15,334,824 -- 15,334,824
------- ------- ---------- --------- ----------
Shares used in computing pro
forma basic and diluted net
loss per common share...... 186,938 705,236 16,667,860 1,068,260 17,543,657
======= ======= ========== ========= ==========
</TABLE>
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to vesting. Potentially dilutive
securities totaling 6,933,441, 13,812,858 and 20,442,440 for the years ended
December 31, 1996, 1997 and 1998, respectively, and 13,826,375 and 21,169,739
for the three month periods ended March 31, 1998 and 1999, respectively, were
excluded from historical basic and diluted earnings per share because of their
anti-dilutive effect.
F-10
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Recapitalization
In November 1998, the Company filed a Certificate of Amendment to its
Articles of Incorporation to effect a three for two forward stock split of all
outstanding shares of common stock and stock options. The Amended and Restated
Certificate of Incorporation increases the authorized stock of the Company
such that the Company is authorized to issue 10,602,464 shares of no par value
preferred stock, and 29,397,536 shares of no par value common stock. The
conversion ratio of the Company's preferred stock is automatically modified to
reflect this common stock split. All common shares, common stock options and
related per share data in the accompanying financial statements have been
adjusted retroactively to give effect to the stock split.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. There was no difference
between the Company's net loss and its total comprehensive loss for the years
ended December 31, 1996, 1997 and 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company has adopted the provisions of SOP 98-1 during
the three months ended March 31, 1999 with no material effect.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"(SOP
98-5). This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company has
adopted the provisions of SOP 98-5 during the three months ended March 31,
1999 with no material effect.
F-11
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Inventory:
Raw materials.......................... $ 332,000 $ 2,582,000 $2,636,000
Work in process........................ -- 790,000 1,178,000
Finished goods......................... 51,000 1,296,000 1,253,000
---------- ----------- ----------
$ 383,000 $ 4,668,000 $5,067,000
========== =========== ==========
Property and Equipment:
Laboratory equipment and software...... $ 868,000 $ 2,265,000 $3,258,000
Computer equipment and software........ 1,296,000 1,885,000 2,291,000
Office furniture and equipment......... 360,000 840,000 950,000
---------- ----------- ----------
2,524,000 4,990,000 6,499,000
Less accumulated depreciation and
amortization............................ (619,000) (1,776,000) (2,260,000)
---------- ----------- ----------
$1,905,000 $ 3,214,000 $4,239,000
========== =========== ==========
Accrued Liabilities:
Accrued compensation................... $ 294,000 $ 621,000 $946,000
Accrued vacation....................... 278,000 493,000 408,000
Accrued warranty....................... 2,000 418,000 685,000
Accrued purchase commitments........... 582,000 -- --
Other.................................. 279,000 687,000 1,454,000
---------- ----------- ----------
$1,435,000 $ 2,219,000 $3,493,000
========== =========== ==========
</TABLE>
3. SHORT-TERM BANK BORROWINGS
In August 1998, the Company entered into a $4,000,000 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 accrues at the bank's prime rate plus .25%
(8.0% at December 31, 1998). The credit agreement includes covenants, which,
among other things, require the Company to maintain stated net worth amounts
plus specific liquidity and long-term solvency ratios. The line of credit
expires on August 13, 1999. Amounts borrowed are secured by substantially all
of the Company's assets. There were no borrowings outstanding as of December
31, 1998.
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
is being amortized over the life of the financing agreement.
4. NOTES PAYABLE
In August 1998, the Company entered into an equipment line of credit with a
bank that allows the Company to borrow up to $1,000,000 for the purchase of
equipment. All borrowings under the equipment line must be made before August
14, 1999, at which time all unpaid principal under such loan will be converted
into a fully amortizing loan for a period of 36 months with a maturity date of
August 14, 2002. As of December 31, 1998 there was $921,000 outstanding under
the equipment line of credit.
F-12
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In 1996, the Company entered into an equipment financing agreement with a
bank and leasing company that allows the Company to borrow up to $1,000,000
for purchases of equipment. The notes are secured by the related equipment. As
of December 31, 1998 the full amount of funds available under the equipment
financing agreement was utilized.
In connection with the 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. 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 $2,500,000 in connection with a
convertible bridge note payable 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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
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.................................. $ 771,000 $ 504,000 $ 508,000
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................ -- 921,000 1,000,000
--------- ---------- ----------
771,000 1,425,000 1,508,000
Less current portion........................ (267,000) (395,000) (497,000)
--------- ---------- ----------
$ 504,000 $1,030,000 $1,011,000
========= ========== ==========
</TABLE>
At December 31, 1998, future aggregate annual principal payments on the
notes payable are $395,000, $519,000, $307,000 and $204,000 for 1999, 2000,
2001 and 2002, respectively.
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
A summary of convertible preferred stock issued and outstanding at December
31, 1998 is as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED AND LIQUIDATION
OUTSTANDING PREFERENCE
----------- -----------
<S> <C> <C>
Series A............................................. 2,723,000 $ 2,723,000
Series B............................................. 1,852,063 6,279,000
Series C............................................. 2,422,361 11,506,000
Series D............................................. 3,225,806 25,000,000
---------- -----------
10,223,230 $45,508,000
========== ===========
</TABLE>
F-13
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has authorized for issuance 10,602,464 shares of preferred stock
of which 2,773,000, 1,999,464, 2,530,000 and 3,300,000 shares have been
authorized for Series A, Series B, Series C and Series D convertible preferred
stock, respectively. At the option of the holder, the outstanding shares of
Series A, Series B, Series C and Series D convertible preferred stock are
convertible into common shares, subject to adjustment for antidilution, on a
three-for-two basis. The preferred stockholders have voting rights equal to
the common shares they would own upon conversion.
The Series A and Series B convertible preferred stock will automatically
convert into common shares upon the earlier of the closing of an underwritten
public offering of common stock under the Securities Act of 1933 in which the
Company receives at least $5,000,000 in gross proceeds at a price of at least
$5.00 per share, or on the date specified by written consent or agreement of
the holders of 66 2/3% of the then outstanding shares of each of the Series A
and Series B convertible preferred stock.
The Series C convertible preferred stock will automatically convert into
common shares upon the earlier of the closing of an underwritten public
offering of common stock under the Securities Act of 1933 in which the Company
receives at least $10,000,000 in gross proceeds at a price of at least $9.50
per share, or on the date specified by written consent or agreement of the
holders of 66 2/3% of the then outstanding shares of Series C convertible
preferred stock.
The Series D convertible preferred stock will automatically convert into
common shares upon the earlier of the closing of an underwritten public
offering of common stock under the Securities Act of 1933 in which the Company
receives at least $20,000,000 in gross proceeds at a price of at least $12.00
per share if the closing of such public offering occurs on or before March 30,
2000, and at a per share issuance price of at least $15.50 per share if the
closing of such public offering occurs after March 30, 2000. Additionally, the
Series D convertible preferred stock will automatically convert on the date
specified by written consent or agreement of the holders of more than a
majority of the then outstanding shares of Series D convertible preferred
stock.
In the event of a liquidation of the Company, holders of Series A, Series B,
Series C and Series D convertible preferred stock are entitled to a
liquidation preference of $1.00, $3.39, $4.75 and $7.75 per share,
respectively, plus any declared but unpaid dividends on such shares. If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of the convertible preferred stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, the entire
assets and funds of the corporation legally available for distribution shall
be distributed ratably among the holders of the convertible preferred stock in
proportion to the aggregate liquidation preferences of the respective shares,
and ratably among the holders of that series in proportion to the amount of
such stock owned by each such holder. Any remaining assets of the Company are
to be distributed to the common stockholders.
The holders of Series A, Series B, Series C and Series D convertible
preferred stock are entitled to receive annual noncumulative dividends of
$.08, $.27, $.38 and $.62 per share, respectively, when, as and if declared by
the Board of Directors, prior and in preference to holders of common stock. As
of December 31, 1998, no dividends have been declared.
Common Stock
The Company has issued 1,964,604 shares of common stock to the founders of
the Company at prices ranging from $.03 to $.07 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, 238,001 unvested common shares were forfeited upon the
termination of one of the founders. Shares issued under these agreements
generally vest over four years. At December 31, 1998, 486,439 shares of common
stock are subject to repurchase by the Company.
F-14
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock Options
In August 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Plan") and reserved 2,190,720 shares of common stock for grants under the
Plan. The Company has amended the plan to reserve an additional 3,932,663
shares of common stock under the Plan. The 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 Plan provides
that incentive stock options will be granted only to employees at no less than
the fair value of the Company's common stock (no less than 85% of the fair
value for nonstatutory stock options), as determined by the Board of Directors
at the date of the grant. 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 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, 1998, 105,000
shares are subject to repurchase by the Company.
The purchase price under each stock purchase agreement resulting from stock
bonuses and purchase rights granted will be at no less than 85% of the fair
value of the Company's common stock on the award date. Shares of stock sold or
awarded under the Plan may be subject to repurchase by the Company.
All stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Granted................................................. 1,160,700 $ .07
Exercised............................................... -- --
Cancelled............................................... -- --
---------
Balance at December 31, 1996............................. 1,160,700 $ .07
Granted................................................. 1,069,725 $ .23
Exercised............................................... (238,437) $ .07
Cancelled............................................... (115,563) $ .07
---------
Balance at December 31, 1997............................. 1,876,425 $ .16
Granted................................................. 3,086,812 $ .66
Exercised............................................... (514,641) $ .12
Cancelled............................................... (183,125) $ .23
---------
Balance at December 31, 1998............................. 4,265,471 $ .52
Granted (unaudited)..................................... 1,232,500 $10.22
Exercised (unaudited)................................... (534,933) $ .16
Cancelled (unaudited)................................... (813) $ 1.25
---------
Balance at March 31, 1999 (unaudited).................... 4,962,225 $ 2.97
=========
</TABLE>
As of December 31, 1996, 1997, and 1998 there were 735,450, 614,734 and
630,139, options, respectively, exercisable at weighted average exercise
prices of $.07, $.08 and $.17, respectively.
F-15
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes all options outstanding and exercisable by
price range as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.07 455,144 7.84 $ .07 291,241 $.07
$.23-$.32 2,950,827 9.20 $ .30 328,896 $.25
$.53-$1.33 712,500 9.77 $ .82 10,002 $.53
$5.00 147,000 9.96 $5.00 -- --
</TABLE>
The following table summarizes all options outstanding and exercisable by
price range as of March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.07 195,138 7.61 $ .07 55,374 $ .07
$.23-$.32 2,688,340 9.02 $ .31 198,802 $ .29
$.53-$1.33 699,247 9.53 $ .83 5,001 $ .53
$5.00-$7.00 538,500 9.80 $ 6.45 -- --
$8.50-$12.00 841,000 8.55 $11.72 180,000 $12.00
</TABLE>
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 during the three years ended December 31, 1998 and the three months
ended March 31, 1999, which resulted in the Company recording deferred
compensation of $1,117,000, 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 $1,813,000, $2,429,000 and $10,011,000
during the three years ended December 31, 1998, respectively and $234,000 for
the three months ended March 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 net loss would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net loss as reported.............. $(2,181,000) $(11,016,000) $(10,331,000)
Pro forma net loss under SFAS No.
123.............................. (2,185,000) (11,161,000) (10,844,000)
Pro forma basic and diluted net
loss under SFAS No. 123.......... $ (11.69) $ (15.83) $ (8.13)
</TABLE>
F-16
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is 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 1996, 1997 and 1998 was $.02, $.06 and $.16 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the vesting period.
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 is being amortized over the two-
year term of the agreement.
Common Shares Reserved for Future Issuance
At December 31, 1998, common shares reserved for future issuance consist of
the following:
<TABLE>
<S> <C>
Conversion of convertible preferred stock......................... 15,334,824
Preferred stock warrants.......................................... 355,706
Shares reserved for future option exercises....................... 5,370,305
----------
21,060,835
==========
</TABLE>
6. COMMITMENTS
The Company leases its facilities under noncancelable operating leases
expiring in 2001. The leases contain renewal options and are subject to cost
increases. Included in the minimum payments under the noncancelable operating
leases for the year ending December 31, 1999 is $147,000 due from the sub-
lease of certain facilities. Rent expense totaled $69,000 $219,000 and
$501,000 for the period from March 11, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998, respectively.
Future minimum payments under the noncancelable operating leases and
equipment under capital leases consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31,
1999................................................ $ 791,000 $ 471,000
2000................................................ 928,000 471,000
2001................................................ 568,000 443,000
2002................................................ 156,000 98,000
2003................................................ 106,000 --
---------- ----------
Total minimum lease payments.......................... $2,549,000 1,483,000
==========
Less amount representing interest..................... (160,000)
----------
Total present value of minimum payments............... 1,323,000
Less current portion.................................. (388,000)
----------
Non-current portion................................... $ 935,000
==========
</TABLE>
F-17
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During September 1997, the Company entered into a capital lease agreement,
which allows for the Company to borrow up to $1,750,000 to finance capital
expenditures. As of December 31, 1998, the Company has $116,000 available for
future borrowings under the capital lease agreement. Equipment held under the
capital leases totaled $327,000 and $1,743,000 and the related accumulated
amortization totaled $45,000 and $559,000 at December 31, 1997 and 1998,
respectively. The obligations under the capital leases are secured by the
related equipment.
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. The warrant is 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 warrant was $25,000,
which has been capitalized as debt issuance costs and is being amortized over
the life of the financing agreement.
7. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1997 and 1998 are shown below. A valuation allowance of $7,781,000 has
been recorded at December 31, 1998 to offset the net deferred tax assets as
realization is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax liability:
Depreciation.................................... $ (21,000) $ (12,000)
Deferred tax assets:
Tax credit carryforwards........................ 571,000 1,185,000
Net operating loss carryforwards................ 4,000,000 5,757,000
Other, net...................................... 456,000 851,000
----------- -----------
Total deferred tax assets......................... 5,027,000 7,793,000
Valuation allowance............................... (5,006,000) (7,781,000)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
</TABLE>
The Company had federal and California tax net operating loss carryforwards
at December 31, 1998 of approximately $14,368,000 and $15,168,000,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2011 and 2004, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $876,000 and $475,000, 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 carryforwards may be 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.
8. 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 Board of
Directors may, at its sole discretion, approve Company contributions. No such
contributions have been approved or made.
F-18
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COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company had a note receivable from an officer with
a face value of $1,000,000 included in other assets. This note was issued in
connection with the officer's employment and relocation agreement. The note
bears no interest, is secured by the officer's residence and is due at the
earlier of March 30, 2003, or 15 days from the date the officer ceases to be
an employee of the Company.
10. RECENT EVENTS
In April 1999, the Company reincorporated as a Delaware corporation. The
authorized shares of the Company was set at 100,000,000 shares of common stock
($.001 par value) and 5,000,000 shares of preferred stock ($.001 par value).
Under the restated certificate, the board has the authority, without further
action by stockholders, to issue up to 5,000,000 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 February 1999, the Company adopted the 1999 Employee Stock Purchase Plan.
The purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code. A total of 300,000 shares of common stock are reserved for
issuance under the purchase plan. The price of shares purchased under the
purchase plan is equal to 85% of the fair market value of the common stock on
the first or last day of the offering period, whichever is lower.
In March 1999, the Company entered into an operating lease for its San Diego
operations. The lease has a commencement date of June 1, 1999 with an initial
term of six years. The Company has one option to extend the lease term for a
period of five years. Initial future minimum lease payments total $1,356,000
per year.
In March 1999, the Company adopted the 1999 Non-Employee Directors' Stock
Option Plan to provide for the automatic grant of options to purchase shares
of common stock to non-employee directors. A total of 360,000 shares have been
reserved for issuance under this plan. As of March 31, 1999, 180,000 options
had been granted under this plan at a exercise price of $12.00 per share.
In March 1999, the Company amended the 1996 Equity Incentive Plan to reserve
for an additional 1,750,000 shares for future grants.
F-19
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[LOGO OF COPPER MOUNTAIN]
