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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ____________ to____________.
Commission File Number ( 000-25865 )
Copper Mountain Networks, Inc.
(Exact name of registrant as specified in its charter)
Delaware 33-0702004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2470 Embarcadero Way, Palo Alto, California 94303
(650) 687-3300
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of January 31, 2000 was approximately $2,118,985,000 (based
on the closing price for shares of the registrant's Common Stock as reported by
the Nasdaq National Market for the last trading day prior to that date).
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of January 31, 2000 was 47,870,942.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 2000 Annual Meeting are incorporated herein by reference into Part III
of this Report. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's year ended
December 31, 1999.
Certain exhibits filed with the registrant's (i) Registration Statement on Form
S-1 (File No. 333-73153), as amended, and (ii) Form 10-Q for the quarter ended
September 30, 1999, are incorporated by reference into Part IV of this Report.
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COPPER MOUNTAIN NETWORKS, INC.
FORM 10-K
For the Year Ended December 31, 1999
INDEX
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Part I Page
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Item 1. Business 1
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 30
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 38
Part III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 39
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 40
Signatures 43
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PART I
Item 1. Business
Forward Looking Statements
This document contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual
results or to changes in our expectations.
Readers are also urged to carefully review and consider the various
disclosures made by us which attempt to advise interested parties of the factors
which affect our business, including without limitation the disclosures made
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and under the caption "Risk Factors" included herein
and in the Company's Registration Statement on Form S-1 (No. 333-73153).
Overview
Copper Mountain Networks supplies Digital Subscriber Line (DSL) communications
products to telecommunications service providers allowing them to effectively
utilize the existing copper infrastructure to deliver high-speed data and voice
services to their customers. Copper Mountain Networks designs, manufactures,
sells and supports these products and believes the demand for high speed access
solutions which are enabled by such products is significant and will continue to
grow with the use of the Internet, the proliferation of data intensive
applications and the proliferation of and corporate networking applications.
From our inception in March 1996 through December 1997, our operating
activities related primarily to developing, building and testing prototype
products; building its technical support infrastructure; commencing the staffing
of its marketing, sales and customer service organizations; and establishing
relationships with its customers. We commenced shipments of our CopperEdge
product family in September 1997, including line cards and our CopperRocket DSL
customer premise equipment, or DSL CPE. Prior to 1999, we have incurred
significant losses on an annual basis and as of December 31, 1999, we had an
accumulated deficit of $11.3 million.
Our revenue is generated primarily from sales of our central office based
equipment: our CopperEdge 200 DSL concentrators, or the CE200s, the related wide
area network cards, line cards and, to a lesser extent, from sales of our DSL
CPE. Additionally, we sell network management software which provides monitoring
and management capabilities for the CE200, revenues from which have not been
material to date. During 1999, we introduced the CopperEdge 150 DSL
concentrator, or the CE150, to support applications for users in the Multi-
Tenant Unit (MTU) market where our CE150 is deployed within a building which
houses multiple small to medium sized businesses.
For the year ended December 31, 1999, sales to our three largest customers
accounted for approximately 88% of our revenue, of which sales to NorthPoint
Communications, Inc., Rhythms NetConnections Inc. and Lucent Technologies, Inc.
accounted for approximately 37%, 28%, and 23% of our revenue, respectively.
While the level of sales to any specific customer is anticipated to vary from
period to period, we expect that we will continue to have significant customer
concentration from these three customers for the foreseeable future.
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We market and sell our products directly to telecommunications service
providers, through strategic original equipment manufacturers and through
distributors. Currently, we derive approximately 76% of our revenue from sales
made directly to telecommunications service providers.
Summary of 1999 Significant Events
The closing of Copper Mountain's Initial Public Offering, which raised
approximately $90 million, net of underwriting fees.
. The announcement of the CopperEdge 150 DSL Concentrator, a new member of the
CopperEdge family that is optimized for use in mid-sized multi-tenant unit
buildings such as office buildings, business parks, multi-family apartments,
campuses, and hotels. The CopperEdge 150 system has since been deployed by
several MTU-focused service providers.
. The introduction of Copper Mountain's AutoDetect SDSL capability, which
automatically learns the characteristics of the local loop and determines the
maximum SDSL speed that the line can sustain, thereby eliminating manually
intensive testing process and enabling cost-effective accelerated deployments.
. The addition of product functionality enhancements to the CopperEdge platform
to support toll-quality voice services over DSL, and the introduction of the
CopperVIP (voice in packets) interoperability program.
. The announcement of a technology licensing and marketing partnership with
TollBridge Technologies for delivering IP-based multi-line voice over DSL
broadband access. In addition, Copper Mountain unveiled partnerships with
other leading voice gateway providers Jetstream Communications and CopperCom.
. The confirmation by the Dell'Oro Group, in a report issued on February 15,
2000, that Copper Mountain's revenues accounted for 42.5 percent of total
business DSL equipment sales in 1999. In addition, Copper Mountain is
classified in the study as the leader for the number of business central
office (CO) ports shipped in 1999, accounting for 42.9 percent of total ports
delivered. In a prior report published by Dell'Oro on May 24, 1999, Copper
Mountain was ranked the leader in both categories for 1998 as well.
. The results of a survey by Infonetics released in May 1999, which ranked
Copper Mountain first with Competitive Local Exchange Carrier (CLEC) service
providers with respect to their anticipated purchases of DSL equipment through
May 2000.
. The announcement of two new Inverse Multiplexing (IMUX) customer premise
equipment (CPE) devices that can bond up to eight copper pairs to deliver
high-bandwidth services at speeds up to 12 Mbps.
. The announcement of a 24-port, G.lite line card for the CopperEdge family of
DSL concentrators that complies with the G.lite G.992.2 standard ratified by
the International Telecommunication Union (ITU) in 1999. This line card allows
service providers to support high-speed data and POTS voice, integrated over
one line, to the residential DSL market.
. The shipment in the fourth quarter of 1999 of over 1,500 CopperEdge DSL
concentrators bringing the cumulative figure to over 4,600 DSL concentrators
shipped since the Company's inception, with a potential capacity in excess of
870,000 DSL ports.
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. The formation of the CopperPowered Hotel initiative, an industry-wide, open
coalition with leading Service Selection Gateway and equipment vendors serving
the hotel industry. With this initiative, Copper Mountain continued its
expansion to the multi-tenant unit and hospitality marketplaces.
Industry Background
Over the past few years, the volume of data traffic across public
communications networks has increased significantly due to the use of the
Internet as a communications and transaction medium. According to International
Data Corporation, the number of Internet users worldwide reached approximately
63 million in 1998 and is forecasted to grow to approximately 177 million by
2003. International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $4 billion in
1998 to over $39 billion in 2003. In addition to electronic commerce, business
usage of web-based communications, remote access for teleworkers, applications
hosting and other services have generated enormous traffic for the existing
communications infrastructure. To meet this demand, service providers have
installed high-bandwidth fiber optic transmission equipment, high-speed switches
and core routers in backbone and interoffice networks.
In contrast to these core networks, which support digital transmission speeds
exceeding 9 gigabits per second, or Gbps, most access networks, or connections
between subscribers and central offices, often called the "last mile," are
made through the copper infrastructure originally built to transmit analog voice
signals. In fact, over 140 million businesses and homes in the United States are
served by this copper infrastructure, and the worldwide installed base of copper
lines exceeds 700 million. We believe most business and residential users have
found narrowband access, using dial-up analog modems with connection speeds that
do not exceed 56.6 kilobits per second, or Kbps, inadequate to meet their high-
bandwidth requirements.
Until recently, local telephone companies such as the Regional Bell Operating
Companies and GTE Corporation, collectively the incumbent local exchange
carriers, or ILECs, were the exclusive operators of this last-mile, copper wire-
based infrastructure and primarily offered ISDN and T-1 services to address the
need for high-speed connectivity. These service offerings enable symmetrical
data transmission at rates up to 128 Kbps and 1.5 megabits per second, or Mbps,
respectively. ISDN, which requires the installation of special equipment at each
end of the copper access line, has achieved limited success due to complexity
and high cost of deployment. T-1 services provide 12 times the bandwidth of
ISDN, but require expensive infrastructure modification and investment. While
there are various transmission media alternatives for providing broadband
connectivity, such as coaxial cable and wireless, we believe none have the cost
and coverage advantages of using the existing copper infrastructure.
Digital Subscriber Line technology was developed to address the last-mile
bottleneck. While there are several variants of DSL implementations, they all
share several important advantages over traditional high-speed services
delivered over the copper infrastructure as well as cable and wireless broadband
alternatives.
. Guaranteed, Dedicated Bandwidth. DSL is a point-to-point technology that
allows for guaranteed levels of bandwidth. Because DSL connections are
dedicated to each user, DSL does not suffer from service degradation as
other subscribers are added to the system, and, in addition, allows a
higher level of security. Alternative broadcast solutions, such as cable
and wireless, are shared systems which suffer service degradation and
increase the risk of security breaches as additional users share bandwidth.
. Low Cost. Because DSL uses the existing copper-based last-mile connection,
it can be significantly less expensive to deploy to businesses and homes
than other broadband solutions. In addition, recent advances in
semiconductor technology and industry standardization have
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made the widespread deployment of DSL increasingly economical to both
service providers and subscribers.
. Universal Coverage. Since virtually all businesses and homes in the United
States already have installed copper wire connections, DSL technologies can
be made immediately available to a large percentage of potential customers.
In addition, the leading variants of DSL can enable data transmission up to
and beyond 20,000 feet without requiring repeaters.
Despite the advantages of deploying DSL over existing copper infrastructure,
ILECs historically have largely sought to protect their existing T-1 and ISDN
businesses. In the mid-1990s, however, the prospect of greater competition from
cable operators deploying cable modems to deliver high-bandwidth services
prompted the ILECs to accelerate their investments in those DSL technologies
that appeared most appropriate for residential subscribers. The ILECs promoted a
DSL variant called asymmetrical DSL, or ADSL, that permits one-way high-
bandwidth data transfer. Most DSL vendors focused on ADSL solutions for the
residential market because consumers typically download large quantities of
data-intensive content from the Internet, while the amount of data sent upstream
by consumers is typically limited.
More recently, DSL transmission technology has been embraced by a new set of
telecommunications service providers that emerged as a result of the
Telecommunications Reform Act of 1996 (Telecom Act). The Telecom Act redefined
the competitive landscape in the telecommunications industry by creating a legal
framework for new service providers to provide competing local
telecommunications services. The Telecom Act also eliminated a substantial
barrier to entry for these competitive local exchange carriers, or CLECs, by
allowing them to use the existing copper-based network infrastructure built by
the ILECs.
The realization of all of the objectives of the Telecom Act, however, is still
subject to certain uncertainties, including:
. legal proceedings that will further define rights and duties under the
Telecom Act;
. actions or inactions by telephone companies or other carriers that affect
the pace at which changes contemplated by the Telecom Act will occur;
. resolution of questions concerning which parties will finance such changes;
and
. other regulatory, economic and political factors.
Since the implementation of the Telecom Act, some of the new CLECs have
focused on providing competitively priced, high-bandwidth connectivity for
business customers who typically had used T-1 lines from the ILECs to meet their
bandwidth needs or who used dial-up modems but are currently seeking cost-
effective broadband services. These CLECs are focused on providing DSL solutions
that meet the current needs of business subscribers and provide flexibility for
future services.
While many DSL equipment vendors focus on the needs of the residential market,
few focus on the unique needs of business subscribers. In particular, CLECs are
seeking equipment solutions that enable the deployment of cost-effective, full-
coverage, high-bandwidth data access services. Moreover, as the demands of high-
bandwidth users and technology mature, other telecommunications service
providers are also looking for vendors that can effectively incorporate DSL into
communications equipment solutions. Finally, telecommunications service
providers generally want their equipment providers to support a variety of end-
user devices. As the DSL market naturally evolves from business to residential
users, telecommunications service providers will require equipment that enables
them to provide high-speed services across their subscriber base.
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The Copper Mountain Solution
We provide broadband access solutions based on DSL technology to
telecommunication service providers. Our solutions enable CLECs, ILECs and other
telecommunications service providers to provide high-speed, cost-effective,
last-mile connectivity over the existing copper wire telephone infrastructure to
the business, multiple tenant unit and residential markets. Our DSL solutions
provide the following key benefits:
Support for Business Applications. Our products enable CLECs, ILECs and other
telecommunications service providers to deliver business services such as high-
speed Internet access, corporate networking, teleworking and packet-based voice
solutions. We focused our initial service offerings on symmetrical data
transmission addressing the bi-directional bandwidth needs of business users
because relevant applications, such as e-mail, file transfer, web hosting and
corporate intranets, require subscribers to send as well as receive data. Our
CopperEdge DSL Concentrator provides multiple networking models and advanced
packet processing to meet the evolving needs of business subscribers by enabling
simultaneous support for Internet access, Frame Relay, virtual private network
(VPN) and voice-over-packet services.
Full Coverage DSL. Our products allow our service provider customers the
flexibility to reach their targeted subscribers. Our symmetric DSL, or SDSL,
service offering delivers symmetrical bandwidth up to 1.5 Mbps on a single
copper pair, and up to 12 Mbps using inverse multiplexing (IMUX) technology, to
distances up to 28,000 feet from the Central Office while supporting multiple
services over DSL, including Internet access, toll-quality voice services,
corporate VPNs, and Frame Relay. We also offer ISDN-based DSL, or IDSL, which is
the only variant of DSL that can reach those U.S. subscribers connected through
existing remote digital loop carriers without requiring an upgrade of these
remote systems.
Multi-Vendor Interoperability. We have partnered with third-party DSL
customer premise equipment manufacturers through the CopperCompatible program to
develop a broad line of customer premise equipment, or CPE, which are compatible
with our CopperEdge DSL concentrators. We provide CPE manufacturers with
interoperability specifications and intellectual property to assist their
development, and we run a test laboratory to certify the CopperCompatible status
of their products. This program gives telecommunications service providers
multiple sources of compatible CPE. Additionally, the Company has a
compatibility program, known as CopperVIP (Voice in Packets), which tests and
validates compatibility between the CopperEdge family of products and the
leading providers of voice gateways which facilitates the simultaneous delivery
of voice and data over our product platform.
Trouble-Free Operations. Our products are designed to reduce installation
time and support requirements for our telecommunications service provider
customers. Our CopperEdge 200 DSL concentrator is designed to meet the stringent
requirements of the telephone company central office environment. Each
concentrator supports full redundancy and is designed for easy support and
service. In addition, our products and management software are designed for and
proven in large-scale national deployments. Our initial service implementations,
SDSL and IDSL, are based on a mature protocol that is spectrally compatible to
existing ISDN and T-1 network elements which minimizes potential interference
within the central offices of host ILECs. Finally, we have reduced CPE
deployment complexity with a zero-installation "plug-and-play" CPE procedure
that eliminates end-user configuration, removes the need to send a technician to
the customer premise and provides centralized management and control.
Support for Multiple Services. Our platform is a highly-scalable and cost-
effective platform that addresses the strong demand for Internet access
services. In addition, the CopperEdge products maximize return on investment
through support of value added Frame Relay, VPN and voice services. Unlike most
DSL access multiplexer platforms, the CopperEdge solution delivers advanced
packet processing, class of service using weighted fair queuing, and subscriber
aggregation to support multiple simultaneous services.
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Strategy
Our objective is to be the leading supplier of DSL solutions to
telecommunications service providers. The key elements of our strategy include:
Extend Position in the Business DSL Market. Since our inception, we have
focused on providing cost-effective solutions for telecommunications service
providers targeting business subscribers. Business users increasingly require
high-speed data services to conduct business, and non-DSL alternatives are often
expensive, complex and lack sufficient bi-directional bandwidth. We are
targeting telecommunications service providers focused on the business market,
including well-financed CLECs and other telecommunications service providers.
Currently, our major customers include NorthPoint Communications, Inc., Rhythms
NetConnections Inc., Lucent Technologies, Inc., DSL.NET, Onsite Access, and MCI
WorldCom, Inc. We will continue to focus on supporting the requirements of our
existing customers as well as providing solutions to existing and new carriers
that are focused on business users.
Expand Service Offerings Supported by Our Platform. We intend to continue to
add functionality and support for the multiple data and voice services to
increase the usefulness and performance of our products. We believe that we have
enhanced our core product offerings to support a variety of services which offer
better value to service providers and their end-user customers. Our products are
designed to support future services and technology. In addition, we are
developing new offerings with DSL technologies such as full-rate ADSL, and plan
to enhance our offerings as needed by subscribers and service providers.
Leverage Original Equipment Manufacturer and Development Relationships. We
have formed original equipment manufacturer relationships with Lucent
Technologies, Inc. and 3Com. Lucent currently resells our product line as a co-
branded sale. Under the original equipment manufacturer and development
agreement with 3Com, they may sell our CPE products directly or through their
distribution channels. We intend to leverage 3Com's broad distribution network
in the commercial and retail markets. We believe that our current original
equipment manufacturer and development relationships will enhance our market
position, and we will continue to seek additional original equipment
manufacturer relationships.
Target Multi-Tenant Building Deployments Outside the Central Office. In
addition to deploying DSL equipment in ILEC central offices for our CLEC and
other telecommunications service provider customers, we have deployed our DSL
150 concentrators in commercial office buildings and apartment and condominium
buildings. We believe that this market, known as the multi-tenant unit (MTU)
market, will significantly expand the deployment of DSL technology. While we
believe that our current product offerings are well suited to this market, we
will continue to develop new products that will allow carriers to reduce the
cost of high-speed data access to tenants in these types of properties.
Recently, we completed the purchase of OnPREM Networks, Inc., who has developed
a low to medium density DSL concentrator, which will complement our existing
product offerings. In addition, we are working with service providers who are
targeting multi-tenant property managers to focus on this emerging market.
Drive Interoperability. We actively support the interoperability of DSL
technology to facilitate faster and broader market acceptance. We have formed
the CopperCompatible program through which we offer licenses of our DSL CPE
technology to a number of third-party manufacturers of CPE equipment.
Additionally, we support the interoperability of DSL technology with voice
related equipment through our CopperVIP program. Under this program we work
directly with makers of voice equipment to achieve and maintain interoperability
with our CopperEdge products. Our efforts in the area of interoperability also
enables our technology to be combined with other networking products such as
routers, access and aggregation devices.
Address Emerging Opportunities in Residential Market. We believe that with
the continued deployment of alternative data-based networks, telecommunications
service providers will seek to offer
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DSL-based services beyond the core market for business subscribers.
Specifically, telecommunications service providers will target residential
subscribers seeking high-speed access to public communications networks. As this
trend toward broad deployment of DSL services evolves, we anticipate significant
opportunities for us to deploy new offerings, such as our recently introduced
G.Lite line card, that leverage both our technology and our relationships with
service providers.
Products
We provide end-to-end DSL solutions that enable service providers to deploy
high-bandwidth services over traditional copper wire telephone infrastructure.
Our product family is designed to offer telecommunication service providers
flexibility in network implementation as well as a wide range of subscriber
equipment offerings. Telecommunications service providers using our products can
allow subscribers access to a full range of DSL services at rates up to 25 times
faster than the current speed (56.6 Kbps) of existing analog modems. Our
products are scalable to enable carriers to cost effectively deploy DSL services
on a selective, regional basis or on a national level addressing thousands of
subscribers. Our products are designed to support the various network
architectures, wide-area network (WAN) interfaces and deployment models of our
service provider customers. Our solution consists of the following product
lines:
. CopperEdge DSL concentrators: Telecommunications service providers install
CopperEdge products in their co-location areas within ILEC central offices
and in multi-tenant buildings to deliver services to their end user
customers.
. CopperRocket DSL CPE: Subscriber connection to the service provider network
is provided at the subscriber's premises with CopperRocket DSL CPE.
. CopperView Network Management Software Tools: Our network management tools
enable telecommunications service providers to manage their Copper Mountain
DSL equipment as well as configure and provision subscriber services.
Because of the large scale deployment of DSL equipment by our CLEC customers,
our shipments of the CE 200 DSL concentrators and the related line and WAN
interface cards have accounted for substantially all of our revenue to date.
CopperEdge 200 DSL Concentrators
Our 192-port, high density DSL concentrator, the CopperEdge 200, or CE200, is
a carrier-class platform designed specifically for ILEC central office
environments, and meets or exceeds industry standards, and applicable regulatory
requirements. The CE200 can be deployed in a central office environment or
within multi-tenant buildings and consists of a modular chassis containing power
supplies, control system, wide area network interface modules and DSL line
cards. All line cards, indicators and switches are accessible from the front of
the system, consistent with current telco industry practices. The following are
characteristics of the CE200:
. contains redundant power supplies that can be replaced without interrupting
power to the chassis to ensure high-availability for subscriber services;
. supports a range of interfaces for wide area network connections;
. supports multiple advanced networking models implemented in the control
system, which can be used concurrently including Frame Relay Multiplexing,
Frame Relay to ATM interworking, Layer 3 IP multiplexing and Layer 2
Ethernet frame multiplexing;
. contains up to 8 line cards containing DSL interfaces which connect to the
subscriber DSL CPE equipment.
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SDSL Line Cards. Our SDSL line cards use technology that is already widely
deployed in access networks, enhancing the ability of telecommunications
service providers to deploy compatible solutions. Each SDSL line card provides
24 ports, each of which can provide service to a subscriber network at speeds
between 160 Kbps and 1.544 Mbps over distances between 22,000 feet and 9,100
feet, respectively.
IDSL Line Cards. For subscribers who can only be served over ISDN capable
copper lines we provide 24 port IDSL line cards. These line cards deliver
service at speeds between 64 Kbps and 144 Kbps up to a distance of 18,000 feet
from the central office. The use of repeaters will increase the reach to over
30,000 feet.
CopperEdge 150 DSL Concentrators
Copper Mountain's mid-density DSL concentrator, the CopperEdge 150, or CE150,
is a DSL concentrator optimized for use in Multi-Tenant Unit (MTU) Buildings.
The CopperEdge 150, available in configurations supporting up to 48 end user
customers, offers symmetric bandwidth at selectable speeds ranging from 128 kbps
to 1.5 Mbps. Service providers use the CopperEdge 150 to deliver multiple high-
bandwidth services concurrently, including Internet access, corporate virtual
private networks (VPNs), and Frame Relay services, as well as PBX extension and
other voice services.
CopperRocket Customer Premise Equipment
The CopperRocket family of CPE products consists of SDSL and IDSL modems and
SDSL and IDSL inverse mutiplexers (IMUX). These CPE products can operate at
multiple transmission speeds and distances to satisfy the price and performance
needs of each subscriber. The CopperRocket is a "plug-and-play" device. Unlike
ISDN modems, there are no hardware switches, configuration parameters or end-
user software configuration required. Copper Mountain's ZIP! (Zero Installation
Procedure) feature enables the CopperRocket to communicate with a CopperEdge DSL
concentrator and automatically download all the necessary c onfiguration
parameters to immediately begin full operation.
The CopperRocket operates over standard copper telephone wire and provides
dedicated, full-duplex throughput at multiple speeds to support network
activities such as file transfers, intranet access and Internet Web browsing.
The CopperRocket's multi-speed DSL feature enables service providers to remotely
adjust line speed based upon subscriber requirements with no additional
investment or software upgrade by the service provider. In addition to
offering our own CPE products, we work with third-party providers to offer a
broad range of interoperable customer premise equipment through our
CopperCompatible program.
CopperView Network Management Tools
Our CopperView suite of network management tools are used to configure and
manage our DSL solutions. This set of tools provides user interfaces necessary
to manage large, geographically separated DSL concentrator networks, individual
concentrators and simple on-site or remote management. Because the CopperEdge
DSL concentrator also manages CopperRocket modems by proxy, CopperView allows
carriers to manage their DSL networks end-to-end from one site.
. The CopperView DSL Management System provides global management of large
networks of CopperEdge DSL concentrators with a simple, intuitive user
interface.
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. The CopperView Element Management System provides a graphical user
interface which allows precise configuration and management of a single
CopperEdge DSL concentrator and its CPE.
. The CopperCraft text based interface provides a simple interface for on-
site technicians and for remote access to a DSL concentrator.
Product Deployment
We sell our products for deployment into both central offices and multi-tenant
buildings. Telecommunications service providers may deploy in either or both of
these environments in order to reach their target market in the most effective
manner.
Central Office-Based DSL Service Deployment. Telecommunications Service
Providers may install our CopperEdge DSL concentrator product in a central
office in order to offer service to any subscriber served by that central office
(within the distance limitations of DSL service). Typically, the CLEC leases
from the ILEC a high-bandwidth trunk, usually a 45 Mbps DS-3 circuit, in order
to connect the DSL concentrator to the CLEC's regional switching office. The
CLEC then requests from the ILEC an individual copper loop to a subscriber, for
which the CLEC pays a monthly fee. The copper loop is provisioned through the
ILEC's distribution facilities out to the subscriber premise. The CLEC then
provisions the wiring inside the subscriber premise and installs the CPE.
CLECs or ILECs deploying DSL from central offices may elect do so in selected
central offices where the number of potential subscribers is highest, or they
may choose to cover a region by installing in all central offices in that
region. A CLEC may choose a regional deployment strategy or a nationwide
deployment strategy.
Multi-Tenant Building DSL Service Deployment. A telecommunications service
provider can deploy our CopperEdge DSL concentrators into multi-tenant buildings
in order to provide Internet access and other data and voice services to the
tenants of that building. For a CLEC or an independent service provider, multi-
tenant building deployment can provide access to DSL subscribers in a highly
selective manner without the high costs of central office collocation. Inside
the building, the service provider can utilize the existing telephone wiring to
deliver high-bandwidth connections to each tenant with no building re-wiring
expense. A high-bandwidth leased circuit or wireless transmitter on the roof
connects the building to the service provider's regional switching office or
point of presence. Tenants in the building can use a single, high-bandwidth
connection from the building to the service provider's switching office,
providing good application performance at a lower cost than the same bandwidth
dedicated to a single subscriber.
Customers
In 1999, sales to our top three largest customers accounted for approximately
88% of our revenue, of which sales to NorthPoint Communications, Inc., Rhythms
NetConnections, Inc. and Lucent Technologies, Inc., accounted for approximately
37%, 28%, and 23%, of our revenue, respectively. While the level of sales to any
specific customer is anticipated to vary from period to period, we expect that
we will continue to have significant customer concentration for the foreseeable
future. The loss of a significant customer could have a material adverse effect
on our business.
Strategic Relationships
We have established several strategic partnerships and licensing agreements
with leading CPE and voice gateway vendors to facilitate the deployment and
acceptance of our products and technology.
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. Lucent. Under an original equipment manufacturer agreement, Lucent
combines our DSL equipment with its NetCare(R) installation, network
management and customer support professional services to create turnkey DSL
solutions for CLECs. Under the agreement Lucent will co-brand and market
our DSL equipment through November 2001. We have agreed to manufacture, co-
brand and sell our products to Lucent and to provide Lucent with training,
installation and technical support for these products. Lucent also plans to
offer our DSL equipment in combination with some of its existing data
networking, switching and access products to enable service providers to
create broader voice and data network solutions that can evolve and grow
with their business.
. 3Com. 3Com has agreed to market our DSL CPE through November 2001. Under
this agreement we have agreed to manufacture, co-brand and sell our
products to 3Com and to collaborate on future development projects.
Additionally, this agreement calls for both companies to co-market their
DSL products. Moreover, 3Com may request to manufacture its own DSL CPE
products. Both parties have agreed to use good faith efforts to effect such
manufacturing license.
Interoperability Partnerships
We have established several CPE licensing relationships with certain vendors
through our CopperCompatible interoperability program in order to promote the
interoperability of our CopperEdge DSL concentrators with such equipment. Under
this interoperability program, licensees are allowed access to our technology
which can be used in the design of their CPE. These CPE licensing relationships
have been established with ADC Kentrox, Netopia, Cayman Systems, Escalate
Networks, and Ramp Networks, among others.
Our CopperVIP initiative, which falls under the CopperCompatible umbrella,
facilitates interoperability of customer premise equipment (CPE), Integrated
Access Devices (IADs), and Integrated Communications Platforms (ICPs) with voice
gateways from Copper Mountain's voice partners and Copper Mountain's widely
deployed DSL platform. Our voice partners include CopperCom, Inc., JetStream
Communications, and Tollbridge Technologies.
Sales and Marketing
We sell and market our products primarily through our direct sales
organization. Additionally, we have relationships with selected original
equipment manufacturers and distributors in order to expand our distribution
capabilities.
Direct Sales. Our direct sales responsibilities are divided into three North
American geographic regions: West, Central and East. Our sales effort is
directed by regional directors and sales managers who are responsible for
relationships with targeted customers. A key feature of our selling effort is
the relationships we establish at various levels in our customer's organization.
The sales management team for each customer is responsible for maintaining
contact with key individuals who have planning and policy responsibility within
the customer's organization. At the same time, our sales engineers work with
customers to sell our products at key levels throughout the customer's
organization. Direct sales accounted for approximately 77% of our revenue in
1999.
Original Equipment Manufacturer Sales. We have established key original
equipment manufacturer relationships with leaders in the telecommunications
equipment and customer premise equipment markets. We intend to maintain a
limited number of relationships with key strategic original equipment
manufacturers who may offer products or have existing customer relationships
which may complement ours. In line with our strategy to offer our
telecommunications service provider customers and their
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subscribers a broad line of CPE, we have entered into several original equipment
manufacturer relationships for our CopperRocket product line and a number of
interoperability partnerships with CPE providers. We receive sales revenues from
our original equipment manufacturer partners, but do not currently receive
royalty revenue from interoperability arrangements.
Marketing is structured along product and distribution channel lines for each
of our major product areas. For each major product area, we employ dedicated
product marketing and marketing program management specialists. The corporate
marketing staff coordinates activities among our various business units and
provides marketing support services, including marketing communications,
marketing research, trademark administration and other support functions. Our
marketing organization performs the following functions:
. develops specific marketing strategies for each product line;
. works with our direct sales force to develop key account and segmented
market strategies; and
. defines the functions and features of our product and service offerings.
Marketing is responsible for sales support, contract negotiations, in-depth
product presentations, interfacing with operations, setting price levels to
achieve targeted margins, developing new services and business opportunities and
writing proposals in response to customer requests for information or
quotations.
Customer Service and Support
A high level of continuing service and support is critical to our objective of
developing long-term customer relationships. The majority of our service and
support activities are related to installation support and network configuration
issues. These services are provided by telephone and directly at customer
installations with resources from our customer support group based in San Diego,
California. To date, our revenues from on-site installation and technical
assistance has not been significant. In June 1998, we engaged Lucent NetCare(R),
Lucent's data communications service organization, to provide field installation
and maintenance support for our products.
We provide technical support for our products which have warranties of up to
12 months, both directly and through our selected service subcontractors. We
have a variety of comprehensive and flexible hardware and software maintenance
and support programs available for products no longer under warranty, with
services ranging from time and materials remote service support to 24-hour on-
site support, depending on our customer's preferences. We also offer various
training courses for our third-party resellers and telecommunications service
provider customers. To date, revenues attributable to customer service and
support services has not been significant.
Research and Development
We believe that our future success depends on our ability to adapt to the
rapidly changing telecommunications environment, to maintain our significant
expertise in core technologies, and to continue meeting and anticipating our
customers' needs. We continually review and evaluate technological changes
affecting the telecommunications market and invest substantially in
applications-based research and development. We are committed to an ongoing
program of new product development
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that combines internal development efforts with acquisitions, joint ventures and
licensing or marketing arrangements relating to new products and technologies
from outside sources.
We have focused our recent research and development expenditures on
commercializing our DSL systems, including our CopperEdge solutions and
CopperRocket modems along with CopperView network management tools which support
these technologies. We believe that our extensive experience designing and
implementing high-quality network components has enabled us to develop high-
value integrated systems solutions. As a result of these development efforts, we
believe we have created an industry-leading platform for cost-effective DSL
delivery.
Competition
The telecommunications equipment industry is highly competitive, and we
believe that competition may increase substantially as the introduction of new
technologies, deployment of broadband networks and potential regulatory changes
create new opportunities for established and emerging companies in the industry.
In addition, a number of our competitors have significantly greater financial
and other resources than us to meet new competitive opportunities. We compete
directly with other providers of DSL concentrators including, Cisco Systems,
Inc., Lucent Technologies, Inc., Alcatel S.A., Nokia Corporation and Paradyne
Corporation, among others. In addition, DSL as a technology for deploying
broadband connections is competing with alternative technologies including ISDN,
T-1 and wireless solutions. In the residential market, we will compete against
certain other companies, including companies relying on coaxial cable
infrastructure and cable modem technology.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to our group of competitors. The principal
competitive factors in our market include:
. brand recognition;
. key product features;
. system reliability and performance;
. pricing and vendor-sponsored financing;
. ease of installation and use;
. technical support and customer service; and
. size and stability of operations.
We believe our success in competing with other manufacturers of
telecommunications products depends primarily on our engineering, manufacturing
and marketing skills, the price, quality and reliability of our products and our
delivery and service capabilities. We may face increasing pricing pressures from
current and future competitors in certain or all of the markets for our products
and services.
We believe that technological change, the increasing addition of voice, video
and other services to networks, continuing regulatory change and industry
consolidation or new entrants will continue to cause rapid evolution in the
competitive environment of the telecommunications equipment market, the full
scope and nature of which is difficult to predict. Increased competition could
result in price reductions, reduced margins and loss of market share by us. We
believe regulatory change in the industry may create new opportunities for
suppliers of telecommunications equipment; however, we expect that such
opportunities may attract increased competition from others as well. We also
believe that the rapid technological changes which characterize the data
communications industry will continue to make the
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markets in which we compete attractive to new entrants. There can be no
assurance that we will be able to compete successfully with our existing or new
competitors or that competitive pressures faced by us will not materially and
adversely affect our business, financial condition and results of operations.
Manufacturing
Our manufacturing operations consist primarily of supporting prototype
development, materials planning and procurement, final assembly, testing and
quality control. We use several independent suppliers to provide certain printed
circuit boards, chassis and subassemblies. We subcontract substantially all of
our manufacturing to one company, Flextronics International Ltd. located in
Freemont, California.
Our manufacturing process enables us to configure our products to meet a wide
variety of individual customer requirements. We have initiated the process of
seeking International Standard Organization 9001 registration for quality
assurance in design, sale, production, installation and service. We plan to
strengthen manufacturing capability both in our existing facilities and through
expansion of activities with independent suppliers and manufacturers. Our future
growth will require an extension of existing internal and external manufacturing
resources, hiring of additional technical personnel, improved coordination of
supplier relationships with our inventory ordering and management practices, and
expansion of information systems to accommodate planned growth across these
areas.
We use a combination of standard parts and components, which are generally
available from more than one vendor, and three key components that are purchased
from sole or single source vendors for which alternative sources are not
currently available: two semi-conductor chips and a system control module. If
supply of these key components should cease, we would be required to redesign
our products. We are evaluating alternate source vendors for each of these key
components but these vendors may not meet our quality standards for component
vendors. While we work closely with some well-established vendors, we have no
supply commitments from our vendors and we generally purchase components on a
purchase order basis, as opposed to entering into long term procurement
agreements with vendors. To date, we have generally been able to obtain adequate
supplies in a timely manner from vendors or, when necessary, to meet production
needs from alternative vendors. We believe that, in most cases, alternative
supplies of standard parts and components can be identified if current vendors
are unable to fulfill our needs. However, delays or failure to identify an
alternate vendor, if required, or a reduction or interruption in supply, or a
significant increase in the price of components would materially and adversely
affect our business, financial condition and results of operations and could
impact customer relationships.
Intellectual Property
We rely on a combination of copyright, trademark, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect our
trade secrets and know-how. Although we employ a variety of intellectual
property in the development and manufacturing of our products, we believe that
none of such intellectual property is individually critical to our current
operations. Taken as a whole, we believe our intellectual property rights are
significant and that the loss of all or a substantial portion of such rights
could have a material adverse effect on our results of operations. There can be
no assurance that our intellectual property protection measures will be
sufficient to prevent misappropriation of our technology. In addition, the laws
of many foreign countries do not protect our intellectual properties to the same
extent as the laws of the United States. From time to time, we may desire or be
required to renew or to obtain licenses from others in order to further develop
and market commercially viable products effectively. There can be no assurance
that any necessary licenses will be available on reasonable terms.
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Employees
As of December 31, 1999 we employed approximately 240 full-time employees,
including 52 in sales and marketing, 31 in manufacturing, 105 in engineering, 34
in finance and administration and 18 in customer service. All of our employees
are located in the United States. None of our employees is represented by
collective bargaining agreements, and management considers relations with its
employees to be good.
Risk Factors
You should carefully consider the following risk factors and the other
information included herein as well as the information included in our
Registration Statement on Form S-1 (No. 333-73153) before investing in our
common stock. Our business and results of operations could be seriously harmed
by any of the following risks. The trading price of our common stock could
decline due to any of these risks, and you may lose part or all of your
investment.
Copper Mountain Has a History of Losses and May Not Achieve or Sustain Annual
Profitability
Copper Mountain has an accumulated deficit of $11.3 million as of December 31,
1999 and may incur net losses in the future. We anticipate continuing to incur
significant sales and marketing, research and development and general and
administrative expenses and, as a result, we will need to generate significantly
higher revenues to sustain profitability on an annual basis. Although our
revenue has grown in recent quarters, we cannot be certain that our revenue
growth will continue or increase in the future or that we will realize
sufficient revenues to sustain profitability on an annual or quarterly basis.
Copper Mountain Derives Almost All of Its Revenues From a Small Number of
Customers and Copper Mountain's Revenues May Decline Significantly if Any Major
Customer Cancels or Delays a Purchase of Copper Mountain's DSL Products
Copper Mountain sells its products predominantly to competitive local exchange
carriers. Aggregate sales to our three largest customers accounted for
approximately 88% of our total net revenues for the year ended December 31,
1999. Sales to our most significant customers NorthPoint Communications, Inc.,
Rhythms NetConnections, Inc., and Lucent Technologies, Inc. accounted for
approximately 37%, 28%, and 23% of Copper Mountain's net revenues, respectively,
for the year ended December 31, 1999. Accordingly, unless and until we diversify
and expand our customer base, our future success will significantly depend upon
the timing and size of future purchase orders, if any, from our largest
customers and, in particular:
. the product requirements of these customers;
. the financial and operational success of these customers; and
. the success of these customers' services deployed using our products.
The loss of any one of our major customers or the delay of significant orders
from such customers, even if only temporary, could among other things reduce or
delay our recognition of revenues, harm our reputation in the industry, and
reduce our ability to accurately predict cash-flow, and, as a consequence, could
materially adversely affect our business, financial condition and results of
operations.
Copper Mountain Has a Limited Operating History
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Copper Mountain has a very limited operating history as we were incorporated
in March 1996. Due to our limited operating history, it is difficult or
impossible for us to predict future results of operations and you should not
expect future revenue growth to be comparable to our recent revenue growth. In
addition, we believe that comparing different periods of our operating results
is not meaningful, as you should not rely on the results for any period as an
indication of our future performance. Investors in our common stock must
consider our business and prospects in light of the risks and difficulties
typically encountered by companies in their early stages of development,
particularly those in rapidly evolving markets such as the telecommunications
equipment industry. Some of the specific risks include whether we are able:
. to compete in the intensely competitive market for telecommunications
equipment;
. to expand our sales, support and distribution organization;
. to effectively introduce new products and product enhancements in a timely
and competitive fashion; and
. to expand our operational infrastructure.
We discuss these and other risks in more detail below.
A Number of Factors Could Cause Copper Mountain's Operating Results to
Fluctuate Significantly and Cause Its Stock Price to be Volatile
Copper Mountain's quarterly and annual operating results have fluctuated in
the past and are likely to fluctuate significantly in the future due to a
variety of factors, many of which are outside of its control. If our quarterly
or annual operating results do not meet the expectations of securities analysts
and investors, the trading price of our common stock could significantly
decline. Some of the factors that could affect our quarterly or annual operating
results include:
. the timing and amount of, or cancellation or rescheduling of, orders for
our products and services, particularly large orders from our key customers
and original equipment manufacturers;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. announcements, new product introductions and reductions in price of
products offered by our competitors;
. a decrease in the average selling prices of our products;
. our ability to achieve cost reductions;
. our ability to obtain sufficient supplies of sole or limited source
components for our products;
. changes in the prices of our components;
. our ability to maintain production volumes and quality levels for our
products;
. the volume and mix of products sold and the mix of distribution channels
through which they are sold;
. the loss of any one of our major customers or a significant reduction in
orders from those customers;
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. increased competition, particularly from larger, better capitalized
competitors;
. fluctuations in demand for our products and services;
. costs relating to possible acquisitions and integration of technologies or
businesses; and
. telecommunications and DSL market conditions and economic conditions
generally.
Historically, our backlog at the beginning of each quarter has not been equal
to expected revenue for that quarter. Accordingly, we are dependent upon
obtaining orders in a quarter for shipment in that quarter to achieve our
revenue objectives. In addition, due in part to factors such as the timing of
product release dates, purchase orders and product availability, significant
volume shipments of product could occur at the end of our fiscal quarter.
Failure to ship products by the end of a quarter may adversely affect our
operating results. Furthermore, our customers may delay delivery schedules or
cancel their orders without notice. Due to these and other factors, quarterly
revenues, expenses and results of operations could vary significantly in the
future, and period-to-period comparisons should not be relied upon as
indications of future performance.
Copper Mountain Sells the Majority of Its Products to Emerging
Telecommunications Service Providers That May Reduce or Discontinue Their
Purchase of Copper Mountain's Products At Any Time
The customers of Copper Mountain's products to date have predominantly been
telecommunications service providers. The market for the services provided by
telecommunications service providers who compete against traditional telephone
companies has only begun to emerge since the passage of the Telecom Act, and
many of these service providers are still building their infrastructure and
rolling out their services. These telecommunications service providers require
substantial capital for the development, construction and expansion of their
networks and the introduction of their services. Financing may not be available
to emerging telecommunications service providers on favorable terms, if at all.
The inability of our current or potential emerging telecommunications service
provider customers to acquire and keep customers, to successfully raise needed
funds, or to respond to any other trends such as price reductions for their
services or diminished demand for telecommunications services generally, could
adversely affect their operating results or cause them to reduce their capital
spending programs. If our customers are forced to defer or curtail their capital
spending programs, our sales to those telecommunication service providers may be
adversely affected, which would have a material adverse effect on our business,
financial condition and results of operations. In addition, many of the
industries in which telecommunications service providers operate have recently
experienced consolidation. The loss of one or more of our telecommunications
service provider customers, through industry consolidation or otherwise, could
reduce or eliminate our sales to such a customer and consequently have a
material adverse effect on our business, financial condition and results of
operations.
If DSL Technology and Copper Mountain's DSL Product Offerings Are Not
Accepted by Telecommunications Service Providers, Copper Mountain May Not Be
Able to Sustain or Grow Its Business
Copper Mountain's future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by telecommunications service
providers, of which there are a limited number, and end users of their services.
We have invested substantial resources in the development of DSL technology, and
all of our products are based on DSL technology. Telecommunications service
providers are continuously evaluating alternative high-speed data access
technologies and may, at any time, adopt technologies other than the DSL
technologies offered by Copper Mountain. Even if telecommunications service
providers adopt policies favoring full-scale implementation of DSL
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technology, they may not choose to purchase our DSL product offerings. In
addition, we have limited ability to influence or control decisions made by
telecommunications service providers. In the event that the telecommunications
service providers to whom we market our products adopt technologies other than
the DSL technologies offered by Copper Mountain or choose not to purchase Copper
Mountain's DSL product offerings, we may not be able to sustain or grow our
business.
Unless Copper Mountain Is Able to Keep Pace With the Rapidly Changing Product
Requirements of Its Customers, It Will Not Be Able to Sustain or Grow Its
Business
The telecommunications and data communications markets are characterized by
rapid technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and evolving offerings by
telecommunications service providers. We believe our future success will depend,
in part, on our ability to anticipate or adapt to such changes and to offer, on
a timely basis, hardware and software products which meet customer demands. Our
inability to develop on a timely basis new products or enhancements to existing
products, or the failure of such new products or enhancements to achieve market
acceptance, could materially adversely affect our business, financial condition
and results of operations.
Copper Mountain's Product Cycles Tend to be Short and Copper Mountain May
Incur Substantial Non-Recoverable Expenses or Devote Significant Resources to
Sales That Do Not Occur When Anticipated
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. Therefore, the resources we devote to product sales and
marketing may not generate revenues for us and from time to time we may need to
write-off excess and obsolete inventory. In the past, we have experienced such
write-offs attributed to the obsolescence of certain printed circuit boards. If
we incur substantial sales, marketing and inventory expenses in the future that
we are not able to recover, it could have a material adverse effect on our
business, financial condition and results of operations.
Copper Mountain's Ability to Sustain or Grow Its Business May Be Harmed if It
Is Unable to Develop and Maintain Certain Strategic Relationships with Third
Parties to Market and Sell Copper Mountain's Products
Copper Mountain's success will be substantially dependent upon its strategic
partnerships, including its original equipment manufacturer agreements with
Lucent Technologies, Inc. and 3Com Corporation under which we have agreed to
manufacture, and sell our products to Lucent and 3Com. The amount and timing of
resources which our strategic partners devote to our business is not within our
control. Our strategic partners may not perform their obligations as expected.
Agreements with our strategic partners are relatively new, and we cannot be
certain that we will be able to sustain the level of revenue generated thus far
under these strategic arrangements. If any of our strategic partners breaches or
terminates its agreement or fails to perform its obligations under its
agreement, we may not be able to sustain or grow our business. In the event that
these relationships are terminated, we may not be able to continue to maintain
or develop strategic relationships or to replace strategic partners. In
addition, any strategic agreements we enter into in the future may not be
successful.
In June 1999, Lucent completed the acquisition of Ascend Communications, Inc.,
a competitor of ours, which offers a competing DSL solution. Subsequently, in
September 1999, Lucent announced a new DSL product based on technology acquired
from Ascend. As a result, Lucent may seek to reduce the marketing and/or sales
of our products in favor of their own competitive products. We expect that the
availability to Lucent of these alternative products will expose Copper Mountain
to increased competition from Lucent. Because of this competition, we expect
sales to Lucent, both in terms of dollars and as a
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percent of sales, will decline over time. In addition, our other customers may
elect to purchase alternative products from Lucent and reduce their future
purchases of Copper Mountain products.
Intense Competition in the Market for Telecommunications Equipment Could
Prevent Copper Mountain From Increasing or Sustaining Revenue and Prevent Copper
Mountain From Sustaining Annual Profitability
The market for telecommunications equipment is highly competitive. We compete
directly with the following companies: Nokia Corporation, Alcatel S.A, Cisco
Systems, Inc., Lucent Technologies, Inc., and Paradyne Corporation, among
others. If we are unable to compete effectively in the market for DSL
telecommunications equipment, our revenue and future profitability could be
materially adversely affected. Many of our current and potential competitors
have significantly greater selling and marketing, technical, manufacturing,
financial, and other resources, including vendor-sponsored lease financing
programs. Moreover, our competitors may foresee the course of market
developments more accurately than we do and could in the future develop new
technologies that compete with our products or even render our products
obsolete. Although we believe we presently have certain technological and other
advantages over our competitors, realizing and maintaining such advantages will
require a continued high level of investment in research and development,
marketing and customer service and support. Due to the rapidly evolving markets
in which we compete, additional competitors with significant market presence and
financial resources, including other large telecommunications equipment
manufacturers, may enter those markets, thereby further intensifying
competition. We may not have sufficient resources to continue to make the
investments or achieve the technological advances necessary to compete
successfully with existing competitors or new competitors. Also, to the extent
we introduce new product offerings intended to capitalize on the anticipated
trend toward broad deployment of DSL services, including DSL services targeted
at residential subscribers seeking high-speed access to public communications
networks, we will encounter new competitors such as coaxial cable and wireless
equipment vendors. Even if we are successful in competing in the business DSL
market, we may not be able to compete successfully in the market for residential
subscribers.
Future Consolidation in the Telecommunications Equipment Industry May Increase
Competition That Could Harm Copper Mountain's Business
The markets in which Copper Mountain competes are characterized by increasing
consolidation both within the data communications sector and by companies
combining or acquiring data communications assets and assets for delivering
voice-related services. We cannot predict with certainty how industry
consolidation will affect our competitors. We may not be able to compete
successfully in an increasingly consolidated industry. Increased competition and
consolidation in our industry, including the future affects of Lucents
acquisition of Ascend, could require that we reduce the prices of our products
and result in our loss of market share, which would materially adversely affect
our business, financial condition and results of operations. Additionally,
because we are now, and may in the future be, dependent on certain strategic
relationships with third parties in our industry, any additional consolidation
involving these parties could reduce the demand for our products and otherwise
harm our business prospects.
Copper Mountain May Experience Difficulties in the Introduction of New
Products That Could Result in Copper Mountain Having to Incur Significant
Unexpected Expenses or Delay the Launch of New Products
Copper Mountain intends to continue to invest in product and technology
development. The development of new or enhanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products
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and enhancements. The introduction of new or enhanced products also requires
that we manage the transition from older products in order to minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new products can be delivered to meet anticipated customer demand. In the
future, we expect to develop certain new products, such as new DSL
Concentrators, line cards for different DSL variants and new types of customer
premise equipment. We may not successfully develop, introduce or manage the
transition of these new products. Furthermore, products such as those we
currently offer may contain undetected or unresolved errors when they are first
introduced or as new versions are released. Despite testing, errors may be found
in new products or upgrades after commencement of commercial shipments. These
errors could result in:
. delays in or loss of market acceptance and sales;
. diversion of development resources;
. injury to our reputation; and
. increased service and warranty costs.
Any of these could materially adversely affect our business, financial condition
and results of operations.
Copper Mountain Is Dependent on Widespread Market Acceptance of Its Products
Widespread market acceptance of Copper Mountain's products is critical to its
future success. Factors that may affect the market acceptance of our products
include market acceptance of DSL technology in particular, the performance,
price and total cost of ownership of our products, the availability and price of
competing products and technologies and the success and development of our
resellers, original equipment manufacturers and field sales channels. Many of
these factors are beyond our control. The introduction of new and enhanced
products may cause certain customers to defer or return orders for existing
products. Although we maintain reserves against such returns, such reserves may
not be adequate. We cannot be certain that we will not experience delays in
product development in the future. Failure of our existing or future products to
maintain and achieve meaningful levels of market acceptance would materially
adversely affect our business, financial condition and results of operations.
Because Substantially All of Copper Mountain's Revenue is Derived From Sales
of a Small Number of Products, Its Future Operating Results Will Be Dependent on
Sales of These Products
Copper Mountain currently derives substantially all of its revenues from its
product family of DSL solutions and expects that this concentration will
continue in the foreseeable future. The market may not continue to demand our
current products, and we may not be successful in marketing any new or enhanced
products. Any reduction in the demand for our current products or our failure to
successfully develop or market and introduce new or enhanced products could
materially adversely affect our operating results and cause the price of our
common stock to decline. Factors that could affect sales of our current or new
or enhanced products include:
. the demand for DSL solutions;
. our successful development, introduction and market acceptance of new and
enhanced products that address customer requirements;
. product introductions or announcements by our competitors;
. price competition in our industry and between DSL and competing
technologies; and
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. technological change.
Copper Mountain's Limited Ability to Protect Its Intellectual Property May
Adversely Affect Its Ability to Compete
Copper Mountain's success and ability to compete is dependent in part upon its
proprietary technology. Any infringement of our proprietary rights could result
in significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
We rely on a combination of copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. Despite our efforts to protect our proprietary
rights, existing copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of certain foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
Attempts may be made to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, we may
not be able to protect our proprietary rights against unauthorized third-party
copying or use. Furthermore, policing the unauthorized use of our products is
difficult. Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our future operating results.
Claims Against Copper Mountain Alleging Its Infringement of a Third Party's
Intellectual Property Could Result in Significant Expense to Copper Mountain and
Result in Its Loss of Significant Rights
The telecommunications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims asserting that our products infringe or
may infringe proprietary rights of third parties, if determined adversely to us,
could have a material adverse effect on our business, financial condition or
results of operations. In addition, in our agreements, we agree to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties. As the number of entrants
in our market increases and the functionality of our products is enhanced and
overlaps with the products of other companies, we may become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. Any claims, with or without merit, could be time-consuming, result in
costly litigation, divert the efforts of our technical and management personnel,
cause product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our operating
results. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to us, if at all. Legal action claiming patent infringement
may be commenced against us. We cannot assure you that we would prevail in such
litigation given the complex technical issues and inherent uncertainties in
patent litigation. In the event a claim against us was successful and we could
not obtain a license to the relevant technology on acceptable terms or license a
substitute technology or redesign our products to avoid infringement, our
business, financial condition and results of operations would be materially
adversely affected.
If Copper Mountain Loses Key Personnel It May Not Be Able to Successfully
Operate Its Business
Copper Mountain's success depends to a significant degree upon the continued
contributions of the principal members of its sales, engineering and management
personnel, many of whom perform important management functions and would be
difficult to replace. Specifically, we believe that our future success is highly
dependent on our senior management. Except for agreements with our President and
Chief
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<PAGE>
Executive Officer, Chief Technology Officer, and Vice President of Engineering,
we do not have employment contracts with our key personnel. In any event,
employment contracts would not prevent key personnel from terminating their
employment with Copper Mountain. The loss of the services of any key personnel,
particularly senior management and engineers, could materially adversely affect
our business, financial condition and results of operations.
If Copper Mountain is Unable to Retain and Hire Additional Qualified Personnel
As Necessary, It May Not Be Able to Successfully Achieve Its Objectives
Copper Mountain has experienced growth in revenues and expansion of its
operations which have placed significant demands on its management, engineering
staff and facilities. We have recently hired additional engineering, sales,
marketing, customer support and administrative personnel. Continued growth will
also require us to hire more engineering, sales and administrative personnel. We
may not be able to attract and retain the necessary personnel to accomplish our
business objectives and we may experience constraints that will adversely affect
our ability to satisfy customer demand in a timely fashion or to support our
customers and operations. We have at times experienced, and continue to
experience, difficulty in recruiting qualified personnel. Recruiting qualified
personnel is an intensely competitive and time-consuming process.
In addition, companies in the telecommunications industry whose employees
accept positions with competitors frequently claim that such competitors have
engaged in unfair hiring practices. We received one such notice from another
company and, although to date this notice has not resulted in litigation, we may
receive other notices in the future as we seek to hire qualified personnel and
such notices may result in material litigation. We could incur substantial costs
in defending ourselves against any such litigation, regardless of the merits or
outcome of such litigation.
Failure to Manage the Growth of Copper Mountain's Operations Will Adversely
Affect Its Business
Copper Mountain has rapidly and significantly expanded its operations and
anticipates that further significant expansion will be required to address
potential growth in its client base and market opportunities if it is successful
in implementing its business strategy. We may not be able to implement
management information and control systems in an efficient and timely manner,
and our current or planned personnel, systems, procedures and controls may not
be adequate to support our future operations. If we are unable to manage growth
effectively, our business, financial condition and results of operations will be
materially adversely affected. During 1999, we increased the number of employees
from 111 to 240. This expansion is placing a significant strain on our
managerial and operational resources. Most of our existing senior management
personnel joined us within the last two years, including a number of key
managerial, technical and operations personnel. We expect to add additional key
personnel in the near future, including direct sales and marketing personnel. To
manage the expected growth of our operations and personnel, we will be required
to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. install new management information systems; and
. train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.
. expand our physical infrastructure and facilities to accommodate growth in
our headcount.
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<PAGE>
As of December 31, 1999 we operated our business from facilities in Palo
Alto, California and San Diego, California. We face challenges related to
effectively and efficiently coordinating our operations between these
facilities. If we are unsuccessful in meeting these challenges, our business and
operating results may be adversely affected.
Copper Mountain's Dependence on Sole and Single Source Suppliers Exposes It to
Supply Interruption
Although Copper Mountain generally uses standard parts and components for its
products, certain key components are purchased from sole or single source
vendors for which alternative sources are not currently available. The inability
to obtain sufficient quantities of these components may in the future result in
delays or reductions in product shipments which could materially adversely
affect our business, financial condition and results of operations. We presently
purchase three key components from vendors for which there are currently no
substitutes: two semiconductor chips, and a system control module. We are
evaluating alternate source vendors for each of these key components, but any
alternate vendors may not meet our quality standards for component vendors. In
the event of a reduction or interruption of supply of any such components, as
much as nine months could be required before we would begin receiving adequate
supplies from alternative suppliers, if any. It is possible that a source may
not be available for us or be in a position to satisfy our production
requirements at acceptable prices and on a timely basis, if at all.
In addition, the manufacture of certain of these single or sole source
components is extremely complex, and our reliance on the suppliers of these
components exposes us to potential production difficulties and quality
variations, which could negatively impact cost and timely delivery of our
products. Any significant interruption in the supply, or degradation in the
quality, of any component could have a material adverse effect on our business,
financial condition and results of operations.
Copper Mountain's Dependence on Independent Manufacturers Could Result in
Product Delivery Delays
Copper Mountain currently uses a small number of independent manufacturers to
provide certain printed circuit boards, chassis and subassemblies and, in
certain cases, to complete final assembly and testing of our products. Our
reliance on independent manufacturers involves a number of risks, including the
absence of adequate capacity, the unavailability of or interruptions in access
to certain process technologies and reduced control over delivery schedules,
manufacturing yields and costs. Recently we entered into a formal manufacturing
agreement with Flextronics International, Ltd. located in Freemont California.
Flextronics is our main source of independent manufacturing. If our current
manufacturers are unable or unwilling to continue manufacturing our components
in required volumes, it could take up to eight months for an alternative
manufacturer to supply the needed components in sufficient volumes. It is
possible that a source may not be available to us when needed or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis, if at all. Any significant interruption in supply would result in
the allocation of products to customers, which in turn could have a material
adverse effect on our business, financial condition and results of operations.
Moreover, since all of our final assembly and tests are performed in one
location, any fire or other disaster at our assembly facility would have a
material adverse effect on our business, financial condition and results of
operations.
Intense Demand Within the Telecommunications Industry for Parts and Components
May Create Allocations or Shortages Which May Expose Copper Mountain to Supply
Interruption
From time to time, the demand in the Telecommunications industry for parts and
components, including semiconductors, programmable devices and printed circuit
boards can be intense. During these
22
<PAGE>
periods manufacturers and suppliers who provide such components to us experience
supply shortages which may in turn affect their ability to meet our production
demands. While we seek to enter into contracts with our suppliers which
guarantee adequate supplies of components for the manufacturing of our products,
we cannot be certain that suppliers will always be able to adequately meet our
demands. To date, we have not experienced any shortages of components or parts
which have impacted our ability to meet the shipment requirements of our
customers. However, in the event that we receive allocations of components from
our suppliers or experience outright interruption in the supply of components we
could experience an inability to ship or deliver our products to our customers
in a timely fashion. Any significant allocation of or interruption in the supply
of any component could have a material adverse effect on our business, financial
condition and results of operations.
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<PAGE>
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which May Result in Operating Losses for Copper Mountain
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which May Result in Operating Losses for Copper Mountain
Copper Mountain's customers tend to be larger than Copper Mountain and are able
to exert a high degree of influence over Copper Mountain. They have sufficient
bargaining power to demand low prices and other terms and conditions that may
materially adversely affect our business, financial condition and results of
operations. In addition, prior to selling our products to such customers, we
must typically undergo lengthy product approval processes, often taking up to
one year. Accordingly, we are continually submitting successive versions of our
products as well as new products to our customers for approval. The length of
the approval process can vary and is affected by a number of factors, including
customer priorities, customer budgets and regulatory issues affecting
telecommunication service providers. Delays in the product approval process
could materially adversely affect our business, financial condition and results
of operations. While we have been successful in the past in obtaining product
approvals from our customers, such approvals and the ensuing sales of such
products may not continue to occur. Delays can also be caused by late deliveries
by other vendors, changes in implementation priorities and slower than
anticipated growth in demand for the services that our products support. A delay
in, or cancellation of, the sale of our products could result in operating
losses and cause our results of operations to vary significantly from quarter to
quarter.
Changes to Regulations Affecting the Telecommunications Industry Could Reduce
Demand for Copper Mountain's Products or Adversely Affect Its Results of
Operations
Any changes to legal requirements relating to the telecommunications industry,
including the adoption of new regulations by federal or state regulatory
authorities under current laws or any legal challenges to existing laws or
regulations relating to the telecommunications industry could have a material
adverse effect upon the market for Copper Mountain's products. Moreover, our
distributors or telecommunications service provider customers may require, or we
may otherwise deem it necessary or advisable, that we modify our products to
address actual or anticipated changes in the regulatory environment. Our
inability to modify our products or address any regulatory changes could have a
material adverse effect on our business, financial condition or results of
operations.
Copper Mountain's Failure to Comply with Regulations and Evolving Industry
Standards Could Delay Its Introduction of New Products
The market for Copper Mountain's products is characterized by the need to meet
a significant number of communications regulations and standards, some of which
are evolving as new technologies are deployed. In order to meet the requirements
of our customers, our products may be required to comply with various
regulations including those promulgated by the Federal Communications
Commission, or FCC, and standards established by Underwriters Laboratories and
Bell Communications Research. Failure of our products to comply, or delays in
compliance, with the various existing and evolving industry regulations and
standards could delay the introduction of our products. Moreover, enactment by
federal, state or foreign governments of new laws or regulations, changes in the
interpretation of existing laws or regulations or a reversal of the trend toward
deregulation in the telecommunications industry could have a material adverse
effect on our customers, and thereby materially adversely affect our business,
financial condition and results of operations.
Copper Mountain May Not Be Able to Obtain Additional Capital to Fund Its
Operations When Needed
Our capital requirements depend on several factors, including the rate of
market acceptance of our products, the ability to expand our client base, the
growth of our product lines and other factors. If capital
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<PAGE>
requirements vary materially from those currently planned, we may require
additional financing sooner than anticipated. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
stockholders will be reduced, stockholders may experience additional dilution,
or such equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. If additional funds are raised through
the issuance of debt securities, such securities would have rights, preferences
and privileges senior to holders of common stock and the terms and conditions
relating to such debt could impose restrictions on our operations. Additional
financing may not be available when needed on terms and conditions favorable to
us or at all. If adequate funds are not available or are not available on
acceptable terms and conditions, we may be unable to develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures, which could materially adversely affect our business, financial
condition or results of operations.
If Copper Mountain's Products Contain Defects, Copper Mountain May Be Subject
to Significant Liability Claims from Its Customers and the End-Users of Its
Products and Incur Significant Unexpected Expenses and Lost Sales
Copper Mountain's products have in the past contained, and may in the future
contain, undetected or unresolved errors when first introduced or as new
versions are released. Despite extensive testing, errors, defects or failures
may be found in our current or future products or enhancements after
commencement of commercial shipments. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
development resources, injury to our reputation or increased service and
warranty costs, any of which could have a material adverse effect on our
business, financial condition and results of operations. Moreover, because our
products are designed to provide critical communications services, we may
receive significant liability claims. Our agreements with customers typically
contain provisions intended to limit our exposure to liability claims. These
limitations may not, however, preclude all potential claims resulting from a
defect in one of our products. Although we maintain product liability insurance
covering certain damages arising from implementation and use of our products,
our insurance may not cover any claims sought against us. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful
could seriously damage our reputation and our business.
Copper Mountain May Engage in Future Acquisitions That Dilute Its
Stockholders, Cause It to Incur Debt and Assume Contingent Liabilities
As part of Copper Mountain's business strategy, we expect to review
acquisition prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. We may acquire businesses, products or
technologies in the future. In the event of such future acquisitions, we could:
. issue equity securities which would dilute current stockholders' percentage
ownership;
. incur substantial debt; or
. assume contingent liabilities.
Such actions by us could materially adversely affect our results of operations
and/or the price of our common stock. Acquisitions also entail numerous risks,
including:
. difficulties in assimilating acquired operations, technologies or products;
. unanticipated costs associated with the acquisition could materially
adversely affect our results of operations;
25
<PAGE>
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with suppliers and
customers;
. risks of entering markets in which we have no or limited prior experience;
and
. potential loss of key employees of acquired organizations.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could have a material adverse effect on our business, financial
condition and results of operations.
We Plan to Expand Our Operations into International Markets. Our Failure to
Effectively Manage Our International Operations Could Harm Our Business.
We believe that international market opportunities for our products may be
significant and we plan to enter markets outside the United States in 2000.
Entering new international markets may require significant management attention
and expenditures and could adversely affect our operating margins and earnings.
In order to commence and expand our international operations, we will need to
hire additional personnel and develop relationships with potential international
customers. To the extent that we are unable to do so on a timely basis, our
growth in international markets would be limited, and our business could be
harmed.
We expect that our international business operations will be subject to a
number of material risks, including, but not limited to:
. difficulties in building and managing foreign operations;
. difficulties in enforcing agreements and collecting receivables
through foreign legal systems and addressing other legal issues;
. longer payment cycles;
. taxation issues;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or
political changes.
Control by a Small Number of Stockholders May Limit the Ability of Other
Stockholders to Influence the Outcome of Director Elections and Other Matters
Requiring Stockholder Approval
Copper Mountain's executive officers, directors and principal stockholders and
their affiliates beneficially own approximately 22% of the outstanding shares of
common stock as of January 31, 2000. These stockholders, if acting together,
would be able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or
other business combination transactions. This concentration of ownership could
have the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could have a material adverse effect on the market price of the common
stock
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or prevent our stockholders from realizing a premium over the market prices for
their shares of common stock.
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Copper Mountain's stock price has been and may continue to be extremely
volatile
The trading price of our common stock has been and is likely to continue to be
extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by us or our competitors;
. changes in financial estimates by securities analysts;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
. additions or departures of key personnel;
. announcements or loss of strategic relationships with third parties or
telecommunications equipment providers by us or our competitors;
. sales of common stock; and
. other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and equity
valuations may not be sustained. These broad market and industry factors may
materially adversely affect the market price of our common stock, regardless of
our actual operating performance. In the past, following periods of volatility
in the market price of a company's securities, securities class-action
litigation has often been instituted against such companies. Such litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources, which would materially adversely affect our business,
financial condition and results of operations.
Substantial Future Sales of Copper Mountain's Common Stock in the Public
Market Could Cause Its Stock Price to Fall
Sales of a large number of shares of Copper Mountain's common stock in the
public market or the perception that such sales could occur could cause the
market price of its common stock to drop. As of December 31, 1999, we had 47.7
million shares of common stock outstanding. We filed a registration statement on
Form S-8 with the Securities and Exchange Commission covering the 14.4 million
shares of common stock reserved for issuance under our 1996 Equity Incentive
Plan, 1999 Non-Employee Directors' Stock Option Plan and 1999 Employee Stock
Purchase Plan and for options issued outside such plans. As of December 31, 1999
at least 1.9 million shares are subject to immediately exercisable options.
Sales of a large number of shares could have an adverse effect on the market
price for our common stock.
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Certain Provisions in Copper Mountain's Corporate Charter and Bylaws May
Discourage Take-Over Attempts and Thus Depress the Market Price of Our Stock
Provisions in Copper Mountain's certificate of incorporation, as amended and
restated upon the closing of this offering, may have the effect of delaying or
preventing a change of control or changes in its management. These provisions
include:
. the right of the board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors;
. the ability of the board of directors to alter our bylaws without getting
stockholder approval;
. the ability of the board of directors to issue, without stockholder
approval, up to 5,000,000 shares of preferred stock with terms set by the
board of directors; and
. the requirement that at least 10% of the outstanding shares are needed to
call a special meeting of stockholders.
Each of these provisions could discourage potential take-over attempts and
could adversely affect the market price of our common stock.
Item 2. Properties
We lease an approximately 14,000 square foot facility in Palo Alto, California
for administrative, sales and marketing purposes. The lease for this facility
expires in April 2001. We also lease an approximately 86,000 square foot
facility in San Diego, California, which is used for manufacturing, engineering,
and administration. The current lease for this facility expires in July 2005. In
addition, we lease an approximately 11,000 square foot facility in San Diego,
California which we are currently attempting to sublease. The lease for this
facility expires in August 2003.
The Company is currently seeking additional facilities to meet the
requirements projected in its business plan.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "CMTN." The Common Stock was initially offered to the public on
May 13, 1999 at $10.50 per share. The following table sets forth the range of
high and low sales prices on the Nasdaq National Market of the Company's Common
Stock for the periods indicated, as reported by Nasdaq. All per share prices
have been adjusted for a 2 for 1 stock dividend which was effective December 10,
1999. Such quotations represent inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.
1999 High Low
--------------- ---------------
Second Quarter (Subsequent to May 13, 1999) $39.75 $25.25
Third Quarter 67.50 34.63
Fourth Quarter 54.75 35.28
To date, the Company has neither declared nor paid any dividends on the Common
Stock. The Company currently intends to retain all future earnings, if any, for
use in the operation and development of its business and, therefore, does not
expect to declare or pay any cash dividends on the Common Stock in the
foreseeable future. As of February 17, 2000, there were 855 holders of record of
the Common Stock.
______________________________________
On May 13, 1999, the Company completed its initial public offering of its
common stock. The managing underwriters in the offering were Morgan Stanley Dean
Witter, BancBoston Robertson Stephens and Dain Rauscher Wessels. The shares of
common stock sold in the offering were registered under the Securities Act of
1933, as amended, on a Registration Statement on Form S-1 (Reg. No. 333-73153)
(the "Registration Statement") that was declared effective by the Securities
and Exchange Commission on May 12, 1999. All 4,600,000 shares of common stock
registered under the Registration Statement, including shares covered by an
over-allotment option, were sold at a price to the public of $21.00 per share.
The offering resulted in gross proceeds of $96,600,000, of which $6,762,000 was
applied toward commissions to the underwriters. Expenses related to the offering
were estimated to be approximately $1,165,000. After deduction of the
underwriters' commissions and the expenses of the offering, the Company received
net proceeds of approximately $88,673,000.
As of December 31, 1999, the Company had used the net proceeds from the
offering to (i) pay for research and development expenses (approximately $11.5
million), (ii) expand its sales and marketing activities (approximately $12.1
million), and (iii) pay for general and administrative expenses and for working
capital (approximately $49.9 million). Other than payments of salaries and
bonuses to officers of the Company, the amounts of which are described in the
Proxy Statement related to the Company's 2000 Annual Meeting, none of the
proceeds from the offering were paid, directly or indirectly, to directors or
officers of the Company or their associates, to persons owning 10 percent or
more of any class of the Company's equity securities or to any affiliates of the
Company. Pending its use of the remaining net proceeds from the offering, the
Company has invested such sums (approximately $15.2 million) in short-term,
interest bearing, investment grade securities.
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Item 6. Selected Financial Data
In the table below, we provide you with our summary historical financial data.
We have prepared this information using our financial statements, for the years
ended December 31, 1999, 1998, and 1997 and for the period March 11, 1996
(inception) to December 31, 1996. When you read this summary historical
financial data, it is important that you read along with it the historical
financial statements and related notes included herein (in thousands, except per
share data).
<TABLE>
<CAPTION>
Period From
March 11, 1996
Year Ended (inception) through
December 31, December 31,
------------------------------------------- ----------------------
1999 1998 1997 1996
------------- ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $112,723 $ 21,821 $ 211 $ ---
Cost of revenue 53,002 12,400 1,717 ---
-------- -------- -------- -------
Gross profit (loss) 59,721 9,421 (1,506) ---
Operating expenses:
Research and development 15,523 7,225 4,753 1,483
Sales and marketing 16,158 5,363 1,510 ---
General and administration 5,998 3,428 1,928 553
Amortization of deferred stock
compensation 5,431 3,929 1,490 189
-------- -------- -------- -------
Total operating expenses 43,110 19,945 9,681 2,225
-------- -------- -------- -------
Income (loss) from operations 16,611 (10,524) (11,187) (2,225)
Interest and other income 4,385 406 268 47
Interest expense (289) (213) (97) (3)
-------- -------- -------- -------
Income (loss) before income taxes 20,707 (10,331) (11,016) (2,181)
Provision for income taxes 8,490 --- --- ---
-------- -------- -------- -------
Net income (loss) $ 12,217 $(10,331) $(11,016) $(2,181)
======== ======== ======== =======
Basic net income (loss) per share (1) $ .39 $ (3.87) $ (7.81) $ (5.84)
======== ======== ======== =======
Diluted net income (loss) per share (1) $ .23 $ (3.87) $ (7.81) $ (5.84)
======== ======== ======== =======
Shares used in basic per share
calculations (1) 31,289 2,666 1,410 374
======== ======== ======== =======
Shares used in diluted per share
calculations (1) 52,282 2,666 1,410 374
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term marketable investments $117,169 $18,529 $ 9,517 $3,406
Working capital 132,187 24,326 7,653 366
Total assets 165,775 36,209 12,332 4,056
Long-term debt and capital lease
obligation, less current portion 4,044 1,965 735 262
Total stockholders' equity 143,321 26,843 9,069 749
</TABLE>
___________________
(1) See Note 1 of the Notes to Financial Statements for a description of the
computation of basic and diluted net income (loss) per share and the number
of shares used to compute basic and diluted net income (loss) per share.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
From Copper Mountain's inception in March 1996 through December 1997, its
operating activities related primarily to developing, building and testing
prototype products; building its technical support infrastructure; commencing
the staffing of its marketing, sales and customer service organizations; and
establishing relationships with its customers. We commenced shipments of our
CopperEdge product family in September 1997, including line cards for these
Copper Edge systems and our CopperRocket DSL customer premise equipment, or DSL
CPE.
Our revenue is generated primarily from sales of our central office-based
equipment: our CopperEdge 200 DSL concentrators, or CE200, the related wide area
network cards, line cards and, to a lesser extent, from sales of our DSL CPE.
Additionally, we sell network management software which provides monitoring and
management capabilities for the CE200, revenues from which have not been
material to date. We also sell our CopperEdge 150 DSL concentrators, or CE 150,
to customers in the multiple tenant unit, or MTU, market.
For the year ended December 31, 1999, sales to our three largest customers
accounted for approximately 88% of our revenue, of which sales to NorthPoint
Communications, Inc., Rhythms NetConnections Inc., and Lucent Technologies, Inc.
accounted for approximately 37%, 28% and 23% of our revenue, respectively. While
the level of sales to any specific customer is anticipated to vary from period
to period, we expect that we will continue to have significant customer
concentration for the foreseeable future.
We market and sell our products directly to telecommunications service
providers and through strategic original equipment manufacturers and
distributors. We generally recognize revenue from product sales upon shipment if
collection of the resulting receivable is probable and product returns are
reasonably estimated. No revenue is recognized on products shipped on a trial
basis. Estimated sales returns, based on historical experience by product, are
recorded at the time the product revenue is recognized. To date, we have not
generated any revenues from international sources.
We expect our gross margin to be affected by many factors including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, costs from our contract manufacturers, the mix of
products or system configurations sold and the volume and timing of sales of
follow-on line cards for CE200 systems shipped in prior periods. Additionally,
our gross margin may fluctuate due to changes in our mix of distribution
channels. Currently, we derive the majority of our revenue from sales made
directly to telecommunications service providers. A significant increase in our
original equipment manufacturer revenue would adversely impact or reduce our
gross margin.
To date, gross margin on sales of our CE200 and related wide area network and
line cards, typically sold as a combined system, has been higher than gross
margin on sales of DSL CPE. Furthermore, combined systems are not generally
fully-populated (i.e., less than the eight line cards which each system can
support or a capacity of 192 subscribers) when sold. When our customers add more
subscribers than are supported in the initial configuration, we expect that
these customers will purchase additional line cards from us to increase
subscriber capacity. The sale of additional line cards generates higher gross
margin than the initial sale of combined systems. Gross margin on our DSL CPE is
expected to decline in the future and we expect to face pricing competition
which may result in lower average selling prices for these products as other
suppliers of Copper Mountain compatible CPE enter the market. As the
telecommunications service providers that purchase our products make their
services broadly available to their customers, we expect our product mix to
continue to shift more heavily toward sales of the Copper Edge family and the
related line cards. We expect gross margin for our CE200 systems and follow-on
line cards to improve due to lower component costs and improved costs from our
subcontractors as our revenue
32
<PAGE>
from these products increases. However, we cannot be sure that we will achieve
or maintain the revenue volumes required for these increases in gross margin.
We outsource most of our manufacturing and supply chain management operations,
and we conduct manufacturing engineering, quality assurance, program management,
documentation control and product repairs at our facility in San Diego,
California. Accordingly, a significant portion of our cost of revenue consists
of payments to our current contract manufacturer, Flextronics International Ltd.
We selected Flextronics as our manufacturing partner with the goal of lowering
per unit product costs as a result of manufacturing economies of scale. However,
we cannot assure you when or if such cost reductions will occur. The failure to
obtain such cost reductions could materially adversely affect our gross margins
and operating results.
Research and development expenses consist principally of salaries and related
personnel expenses, consultant fees and prototype expenses related to the
design, development and testing of our products and enhancement of our network
management software. We expense all research and development expenses as
incurred. We believe that continued investment in research and development is
critical to attaining our strategic product and cost-reduction objectives and,
as a result, we expect these expenses to increase in absolute dollars in the
future.
Sales and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and field service support
functions, as well as trade shows and promotional expenses. We intend to invest
in marketing, business development activities, selling and promotional programs,
and therefore we expect expenses related to these programs to continue to
increase substantially in absolute dollars in the future. In addition, we expect
to substantially expand our field sales operations and customer support
organizations, which would also result in an increase in sales and marketing
expenses.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance, human resources, and administrative personnel,
recruiting expenses, professional fees and other general corporate expenses. We
expect general and administrative expenses to increase in absolute dollars as we
add personnel and incur additional costs related to the growth of our business
and operation as a public company.
Amortization of deferred stock compensation resulted from the granting of
stock options to employees with exercise prices per share determined to be below
the deemed fair values per share for financial reporting purposes of our common
stock at dates of grant. The deferred compensation is being amortized to expense
in accordance with FASB Interpretation No. 28 over the vesting period of the
individual options, generally four years. We recorded total deferred stock
compensation of $1.8 million, $2.4 million, $11.1 million and $234,000 in 1996,
1997, 1998, and 1999, respectively, and amortized $189,000, $1.5 million, $3.9
million, and $5.4 million in 1996, 1997, 1998 and 1999, respectively, leaving
approximately $4.6 million to be amortized in future periods.
33
<PAGE>
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
income data for the periods indicated.
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0%
Cost of revenue 47.0 56.8 813.7
----- ------ ---------
Gross profit (loss) 53.0 43.2 (713.7)
Operating expenses:
Research and development 13.8 33.1 2,252.6
Sales and marketing 14.3 24.6 715.6
General and administration 5.4 15.7 913.8
Amortization of deferred stock compensation 4.8 18.0 706.2
----- ------ ---------
Total operating expenses 38.3 91.4 4,588.2
----- ------ ---------
Income (loss) from operations 14.7 (48.2) (5,301.9)
Interest and other income 3.9 1.9 127.0
Interest expense (.3) (1.0) (46.0)
----- ------ ---------
Income (loss) before income taxes 18.3 (47.3) (5,220.9)
Provision for income taxes 7.5 --- ---
----- ------ ---------
Net income (loss) 10.8% (47.3)% (5,220.9)%
----- ------ ---------
</TABLE>
Years Ended December 31, 1998 and 1999
Net Revenue. Our revenue increased from $21.8 million in 1998 to $112.7
million in 1999. This increase was primarily due to the increased commercial
acceptance of DSL technology, the commercial market acceptance of our products,
and investments made in our marketing and sales organization. Incremental sales
made to our established customers accounted for approximately $56.4 million of
the increase with the remaining $34.5 million of the increase being derived from
new customer relationships. Sales to our three largest customers, NorthPoint,
Rhythms and Lucent, increased from $13.2 million, $4.0 million and zero,
respectively, for the year ended December 31, 1998 to $42.2 million, $32.0
million and $25.4 million, respectively, for the year ended December 31, 1999.
Gross Profit (Loss). Our gross profit increased from $9.4 million in 1998 to
$59.7 million in 1999. The increase in gross profit was primarily the result of
an increase in net revenue for the period. Gross profit percentages also
increased on a year-over-year basis, from 43.2% for the year ended December 31,
1998 to 53.0% for the year ended December 31, 1999. The increase in gross profit
as a percentage of sales was primarily due to an increase in unit volumes, a
favorable product mix, and decreased unit costs associated with improved
overhead absorption.
Research and Development. Our research and development expenses increased
from $7.2 million in 1998 to $15.5 million in 1999. This increase was primarily
due to an increase in personnel expenses related to an increase in our
engineering staff, increased prototype material costs, increased facility
related costs, and higher depreciation related to an increase in capital
equipment. Research and development expenses as a percentage of net revenue
decreased from 33.1% in 1998 to 13.8% in 1999. The decrease in research and
development expense as a percentage of net revenue was primarily the result of
an increase in our net revenue during 1999. We intend to increase expenditures
in research and development programs in future periods for the purpose of
enhancing current products, reducing the cost of current products and developing
new products.
34
<PAGE>
Sales and Marketing. Our sales and marketing expenses increased from $5.4
million in 1998 to $16.2 million in 1999. This increase was primarily the result
of an increase in personnel expenses for sales and marketing staff, increased
expenses related to customer support, increased sales commissions associated
with higher net revenue, and increased promotional and product marketing
expenses. The decrease in sales and marketing expense as a percentage of net
revenue was primarily the result of an increase in our net revenue in 1999.
General and Administrative. Our general and administrative expenses increased
from $3.4 million in 1998 to $6.0 million in 1999. This increase was primarily
the result of increased staffing for finance, management information systems,
and human resources, and growth in recruiting and facility related expenses.
General and administrative expenses as a percentage of net revenue decreased
from 15.7% for 1998 to 5.4% for 1999. This decrease was primarily the result of
an increase in our net revenue in 1999.
Interest and Other Income. Interest and other income increased from $406,000
in 1998 to $4.4 million in 1999. This increase reflects an increase in interest
income generated from higher average cash balances and investments in marketable
securities in 1999, which included the proceeds from our initial public offering
completed in May of 1999.
Income taxes. Our effective income tax rate for 1999 was 41%, which
approximates the combined federal and California (net of federal benefit)
statutory rate. During 1999, our utilization of net operating loss and tax
credit carryforwards was limited under sections 382 and 383 of the Internal
Revenue Code. We have previously not recorded a tax provision (benefit) due to
our historical net losses. Additionally, the realization of our carryforwards is
considered uncertain and as a result a full valuation allowance has been
established which offsets these deferred tax assets for all periods presented.
Years Ended December 31, 1997 and 1998
Net Revenue. Our revenue increased from $211,000 in 1997 to $21.8 million in
1998. This increase was primarily due to the successful transition from
development of our products to commencement of commercial operations and the
general release of our products. In 1998, we successfully introduced our 24 port
SDSL line card, our 24 port IDSL line card, our frame relay-based wide area
networks card and our IDSL CPE.
Gross Profit (Loss). Our gross profit increased from a loss of $1.5 million in
1997 to a profit of $9.4 million in 1998. The increase in gross profit was
primarily the result of the absorption of overhead associated with greater unit
volumes and increased economies of scale. As a result, our gross margin in 1998
improved substantially over 1997.
Research and Development. Our research and development expenses increased from
$4.8 million in 1997 to $7.2 million in 1998. This increase in our research and
development expenses was related to increases in personnel and personnel related
costs, prototype material expenses, contract development expense as well as
expenses related to the completion and commercial release of our initial
products.
Sales and Marketing. Our sales and marketing expenses increased from $1.5
million in 1997 to $5.4 million in 1998. This increase was primarily a result of
an increase in personnel and personnel-related costs, including increases in
staffing for marketing program management, product marketing, account
management, customer support and direct sales as well as a substantial increase
in sales commissions. To a lesser extent, the increase resulted from higher
trade show and marketing communications expenses.
General and Administrative. Our general and administrative expenses increased
from $1.9 million in 1997 to $3.4 million in 1998. This increase is a result of
an increase in personnel costs for executive officers and support staff, legal,
accounting and consulting fees. The increase in our general and
35
<PAGE>
administrative staffing, was required to support the growth in our operations,
commercial activities and customer base.
Interest and Other Income. Interest and other income increased from $268,000
in 1997 to $406,000 in 1998. This increase reflects an increase in interest
income generated from higher average cash balances and investments in marketable
securities in 1998.
Liquidity and Capital Resources
From our inception through April 1999, we have financed our operations
primarily through the sale of preferred equity securities. In total, we raised
approximately $44.5 million, net of fees and expenses, through the sale of
preferred equity. In May 1999, we closed our initial public offering with
proceeds, net of underwriting fees, of approximately $89.9 million. We have also
utilized available financing for the purchase of capital equipment.
At December 31, 1999, we had cash and cash equivalents of $25.4 million,
short-term marketable investments of $91.8 million and long-term marketable
investments of $5.1 million. We have a $5.0 million financing agreement with a
bank which allows us to finance the purchase of capital equipment. As of
December 31, 1999 we had utilized $4.7 million of the available credit under the
financing agreement.
Cash provided by or (used in) operating activities for the years ended
December 31, 1999, 1998 and 1997 was $20.3 million, ($14.3) million and ($8.0)
million, respectively. The relative increase in cash provided by operating
activities for the year ended December 31, 1999 compared to the prior year was
primarily the result of the change in net income to $12.2 million in 1999
compared to a net loss of loss of $10.3 million in 1998. Additionally, the
company's provision for income tax for 1999 does not include $9.4 million of tax
benefits generated in 1999 as a result of sales of Copper Mountain stock by
employees in disqualifying disposition transactions. The relative increase in
cash used for operating activities for the year ended December 31, 1998 compared
to the prior year was primarily due to increases in accounts receivable,
inventory and other assets, as a result of the introduction of and growth in
demand for our products. This increase was partially offset by increases in
accounts payable and other accruals, as well as a $685,000 decrease in the net
loss.
Cash used in investing activities for the years ended December 31, 1999, 1998
and 1997 was $92.6 million, $12.1 million and $1.5 million, respectively. The
relative increase in cash used for investing activities for the year ended
December 31, 1999 compared to the prior period was the result of net purchases
of marketable investments, and to a lesser extent, the purchase of computers and
other equipment. The relative increase in cash used for investing activities for
the year ended December 31, 1998 compared to the prior year was primarily due to
the purchase of $10.9 million in short-term marketable investments, which was
partially offset by a decrease in the amount of equipment purchased.
Cash provided by financing activities for the years ended December 31, 1999,
1998 and 1997 was $90.0 million, $24.5 million and $15.6 million, respectively.
The relative increase in cash provided by financing activities for the year
ended December 31, 1999 compared to the prior year was primarily due to the
receipt of the proceeds from our initial public offering. The relative increase
in cash provided from financing activities for the year ended December 31, 1998
compared to the prior year was primarily due to $24.1 million in net proceeds
from an equity financing in October 1998.
In August 1999, the Company entered into a credit facility with a bank for the
purchase of equipment. The credit facility includes $2.4 million in equipment
loans and $2.6 million in commitments for the purchase of equipment under a
capital lease agreement. As of December 31, 1999, the full amount of funds
available under the equipment loan had been utilized. As of December 31, 1999,
the Company had $316,000 available for future borrowings under the capital lease
agreement. The borrowings under the
36
<PAGE>
equipment loans and the capital lease agreement are to be repaid in 48 equal
monthly installments and accrue interest at 10.8%. Both obligations are secured
by the related equipment. All borrowings under the capital lease agreement must
be completed by March 31, 2000.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. See Notes 5, 6 and 8 of Notes to
Financial Statements. Our future capital requirements will depend upon many
factors, including the timing of research and product development efforts and
expansion of our marketing efforts. We expect to continue to expend significant
amounts on property and equipment related to the expansion of facility
infrastructure, computer equipment and for research and development laboratory
and test equipment to support on-going research and development operations.
In future periods, we generally anticipate significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product revenue. In conjunction with the expected increase in revenue, we expect
higher relative levels of inventory and accounts receivable. While we also
expect an increase in accounts payable and other liabilities, we do not expect
that they will offset the increases in inventory and accounts receivable.
We believe that our cash and cash equivalents balances, short-term marketable
investments and funds available under our existing credit facilities will be
sufficient to satisfy our cash requirements for at least the next 12 months. Our
management intends to invest our cash in excess of current operating
requirements in interest-bearing, investment-grade securities.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $100,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, it internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
37
<PAGE>
Summarized Quarterly Data (Unaudited)
The following tables present unaudited quarterly financial information, for
the eight quarters ended December 31, 1999. We believe this information reflects
all adjustments (consisting only of normal recurring adjustments) that we
consider necessary for a fair presentation of such information in accordance
with generally accepted accounting principles. The results for any quarter are
not necessarily indicative of results for any future period. (in thousands,
except per share data):
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1999
Net revenue $13,217 $22,890 $32,016 $44,601
Gross profit 6,833 12,075 16,999 23,815
Income (loss) from operations (1,135) 2,545 6,189 9,011
Net income (loss) (1,036) 2,343 4,646 6,264
Basic net income (loss) per share (1) (0.24) 0.09 0.10 0.13
Diluted net income (loss) per share (1) (0.24) 0.05 0.08 0.11
1998
Net revenue $ 317 $ 1,281 $ 5,556 $14,667
Gross profit 100 486 2,197 6,638
Loss from operations (3,367) (3,545) (3,210) (402)
Net loss (3,287) (3,545) (3,257) (242)
Basic net loss per share (1) (1.54) (1.44) (1.16) (0.07)
Diluted net loss per share (1) (1.54) (1.44) (1.16) (0.07)
</TABLE>
_____________
(1) Basic and diluted net income (loss) per share computations for each quarter
are independent and may not add up to the net income (loss) per share
computation for the respective year. Net income (loss) per share data for
all periods presented has been adjusted to reflect the two-for-one stock
dividend that was effective December 10, 1999. See Note 1 and Note 7 of
Notes to the Financial Statements for an explanation of the determination of
basic and diluted net income(loss) per share.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in certain held-to-maturity
securities. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of interest sensitive financial
instruments at December 31, 1999.
Item 8. Financial Statements
The Company's financial statements at December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999, and the Report of
Ernst & Young LLP, Independent Auditors, are included in this Report on pages F-
1 through F-19.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
38
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be set forth under the captions
"Election of Directors" and "Executive Officers" in our definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the 2000 Annual Meeting of Stockholders (the "Proxy Statement"), which is
incorporated by reference herein.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management ."
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
39
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
Number
--------
(a) Documents filed as part of the report:
(1) Report of Ernst & Young LLP, Independent
Auditors F-1
Balance Sheets at December 31, 1999 and 1998 F-2
Statements of Operations for 1999, 1998 and
1997 F-3
Statements of Stockholders' Equity for 1999,
1998 and 1997 F-4
Statements of Cash Flows for 1999, 1998 and
1997 F-6
Notes to Financial Statements F-7
Schedule II Valuation and Qualifying Accounts II-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(2) Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.(1)
4.2 Specimen Stock Certificate.(1)
10.1 Amended and Restated 1996 Equity Incentive Plan (the "1996
Plan").(1)
10.2 Form of Stock Option Agreement pursuant to the 1996 Plan.(1)
10.3 1999 Employee Stock Purchase Plan and related offering
documents.(1)
10.4 Employment Agreement between the Company and Steve Hunt, dated
July 31, 1996.(1)
10.5 Employment Agreement between the Company and Richard Gilbert,
dated March 22, 1998.(1)
10.6 Master Equipment Lease between the Company and Comdisco, Inc.,
dated September 30, 1997.(1)
10.7 Loan and Security Agreement between the Company and Silicon
Valley Bank, dated August 14, 1998.(1)
10.8 Loan and Security Agreement between the Company and Silicon
Valley Bank and MMC/GATX Partnership No. 1, dated October 4,
1996.(1)
10.9 Office Lease between the Company and Public Storage Properties
XVIII, Inc., dated June 14, 1996.(1)
10.10 Office Lease between the Company and R.G. Harris & Company, dated
August 12, 1997.(1)
10.11 Office Sublease between the Company and Stuart Leeb and
Associates, dated May 1, 1998.(1)
10.12 Office Lease between the Company and Palomar Enterprises, Inc.,
dated July 20, 1998.(1)
10.13 Warrant Agreement between the Company and MMC/GATX Partnership
No. 1, dated October 4, 1996.(1)
10.14 Warrant Agreement between the Company and Silicon Valley Bank,
dated October 4, 1996.(1)
10.15 Warrant Agreement between the Company and Comdisco, Inc., dated
October 29, 1997.(1)
40
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
10.16 Warrant Agreement between the Company and Comdisco, Inc., dated
April 27, 1998.(1)
10.17 Warrant Agreement between the Company and Intel Corporation,
dated January 14, 1997.(1)
10.18 Warrant Agreement between the Company and Silicon Valley Bank,
dated August 14, 1998.(1)
10.19 Amended and Restated Investors' Rights Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.(1)
10.20 Right of First Refusal and Co-Sale Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.(1)
10.21 Voting Agreement by and among the Company and certain
stockholders of the Company, dated October 9, 1998.(1)
10.22 Founder Stock Purchase Agreement between the Company and Joseph
D. Markee, dated March 11, 1996.(1)
10.23 First Amendment to Founder Stock Purchase Agreement between the
Company and Joseph D. Markee, dated June 12, 1998.(1)
10.24 Founder Stock Purchase Agreement between the Company and Mark J.
Handzel, dated March 11, 1996.(1)
10.25 First Amendment to Founder Stock Purchase Agreement between the
Company and Mark J. Handzel, dated January 27, 1999.(1)
+10.26 General Agreement for the Procurement of Products and Services
and the Licensing of Software between the Company and Lucent
Technologies Inc., dated November 17, 1998.(1)
+10.27 OEM Purchase and Development Agreement between the Company an
3COM Corporation, dated November 24, 1998.(1)
+10.28 Development, Manufacturing and Supply Agreement between the
Company and Netopia, Inc., dated May 19, 1998.(1)
10.29 Warrant Agreement between the Company and Intel Corporation,
dated January 14, 1997.(1)
10.30 1999 Non-Employee Directors' Stock Option Plan.(1)
10.31 Form of Nonqualified Stock Option for use with 1999 Non-Employee
Directors' Stock Option Plan.(1)
10.32 Form of Indemnification Agreement(1)
+10.33 Equipment Purchase Agreement between the Company and NorthPoint
Communications, Inc. dated April 8, 1999.(1)
+10.34 Standard Full Service Gross Office Lease among the Company,
Pacific Sorrento Mesa Holdings, L.P., and Pacific Stonecrest
Holdings, L.P., dated March 31, 1999.(1)
+10.35 Equipment Purchase Agreement between the Company and NorthPoint
Communications, Inc. dated July 21, 1999. (2)
+10.36 Equipment Purchase Agreement between the Company and Rhythms
NetConnections, Inc. dated December 10, 1999.*
10.37 Software License Agreement between the Company and Rhythms
NetConnections, Inc. dated December 10, 1999.*
+10.38 Customer Technical Support Services Agreement between the Company
and Rhythms NetConnections, Inc. dated December 10, 1999.*
10.39 Employment Agreement between the Company and Joseph D. Markee,
dated March 12, 1999.(1)
23.1 Consent of Ernst & Young LLP, Independent Auditors.*
24.1 Power of Attorney.
27 Financial Data Schedule.*
___________________________________________________________________________
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission (the
"Commission") on March 1, 1999 (File No. 333-73153), as amended by
Amendment No. 1 filed with the Commission on April 13, 1999, Amendment
No. 2 filed with the Commission on April 26, 1999, and Amendment No. 3
filed with the Commission on
41
<PAGE>
May 11, 1999.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
* Filed Herewith
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 17, 2000
Copper Mountain Networks, Inc.
By: /s/ RICHARD S. GILBERT
------------------------------
Richard S. Gilbert
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ RICHARD S. GILBERT President, Chief Executive March 17, 2000
- -----------------------------
Richard S. Gilbert Officer and Director (Principal
Executive Officer)
/s/ JOHN A. CREELMAN Vice President of Finance, Chief March 17, 2000
- -----------------------------
John A. Creelman Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ JOSEPH D. MARKEE Chief Technical Officer and March 17, 2000
- -----------------------------
Joseph D. Markee Chairman of the Board
/s/ ROBERT L. BAILEY Director March 17, 2000
- -----------------------------
Robert L. Bailey
/s/ TENCH COXE Director March 17, 2000
- -----------------------------
Tench Coxe
/s/ ROGER EVANS Director March 17, 2000
- -----------------------------
Roger Evans
/s/ RICHARD H. KIMBALL Director March 17, 2000
- -----------------------------
Richard H. Kimball
/s/ RAYMOND V. THOMAS Director March 17, 2000
- -----------------------------
Raymond V. Thomas
/s/ ANDREW W. VERHALEN Director March 17, 2000
- -----------------------------
Andrew W. Verhalen
43
<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, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Copper Mountain Networks, Inc.
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Diego, California
January 28, 2000,
except for Note 12, as
to which the date is
February 29, 2000
F-1
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 25,405 $ 7,631
Short-term marketable investments 91,764 10,898
Accounts receivable, net 18,992 8,026
Inventory 12,801 4,668
Other current assets 1,530 476
-------- --------
Total current assets 150,492 31,699
Property and equipment, net 8,825 3,214
Marketable investments 5,139 ---
Other assets 1,319 1,296
-------- --------
Total assets $165,775 $ 36,209
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 7,887 $ 4,371
Accrued liabilities 8,800 2,219
Current portion of obligations under capital leases
and equipment notes payable 1,618 783
-------- --------
Total current liabilities 18,305 7,373
Obligations under capital leases and equipment
notes payable, less current portion 4,044 1,965
Other accrued 105 28
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares
authorized, none issued and outstanding as of December 31, 1999
and 1998, respectively ---- ----
Convertible preferred stock, no par value, zero and
10,223 shares issued and outstanding at December 31,
1999 and 1998, respectively ---- 44,502
Common stock, $.001 par value, 100,000 shares
authorized, 47,662 and 5,034 shares issued and
outstanding at December 31, 1999 and 1998, respectively 48 5
Notes receivable from stockholders ---- (41)
Additional paid in capital 159,149 15,667
Deferred compensation (4,565) (9,762)
Accumulated deficit (11,311) (23,528)
-------- --------
Total stockholders' equity 143,321 26,843
-------- --------
Total liabilities and stockholders' equity $165,775 $ 36,209
======== ========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net revenue $112,723 $ 21,821 $ 211
Cost of revenue 53,002 12,400 1,717
--------------- --------------- ---------------
Gross profit (loss) 59,721 9,421 (1,506)
Operating expenses:
Research and development 15,523 7,225 4,753
Sales and marketing 16,158 5,363 1,510
General and administrative 5,998 3,428 1,928
Amortization of deferred stock compensation 5,431 3,929 1,490
--------------- --------------- ---------------
Total operating expenses 43,110 19,945 9,681
--------------- --------------- ---------------
Income (loss) from operations 16,611 (10,524) (11,187)
Other income (expense):
Interest and other income 4,385 406 268
Interest expense (289) (213) (97)
--------------- --------------- ---------------
Income (loss) before income taxes 20,707 (10,331) (11,016)
Provision for income taxes 8,490 ---- ----
--------------- --------------- ---------------
Net income (loss) $ 12,217 $(10,331) $(11,016)
=============== =============== ===============
Basic net income (loss) per share $ 0.39 $ (3.87) $ (7.81)
=============== =============== ===============
Diluted net income (loss) per share $ 0.23 $ (3.87) $ (7.81)
=============== =============== ===============
Basic common equivalent shares 31,289 2,666 1,410
=============== =============== ===============
Diluted common equivalent shares 52,282 2,666 1,410
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ------------------
Notes
Receivable Additional
Number of Number of From Paid in
Shares Amount Shares Amount Stockholders Capital
--------- -------- --------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,723 $ 2,723 3,929 $4 (69) $ 1,896
Issuance of Series B convertible preferred stock
at $3.39 per share for cash and conversion of
convertible bridge note payable, net 1,850 6,196 ---- ---- ---- ----
Issuance of Series C convertible preferred stock
at $4.75 per share for cash 2,422 11,506 ---- ---- ---- ----
Exercise of options to purchase common stock ---- ---- 477 ---- ---- 16
Stock grants for consulting services 2 ---- 55 ---- ---- 15
Issuance of warrants to purchase convertible
preferred stock in connection with technology
agreement, notes payable, and consulting
services ---- ---- ---- ---- ---- 113
Deferred compensation related to the grant of
stock options ---- ---- ---- ---- ---- 2,429
Amortization related to deferred stock
compensation ---- ---- ---- ---- ---- ----
Net loss ---- ---- ---- ---- ---- ----
--------- -------- --------- ------ ------------ ----------
Balance at December 31, 1997 6,997 20,425 4,461 4 (69) 4,469
Exercise of options to purchase common stock ---- ---- 1,030 1 ---- 60
Stock grants for consulting services ---- ---- 19 ---- ---- 5
Deferred compensation related to the grant of
stock options ---- ---- ---- ---- ---- 11,128
Amortization related to deferred stock
compensation ---- ---- ---- ---- ---- ----
Stock forfeited by employee ---- ---- (476) ---- 16 (16)
Repayment of note receivable from stockholder ---- ---- ---- ---- 12 ----
Issuance of Series C convertible preferred stock
warrants in connection with a financing
agreement ---- ---- ---- ---- ---- 21
Issuance of Series D convertible preferred stock
at $7.75 per share for cash, net 3,226 24,077 ---- ---- ---- ----
Net loss ---- ---- ---- ---- ---- ----
--------- -------- --------- ------ ------------ ----------
Balance at December 31, 1998 10,223 $44,502 5,034 $5 $(41) $15,667
<CAPTION>
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------ ----------- -------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (1,624) $ (2,181) $ 749
Issuance of Series B convertible preferred stock
at $3.39 per share for cash and conversion of
convertible bridge note payable, net ---- ---- 6,196
Issuance of Series C convertible preferred stock
at $4.75 per share for cash ---- ---- 11,506
Exercise of options to purchase common stock ---- ---- 16
Stock grants for consulting services ---- ---- 15
Issuance of warrants to purchase convertible
preferred stock in connection with technology
agreement, notes payable, and consulting
services ---- ---- 113
Deferred compensation related to the grant of
stock options (2,429) ---- ----
Amortization related to deferred stock
compensation 1,490 ---- 1,490
Net loss ---- (11,016) (11,016)
------------ ----------- -------------------
Balance at December 31, 1997 (2,563) (13,197) 9,069
Exercise of options to purchase common stock ---- ---- 61
Stock grants for consulting services ---- ---- 5
Deferred compensation related to the grant of
stock options (11,128) ---- ----
Amortization related to deferred stock
compensation 3,929 ---- 3,929
Stock forfeited by employee ---- ---- ----
Repayment of note receivable from stockholder ---- ---- 12
Issuance of Series C convertible preferred stock
warrants in connection with a financing
agreement ---- ---- 21
Issuance of Series D convertible preferred stock
at $7.75 per share for cash, net ---- ---- 24,077
Net loss ---- (10,331) (10,331)
------------ ----------- -------------------
Balance at December 31, 1998 $ (9,762) $(23,528) $ 26,843
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CON'T)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------- -----------------
Notes
Receivable Additional
Number of Number of from Paid in
Shares Amount Shares Amount Stockholders Capital
--------- --------- --------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Conversion of preferred to common stock (10,223) $(44,502) 30,670 $31 $ ---- $ 44,471
Issuance of common stock, net ---- ---- 9,200 9 ---- 88,664
Stock grants for consulting services ---- ---- 1 ---- ---- 7
Repayment of notes receivable from stockholders ---- ---- ---- ---- 41 ----
Deferred compensation related to the grant of stock options ---- ---- ---- ---- ---- 234
Amortization related to deferred stock compensation ---- ---- ---- ---- ---- ----
Net exercise of warrant to purchase common stock ---- ---- 235 ---- ---- ----
Tax benefit from the exercise of stock options ---- ---- ---- ---- ---- 9,389
Exercise of options to purchase common stock ---- ---- 2,522 3 ---- 717
Net income ---- ---- ---- ---- ---- ----
--------- --------- --------- ------ ------------ ----------
Balance at December 31, 1999 ---- $ ---- 47,662 $48 $ ---- $159,149
========= ========= ========= ====== ============ ==========
<CAPTION>
Total
Deferred Accumulated Stockholders'
Compensation Deficit Equity
------------- --------- ------------
<S> <C> <C> <C>
Conversion of preferred to common stock $ ---- $ ---- $ ----
Issuance of common stock, net ---- ---- 88,673
Stock grants for consulting services ---- ---- 7
Repayment of notes receivable from stockholders ---- ---- 41
Deferred compensation related to the grant of stock options (234) ---- ----
Amortization related to deferred stock compensation 5,431 ---- 5,431
Net exercise of warrant to purchase common stock ---- ---- ----
Tax benefit from the exercise of stock options ---- ---- 9,389
Exercise of options to purchase common stock ---- ---- 720
Net income ---- 12,217 12,217
--------- --------- ---------
Balance at December 31, 1999 $ (4,565) $ (11,311) $ 143,321
========= ========= =========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 12,217 $(10,331) $(11,016)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,089 1,231 511
Non-cash compensation 5,438 3,934 1,503
Loss on disposal of equipment 193 ---- ----
Tax benefit from the sale of stock options 9,389 ---- ----
Changes in operating assets and liabilities:
Accounts receivable (10,966) (7,843) (183)
Inventory (8,133) (4,285) (383)
Other current assets and other assets (1,095) (1,469) (155)
Accounts payable and accrued liabilities 10,174 4,435 1,735
--------- -------- --------
Net cash provided by (used in) operating activities 20,306 (14,328) (7,988)
--------- -------- --------
Cash flows from investing activities:
Purchases of marketable investments (113,416) (11,140) ----
Maturities of marketable investments 27,411 242 ----
Purchases of property and equipment (6,572) (1,171) (1,515)
--------- -------- --------
Net cash used in investing activities (92,577) (12,069) (1,515)
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of equipment notes payable 2,464 921 615
Payments on capital lease obligations (429) (293) (18)
Payments on equipment notes payable (1,424) (267) (201)
Proceeds from issuance of preferred stock ---- 24,077 15,202
Repayment of shareholders notes receivable 41 ---- ----
Proceeds from issuance of common stock 89,393 73 16
--------- -------- --------
Net cash provided by financing activities 90,045 24,511 15,614
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 17,774 (1,886) 6,111
Cash and cash equivalents at beginning of year 7,631 9,517 3,406
--------- -------- --------
Cash and cash equivalents at end of year $ 25,405 $ 7,631 $ 9,517
========= ======== ========
Supplemental information:
Interest paid $ 289 $ 150 $ 74
========= ======== ========
Capital lease obligations entered into for equipment $ 2,303 $ 1,307 $ 327
========= ======== ========
Conversion of convertible bridge note payable to
preferred stock $ ---- $ ---- $ 2,500
========= ======== ========
Stock forfeited for notes receivable $ ---- $ (16) $ ----
========= ======== ========
Issuance of convertible preferred stock warrants $ ---- $ 21 $ 113
========= ======== ========
Issuance of stock for consulting services $ 7 $ 5 $ 13
========= ======== ========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Copper Mountain Networks, Inc. (the "Company" or "Copper Mountain"), a
Delaware corporation, is a supplier of high-speed DSL-based communication
solutions for the broadband access market. The Company's solutions enable
telecommunication service providers to provide high-speed, cost-effective
connectivity over the existing copper wire infrastructure to the business,
multiple tenant unit and residential markets.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value. The
Company generally invests its excess cash in debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings. Such
investments are made in accordance with the Company's investment policy, which
establishes guidelines relative to diversification and maturities designed to
maintain safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any significant losses on its cash and cash equivalents.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, marketable investments,
accounts receivable, accounts payable, accrued liabilities, short-term bank
borrowings and notes payable approximates fair value.
Investments
At December 31, 1999, the Company held investments in investment grade debt
securities with various maturities through January 2001. Management determines
the appropriate classification of its investments in debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date. The
Company's total investments in these securities as of December 31, 1999 totaled
$106.7 million. The Company has included $9.8 million of these securities in
cash and cash equivalents, as of December 31, 1999, as they have original
maturities of less than 90 days. The remaining debt securities totaling $91.8
million and $5.1 million as of December 31, 1999 have been classified as short-
term and long-term marketable investments, respectively. The Company has
designated all of its investments as held to maturity.
F-7
<PAGE>
Concentration of Credit Risk
The Company operates in one business segment, developing, marketing and
supporting advanced communications products which enable high-speed data access
to business, multi-tenant unit and residential users. The markets for high-speed
data access products are characterized by rapid technological developments,
frequent new product introductions, changes in end user requirements and
evolving industry standards. The Company's future success will depend on its
ability to develop, introduce and market enhancements to its existing products,
to introduce new products in a timely manner which meet customer requirements
and to respond to competitive pressures and technological advances. Further, the
emergence of new industry standards, whether through adoption by official
standards committees or widespread use by telephone companies or other
telecommunications service providers, could require the Company to redesign its
products.
A relatively small number of customers account for a significant percentage of
the Company's revenues. The Company expects that the sale of its products to a
limited number of customers may continue to account for a high percentage of
revenues for the foreseeable future. The Company's revenues for the year ended
December 31, 1999 include sales to three significant customers totaling $42.2
million, $32.0 million and $25.4 million. The Company's revenues for the year
ended December 31, 1998 include sales to two significant customers totaling
$13.2 million and $4.0 million.
The Company performs ongoing credit evaluations of its customers and generally
requires no collateral. The Company had significant accounts receivable balances
due from four customers individually representing 39%, 24%, 12% and 10% of total
accounts receivable at December 31, 1999.
The Company from time to time maintains a substantial portion of its cash and
cash equivalents in money market accounts with one financial institution. The
Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or marketable investments.
Inventory
Inventory is stated at the lower of cost, principally standard costs, which
approximate actual costs on a first-in, first-out basis, or market. The Company
recorded charges to reduce the carrying costs of inventory totaling $750,000,
$504,000 and $315,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The reduction in the value of the inventory was primarily due to
the discontinuance of certain products, which was the result of the development
and introduction of new products. For the year ended December 31, 1997, the
Company also incurred a loss on purchase commitments totaling $582,000 to
purchase inventory used in the production of the discontinued products which had
not yet been received by December 31, 1997. All such reductions to inventory
value and losses on revenue commitments for the years ended December 31, 1999
and 1998 are included in cost of revenues.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from two to five years, using the straight-
line method.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment or, in some
cases, on customer receipt if collection of the resulting receivable is probable
and product returns can be reasonably estimated. Sales returns are estimated
based on historical experience and management's expectations and are recorded at
the time product revenue is recognized.
F-8
<PAGE>
Revenue from service and support arrangements is recognized ratably as
services are performed. Annual service and support arrangements can be purchased
by customers for products no longer under warranty and are billed quarterly.
The Company may extend limited stock rotation, product return and price
protection rights to certain distributors and resellers. The Company may not be
able to estimate product returns if the relationship with the distributor is new
or if there is limited historical basis to determine product returns. Deferred
revenue, which is included in accrued liabilities, represents the margin on
shipments of products to distributors or resellers that will be recognized when
the Company can reasonably estimate product returns.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Costs
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. There have been no such costs capitalized to date as the costs incurred
subsequent to reaching technological feasibility have not been significant.
Impairment of Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss would be recognized when the
sum of the expected future undiscounted net cash flows is less than the carrying
amount of the asset. Should an impairment exist, the impairment loss would be
measured based on the excess of the carrying amount of the asset over the
asset's fair value. The Company has identified no such impairment losses.
Substantially all of the Company's long-lived assets are located in the United
States.
Warranty Reserves
The Company provides limited warranties on certain of its products for periods
of up to one year. The Company recognizes warranty reserves when products are
shipped based upon an estimate of total warranty costs, and such reserves are
included in accrued liabilities.
Income Taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are determined
based on the difference between the financial statement bases and the tax bases
of assets and liabilities using enacted tax rates. A valuation allowance is
established to reduce a deferred tax asset to the amount that is expected more
likely than not to be realized.
Stock Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income (loss) and net income (loss) per share as if the fair
value method had been applied in measuring compensation expense (See Note 7).
F-9
<PAGE>
Deferred compensation for options granted to non-employees has been determined
in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share has been computed in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," using the weighted-average number of shares of common stock outstanding
and common stock equivalents during the period. Options, warrants, and preferred
stock were not included in the computation of diluted net loss per share for the
years ended December 31, 1998 and 1997 because the effect would be anti-
dilutive.
A reconciliation of shares used in the calculation of basic and diluted net
loss per share attributable to common shareholders is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding 31,289 2,666 1,410
Dilutive effect of preferred shares 11,091 ---- ----
Dilutive effect of stock options 8,585 ---- ----
Dilutive effect of restricted shares 708 ---- ----
Dilutive effect of warrants 609 ---- ----
------ ----- -----
Shares used in computing diluted net income (loss) per
common share 52,282 2,666 1,410
====== ===== =====
</TABLE>
Dilutive securities include options, warrants, preferred stock as if converted
and restricted stock subject to vesting. Potentially dilutive securities
totaling 40.9 million and 27.6 million for the years ended December 31, 1998 and
1997, respectively, were excluded from basic and diluted earnings per share
because of their anti-dilutive effect.
Recapitalization
In April 1999, the Company reincorporated as a Delaware corporation. The
authorized shares of the Company were set at 100 million shares of common stock
($.001 par value) and 5 million shares of preferred stock ($.001 par value).
Under the restated certificate, the Company's board of directors has the
authority, without further action by stockholders, to issue up to 5 million
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon such preferred stock. The issuance of preferred stock could adversely
affect the voting power of holders of common stock. All common share data in the
accompanying financial statements have been adjusted retroactively to give
effect to the reincorporation.
In November 1999, the Company's Board of Directors declared a two-for-one
stock split of the Company's common stock in the form of a stock dividend. The
stock dividend was distributed on December 10, 1999 to stockholders of record on
November 24, 1999. All references in the financial statements and notes to
number of shares and per share amounts have been restated to reflect this stock
split.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of FAS 133 by one year. The Company will be required to
adopt FAS 133 for
F-10
<PAGE>
fiscal year 2001. This statement establishes a new model for accounting for
derivatives and hedging activities. Under FAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value. The Company has
not completed its determination of the impact of the adoption of this new
accounting standard on its financial position or results of operations.
2. Completion of Initial Public Offering
On May 13, 1999, the Company completed its initial public offering for the
sale of 9.2 million shares of common stock at a price to the public of $10.50
per share, which resulted in net proceeds to the Company of $89.8 million after
payment of the underwriters' commissions but before offering expenses.
Simultaneously with the closing of the initial public offering, all of the
Company's convertible preferred stock was automatically converted into an
aggregate of 30.7 million shares of common stock.
3. Composition of Certain Balance Sheet Captions
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
------------- --------------
(in thousands)
<S> <C> <C>
Accounts receivable:
Trade receivables $19,132 $ 8,026
Allowance for doubtful accounts (140) ----
------- -------
$18,992 $ 8,026
======= =======
Inventory:
Raw materials $ 6,003 $ 2,582
Work in process 3,148 790
Finished goods 3,650 1,296
------- -------
$12,801 $ 4,668
======= =======
Property and equipment:
Laboratory equipment and software $ 8,590 $ 2,265
Computer equipment and software 3,294 1,885
Office furniture and fixtures 1,669 840
------- -------
13,553 4,990
Less accumulated depreciation and amortization (4,728) (1,776)
------- -------
$ 8,825 $ 3,214
======= =======
Accrued liabilities:
Accrued compensation $ 2,293 $ 621
Accrued warranty 1,930 418
Accrued vacation 1,385 493
Other 3,192 687
------- -------
$ 8,800 $ 2,219
======= =======
</TABLE>
F-11
<PAGE>
4. Investments
At December 31, 1999 and 1998, investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Current Noncurrent
-------------------------------- --------------------------------
December 31, December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Held to maturity:
Commercial paper $31,856 $ 995 $ ---- $----
U.S. government securities 33,514 9,903 ---- ----
Corporate medium-term notes 26,394 ---- 5,139 ----
------- ------- ------ -----
$91,764 $10,898 $5,139 $----
======= ======= ====== =====
</TABLE>
At December 31, 1999, non-current held-to-maturity debt securities of $5.1
million had maturities of less than fourteen months.
5. Short-Term Bank Borrowings
In August 1998, the Company entered into a $4.0 million line of credit
agreement with a bank which allows it to borrow an amount equal to 80% of
eligible accounts receivable plus the lesser of 25% of the Company's eligible
inventory or $500,000. Interest accrued at the bank's prime rate plus .25% (8.0%
at December 31, 1998). There were no borrowings outstanding as of December 31,
1999 and the line of credit expired on August 13, 1999.
In connection with this financing agreement, the Company granted warrants to
the bank to purchase an aggregate of 25,000 shares of Series C convertible
preferred stock at $4.75 per share. The warrants are exercisable for five years
from the date of issuance. The estimated fair value of the warrants was
approximately $21,000, which has been capitalized as debt issuance costs and was
amortized over the life of the financing agreement. These warrants were
exercised in 1999 and converted into 75,000 shares of common stock.
6. Notes Payable
In August 1999, the Company entered into a credit facility with a bank for
the purchase of equipment. The credit facility includes $2.4 million in
equipment loans and $2.6 million in commitments for the purchase of equipment
under a capital lease agreement. As of December 31, 1999, the full amount of
funds available under the equipment loan had been utilized. As of December 31,
1999, the Company had $316,000 available for future borrowings under the capital
lease agreement. The borrowings under the equipment loans and the capital lease
agreement are to be repaid in 48 equal monthly installments and accrue interest
at 10.8%. Both obligations are secured by the related equipment. All borrowings
under the capital lease agreement must be completed by March 31, 2000.
In August 1998, the Company entered into an equipment line of credit with a
bank that allows the Company to borrow up to $1.0 million for the purchase of
equipment. The Company used a portion of the equipment loans entered into in
August 1999 to repay all amounts outstanding under this equipment line.
In 1996, the Company entered into an equipment financing agreement with a
bank and leasing company that allows the Company to borrow up to $1.0 million
for purchases of equipment. The notes are secured by the related equipment. As
of December 31, 1999 the full amount of funds available under the equipment
financing agreement was utilized.
In connection with the 1996 equipment financing agreement, the Company agreed
to make a final payment equal to 12.5% of the equipment financed at the end of
the amortization period. Additionally, the Company granted warrants to the bank
and leasing company to purchase an aggregate of 50,000 shares of Series A
convertible preferred stock at $1.00 per share of which 40,000 warrants were
exercised in 1999 and converted into 120,000 shares of
F-12
<PAGE>
common stock. The warrants are exercisable for the longer of ten years from the
date of issuance or five years after an initial public offering. The estimated
fair value of the warrants was approximately $18,000, which has been capitalized
as debt issuance costs and is being amortized over the life of the equipment
financing agreement.
In December 1996, the Company received $2.5 million in connection with a
convertible bridge note that accrued interest at 8.0% per annum. During 1997,
the note was converted into Series B convertible preferred stock at a rate of
$3.39 per share.
A summary of the notes payable is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Bank installment loan, with a various maturity dates through October
2003, total monthly payments of $57,000, bearing interest at $2,254 $ ----
10.8%, collateralized by equipment
Bank and leasing company installment loans, with various maturity
dates through December 2000, total monthly payments of $27,000
with interest rates ranging between 8.99% and 9.76%, collateralized
by equipment 212 504
Bank installment loan, with a maturity date of August 2002, interest
only payments until August 1999 with a variable interest rate at the
bank prime rate plus 0.25%, collateralized by equipment ---- 921
------ ------
2,466 1,425
Less current portion (753) (395)
------ ------
$1,713 $1,030
====== ======
</TABLE>
At December 31, 1999, future aggregate annual principal payments on the notes
payable are $753,000, $513,000, $571,000 and $629,000 for 2000, 2001, 2002 and
2003, respectively.
7. Stockholders' Equity
Preferred Stock
At December 31, 1998, the Company had 10.2 million shares of its convertible
preferred stock outstanding. On May 18, 1999, the Company completed its initial
public offering which resulted in the conversion of all of the outstanding
convertible preferred stock into 30.7 million shares of common stock. Following
the conversion, and upon the Company's reincorporation in Delaware, the
Company's certificate of incorporation was amended and restated to delete all
references to such shares of preferred stock. Under the restated certificate,
the Board has the authority, without further action by stockholders, to issue up
to 5.0 million shares of preferred stock in one or more series and to fix the
rights, preferences, privileges, qualifications and restrictions granted to or
imposed upon such preferred stock, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preference and
sinking fund terms, any or all of which may be greater than the rights of the
common stock.
Common Stock
The Company has issued 3.9 million shares of common stock to the founders of
the Company at prices ranging from $.02 to $.04 per share in exchange for
promissory notes bearing interest at rates ranging from 5.5% to 10% and maturing
March 12, 2000. The Company has the option to repurchase, at the original issue
price, unvested shares in the event of termination of employment. In 1998,
476,000 unvested common shares were forfeited upon the termination of one of the
founders. Shares issued under these agreements generally vest over four years.
As of December 31, 1999 all amounts outstanding under the remaining promissory
notes had been repaid by the founders. At December 31, 1999, 195,000 shares of
common stock are subject to repurchase by the Company.
F-13
<PAGE>
1996 Equity Incentive Plan
In August 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"). A total of 7.9 million shares of common stock are currently
reserved for issuance pursuant to the 1996 Plan. In addition, the 1996 Plan
provides for automatic annual increases in the number of shares reserved for
issuance thereunder (beginning in 2000) equal to the lesser of: (i) 4% of Copper
Mountain's outstanding shares on a fully diluted basis taking into account stock
options and warrants and (ii) a lesser amount determined by the board of
directors.
The 1996 Plan provides for the grant of options to the Company's directors,
officers, key employees, consultants and certain advisors. The 1996 Plan
provides for the grant of incentive and nonstatutory stock options, stock
bonuses and rights to purchase stock to employees, directors or consultants of
the Company. The 1996 Plan provides that incentive stock options will be granted
only to employees at no less than the fair market value of the Company's common
stock (no less than 85% of the fair market value for nonstatutory stock
options). Options generally vest 25% one year from date of grant and ratably
each month thereafter for a period of 36 months, and are exercisable up to ten
years from date of grant.
Certain option grants under the 1996 Plan are subject to an early exercise
provision. Common shares obtained on early exercise of unvested options are
subject to repurchase by the Company at the original issue price and will vest
according to the respective option agreement. At December 31, 1999, 70,000
shares are subject to repurchase by the Company.
Non-Employee Directors' Stock Option Plan
In March 1999, the Company adopted the 1999 Non-Employee Directors' Stock
Option Plan ("Directors Plan") to provide for the automatic grant of options to
purchase shares of common stock to our non-employee directors. The Directors
Plan is administered by the board, unless the board delegates administration to
a committee of at least two disinterested directors. A total of 720,000 shares
of common stock has been reserved for issuance under the Directors Plan.
On the effective date of the Directors Plan, each person who was then a non-
employee director was granted an option to purchase 60,000 shares of common
stock. Each person who, after the effective date of the plan, for the first time
becomes a non-employee director automatically will be granted, upon the date of
his or her initial appointment or election to be a non-employee director, a one-
time option to purchase 60,000 shares of common stock. On the date of each
annual meeting of our stockholders commencing with the 2000 annual meeting of
stockholders, each person who was initially elected or appointed to be a non-
employee director at least six months prior to the date of such annual meeting
automatically will be granted an option to purchase 20,000 shares of common
stock.
Options granted under the Directors Plan shall be fully vested and
exercisable on the date of grant and must be exercised within five years from
the date they are granted. The exercise price of options under the Directors
Plan will equal 100% of the fair market value of the common stock on the date of
grant. Unless otherwise terminated by the board of directors, the Directors Plan
automatically terminates when all of our common stock reserved for issuance
under the Directors Plan has been issued. As of December 31, 1999, 360,000 stock
options have been granted under the Directors Plan.
F-14
<PAGE>
All stock option transactions are summarized as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------------- ---------------
<S> <C> <C>
Balance at December 31, 1996 2,321 $ .04
Granted 2,140 $ .12
Exercised (477) $ .04
Cancelled (231) $ .04
------
Balance at December 31, 1997 3,753 $ .08
Granted 6,173 $ .33
Exercised (1,029) $ .06
Cancelled (366) $ .12
------
Balance at December 31, 1998 8,531 $ .26
Granted 4,829 $18.09
Exercised (2,522) $ .28
Cancelled (82) $ 1.97
------
Balance at December 31, 1999 10,756 $ 8.25
======
</TABLE>
As of December 31, 1999, 1998, and 1997 there were 1.9 million, 1.3 million
and 1.2 million options, respectively, exercisable at weighted average exercise
prices of $1.22, $.08 and $.04, respectively.
The following table summarizes all options outstanding and exercisable by
price range as of December 31, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life-Years Price Exercisable Price
---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .03 - 0.11 856 7.30 $ 0.09 248 $0.08
0.16 - 0.16 3,716 8.43 0.16 1,065 0.16
0.27 - 3.50 2,218 8.90 1.77 304 1.17
4.25 - 10.50 2,514 8.67 6.42 300 6.00
30.19 - 60.50 1,452 9.68 46.84 ---- ----
------ -----
$ 0.03 - 60.50 10,756 8.66 $ 8.25 1,917 $1.22
====== =====
</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
F-15
<PAGE>
during the three fiscal years ended December 31, 1998, which resulted in the
Company recording deferred compensation of $1.1 million, with respect to certain
options granted during 1998. During April 1999, in conjunction with the
Company's initial public offering registration statement, the Company revised
the estimates of the deemed fair value of its common stock at various dates and
has recognized additional deferred compensation of $1.8 million, $2.4 million,
$10.0 million and $234,000 during the four fiscal years ended December 31, 1999.
The deferred compensation is being amortized to expense in accordance with FASB
Interpretation No. 28 over the vesting period of the individual options,
generally four years.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's pro forma amounts would
have been as indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) as reported $12,217 $(10,331) $(11,016)
Pro forma net loss under SFAS No. 123 (2,064) (10,884) (11,161)
Pro forma basic and diluted net loss per share
under SFAS No. 123 (0.07) (4.07) (7.92)
</TABLE>
The fair value of each option grant subsequent to the Company's initial public
offering in May 1999 was estimated on the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: no
dividend yield; volatility factor of 76.0%; risk free interest rate of 6.0%; and
expected life for the option of five years.
The fair value of each option grant prior to the Company's initial public
offering in May 1999 was estimated on the date of grant using the minimum value
method with the following weighted-average assumptions: no dividend yield; risk
free interest rate of 5.7% to 6.5%; and expected life for the option of five
years.
The weighted-average estimated fair value of employee stock options granted
during 1999, 1998 and 1997 was $14.01, $0.08 and $0.03 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the vesting period.
Employee Stock Purchase Plan
In February 1999, the Company adopted the 1999 Employee Stock Purchase Plan.
A total of 600,000 shares of common stock has been reserved for issuance under
the purchase plan. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. Under the purchase plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings
following the commencement of the purchase plan. The initial offering under the
purchase plan commenced on May 13, 1999 and terminates on July 31, 2000.
Unless otherwise determined by the Board, employees are eligible to
participate in the purchase plan only if they are employed by us or one of our
subsidiaries designated by the Board of Directors for at least 20 hours per week
and are customarily employed for at least five months per calendar year.
Employees who participate in an offering may have up to 10% of their earnings
withheld pursuant to the purchase plan. The amount withheld is then used to
purchase shares of common stock on specified dates determined by the Board of
Directors. The price of common stock purchased under the purchase plan will be
equal to 85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment.
F-16
<PAGE>
Warrants
In January 1997, the Company entered into an agreement with a corporate
partner, whereby the two companies exchanged certain technology and services.
In addition, the Company issued a warrant to such corporate partner to purchase
147,401 shares of Series B convertible preferred stock at a price of $3.39 per
share. The warrant is exercisable for four years following the date of
issuance. The estimated fair value of the warrant was $88,000, which has been
capitalized as an intangible asset and was amortized over the two-year term of
the agreement. The warrant is convertible into 442,202 shares of common stock.
Common Shares Reserved for Future Issuance
At December 31, 1999, common shares reserved for future issuance consist of
the following (in thousands):
Warrants 472
Shares reserved for future option exercises 10,756
------
11,228
======
8. Commitments
The Company leases its facilities under noncancelable operating leases
expiring in 2005. The leases contain renewal options and are subject to cost
increases. Rent expense totaled $1.6 million, $501,000 and $219,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum payments under the noncancelable operating leases and equipment
under capital leases consist of the following at December 31, 1999 (in
thousands):
Operating Capital
Leases Leases
------------ -------------
Year ending December 31,
2000 $ 2,668 $1,138
2001 2,522 1,124
2002 2,330 792
2003 2,259 820
2004 2,194 ----
Thereafter 1,306 ----
------- ------
Total minimum lease payments $13,279 3,874
======= (678)
Less amount representing interest ------
Total present value of minimum payments 3,196
Less current portion (865)
------
Non-current portion $2,331
======
During September 1997, the Company entered into a capital lease agreement,
which allows for the Company to borrow up to $1,750,000 to finance capital
expenditures. As of December 31, 1999, the Company had borrowed all of the
available funds under this agreement.
In conjunction with the capital lease agreement, the Company issued a warrant
to the lessor to purchase 14,737 shares of Series C convertible preferred stock
at a price of $4.75 per share all of which were exercised in 1999 and converted
into 40,000 shares of common stock. The estimated fair value of the warrant was
$25,000, which has been capitalized as debt issuance costs and is being
amortized over the life of the financing agreement.
F-17
<PAGE>
Equipment held under the capital leases totaled $4.1 million and $1.7 million
and the related accumulated amortization totaled $1.4 million and $559,000 at
December 31, 1999 and 1998, respectively. The obligations under the capital
leases are secured by the related equipment.
9. Income Taxes
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Current provision:
Federal $ ---- $ ----
State ---- ----
------- -------
Total current: ---- ----
Deferred provision:
Federal 822 ----
State 329 ----
------- -------
Total deferred: 1,151 ----
Benefit of net operating loss carryforwards (2,050)
Stock options - benefit to additional paid in capital 9,389 ----
------- -------
$ 8,490 $ ----
======= =======
</TABLE>
The following is a reconciliation from the expected statutory federal income
tax expense to the Company's actual income tax expense (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------
1999 1998
------------- --------------
<S> <C> <C>
Tax at U.S. statutory rate $7,237 $(3,616)
State income taxes, net of federal benefit 1,190 (620)
Net change in valuation allowance and other 63 4,236
------ -------
$8,490 $ ----
====== =======
</TABLE>
A valuation allowance of $13.3 million has been recorded at December 31, 1999
to offset the net deferred tax assets as realization is uncertain. Significant
components of the Company's deferred tax assets and liabilities as of December
31, 1999 and 1998 are shown below (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred tax liability:
Depreciation $ ---- $ (12)
Deferred tax assets:
Net operating loss carryforwards 5,562 5,757
Tax credit carryforwards 2,993 1,185
Accruals and reserves 1,957 351
Deferred compensation 1,747 ----
Inventory reserves 927 500
Other, net 153 ----
-------- -------
Total deferred tax assets 13,339 7,793
Valuation allowance (13,339) (7,793)
-------- -------
Net deferred tax assets $ ---- $ ----
======== =======
</TABLE>
F-18
<PAGE>
The Company had federal and California tax net operating loss carryforwards
at December 31, 1999 of approximately $14.5 million and $14.9 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2011 and 2004, respectively, unless previously utilized. Included in
the net operating loss carryforwards are stock option deductions of
approximately $5.0 million. The benefit of these net operating loss
carryforwards will be credited to equity when realized. The Company also has
federal and California research tax credit carryforwards of approximately $2.0
million and $1.5 million, respectively, which will begin to expire in 2011
unless previously utilized.
Pursuant to Internal Revenue Service Code Sections 382 and 383, use of the
Company's net operating loss and credit carryforwards are limited because of a
cumulative change in ownership of more than 50% which occurred in prior years.
However, the Company does not believe such limitations will have a material
impact on the Company's ability to use these carryforwards.
10. Employee Savings Plan
The Company has a 401(k) plan, which allows participating employees to
contribute up to 15% of their salary, subject to annual limits. The Company may,
at its sole discretion, approve Company contributions. The Company has approved
a match of 50% of the first 4% of salary deferred by employees during the year
ending December 31, 2000. The Board has not approved any previous matching
contributions.
11. Related Party Transactions
At December 31, 1999, the Company had a note receivable from an officer with
a face value of $1.0 million included in other assets. This note was issued in
connection with the officer's employment and relocation agreement. The note
bears no interest, is secured by the officer's residence and is due at the
earlier of March 30, 2003, or 15 days from the date the officer ceases to be an
employee of the Company.
12. Recent Events
In February 2000, the Company completed its acquisition of privately-held
OnPREM Networks Corporation ("OnPREM") of Fremont, California. OnPREM is a
developer of highly integrated DSL solutions for the small and medium building
Multi-Tenant Unit ("MTU") market. Under the terms of the agreement, Copper
Mountain acquired OnPREM in exchange for the issuance of approximately 1.3
million shares of Copper Mountain common stock and Copper Mountain stock
options. The acquisition was accounted for as a purchase transaction.
F-19
<PAGE>
Schedule II
COPPER MOUNTAIN NETWORKS, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
-----------
Balance at Charged to Balance at
Beginning Costs and End of
Allowance for Doubtful Accounts: of Year Expenses Deductions Year
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999.............. $ ------- 140,000 ------- $140,000
</TABLE>
NOTE: The Company had no activity in allowance for doubtful accounts prior
to 1999.
<TABLE>
<CAPTION>
Additions
----------
Balance at Charged to Balance at
Beginning Costs and End of
Inventory Reserves: of Year Expenses Deductions Year
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997.............. $ ------- 897,000 ------- $ 897,000
Year ended December 31, 1998.............. $ 897,000 504,000 229,000 $1,172,000
Year ended December 31, 1999.............. $1,172,000 750,000 1,094,000 $ 828,000
</TABLE>
<TABLE>
<CAPTION>
Additions
----------
Balance at Charged to Balance at
Beginning Costs and End of
Accrued Warranty: of Year Expenses Deductions Year
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997.............. $------- 2,000 ------- $ 2,000
Year ended December 31, 1998.............. $ 2,000 426,000 10,000 $ 418,000
Year ended December 31, 1999.............. $418,000 1,779,000 267,000 $1,930,000
</TABLE>
II-1
<PAGE>
EXHIBIT 10.36
*Confidential Treatment Requested
Under 17 C.F.R. (S)(S)200.80(b)(4),
200.83 and 240.24b-2
EQUIPMENT PURCHASE AGREEMENT
THIS EQUIPMENT PURCHASE AGREEMENT (the "Agreement") is entered into as
of December 10, 1999 (the "Effective Date"), by and between RHYTHMS LINKS, INC.,
a company duly organized and existing under the laws of the State of Delaware
("Customer"), and COPPER MOUNTAIN NETWORKS, INC., a company duly organized and
existing under the laws of the State of Delaware ("Copper Mountain").
RECITAL
WHEREAS, Copper Mountain desires to sell to Customer, and Customer
desires to purchase from Copper Mountain, a Digital Subscriber Line ("DSL")
networking system.
NOW, THEREFORE, Copper Mountain and Customer hereby agree as follows:
AGREEMENT
1. DEFINITIONS
"ACCEPTANCE" means Customer's final and irrevocable acceptance of the
Equipment in accordance with the terms of this Agreement.
"BLANKET PURCHASE ORDER" means the two non-cancelable Purchase Orders
issued prior to each calendar quarter by Customer as outlined in Exhibit B
attached hereto.
"DEFECTIVE" means the Equipment fails to operate substantially in
accordance with the specifications set forth in the documentation provided to
Customer under normal use and service.
"EQUIPMENT" means the Network Equipment and Subscriber Equipment being
purchased under this Agreement by Customer.
"FIRMWARE" has the meaning set forth in the Software License Agreement
between Copper Mountain and Customer entered into concurrently with the
execution of this Agreement (the "Software License Agreement").
"FORECAST" has the meaning set forth in Section 2.3.
"LINE CARDS" means the portion of the Network Equipment comprised of
the printed circuit board assemblies, which contain the line or port capacity of
the Network Equipment.
"MINIMUM VOLUME COMMITMENT" means the minimum volume commitment of
Equipment to be purchased by and delivered to Customer each quarter as set forth
on Exhibit B.
"NETWORK EQUIPMENT" means the infrastructure DSL networking equipment
(i.e., a high-performance, carrier-class platform) and related materials listed
in Exhibit A that will be used to implement the System.
1
<PAGE>
"PURCHASE ORDER" means a written purchase order submitted to Copper
Mountain by Customer setting forth the number of units of Network Equipment and
Subscriber Equipment to be purchased and the requested shipping date.
"PURCHASE PRICE" means the price of the Equipment to be paid by
Customer to Copper Mountain as set forth in Exhibit A, subject to the discount
set forth on Exhibit B.
"SPECIAL OR NON-STANDARD PARTS" means any component of the Equipment,
which is not contained within a standard product on the Price List.
"SUBSCRIBER EQUIPMENT" means the subscriber equipment that will be used
to connect subscribers within the System to the Network Equipment to provide
high-speed access to the Internet and other data services (e.g., CopperRockets).
"SYSTEM" means the Equipment and the System Software.
"SYSTEM SOFTWARE" means the Firmware furnished and licensed to Customer
under the Software License Agreement between Copper Mountain and Customer to be
executed concurrently with this Agreement.
"TERM" has the meaning set forth in Section 12.1.
"WARRANTY PERIOD" means [...***...] after shipment of the Equipment to
Customer and any extended warranty period associated with any additional
warranty coverage purchased by Customer from Copper Mountain with respect to the
Equipment.
2. PURCHASE OF EQUIPMENT
2.1 PURCHASE OF EQUIPMENT. In accordance with and subject to the
terms and conditions of this Agreement, Customer hereby orders and agrees
to purchase from Copper Mountain, and Copper Mountain hereby accepts and agrees
to sell to Customer, the Equipment. The System Software shall be licensed, not
sold, to Customer under the terms of the Software License Agreement.
Concurrently with the execution of this Agreement by the parties hereto, RLI
shall deliver to COPPER MOUNTAIN the form of guarantee set forth as Exhibit F
hereto, which shall be signed by a duly authorized officer or representative of
Rhythms NetConnections Inc.
2.2 [...***...] Customer acknowledges and agrees that, pursuant to
the terms hereof, Copper Mountain has [...***...] to Customer [...***...] for
the [...***...] upon [...***...] of the [...***...].
2.3 FORECASTS. On or before the 20th day of each month during the
Term, Customer shall submit a written forecast, or approve a forecast as
prepared mutually with Copper Mountain, to Copper Mountain (the "Forecast")
which shall set forth the estimated number of
* Confidential Treatment Requested
2
<PAGE>
units of Network Equipment to be purchased in each month during the twelve (12)
month period beginning with the month for which such Forecast is being delivered
(or such lesser period from the date of such forecast to the end of this
Agreement).
3. PURCHASE PRICE AND PAYMENT
3.1 PURCHASE PRICE. Customer shall pay to Copper Mountain the
Purchase Price for the Equipment as set forth on Exhibit A, less a discount as
set forth on Exhibit B. Both parties acknowledge that the Purchase Price shall
not include any maintenance or support above and beyond the warranty set forth
in Section 7.
3.2 PAYMENT SCHEDULE. Customer shall pay all invoices issued under
this Agreement within thirty (30) days from the date of invoice, and each
invoice shall be mailed by Copper Mountain to Customer within three (3) days of
the date of such invoice. Shipments, deliveries and performance of work will at
all times be subject to the approval of Copper Mountain. In the event that the
Customer has not met the payment schedule set forth in this Section 3.2, Copper
Mountain may at any time decline to make any shipments or deliveries or perform
any work except upon receipt of payment or upon terms and conditions or security
satisfactory to Copper Mountain. In no event shall Copper Mountain decline to
make any shipments or deliveries or perform any work, unless Copper Mountain has
notified Customer in writing of any overdue amounts and Customer has not paid
all overdue amounts to Copper Mountain within ten (10) days from the date of
such written notice.
3.3 TAXES. Customer shall pay any and all taxes (other than taxes
based upon Copper Mountain's net income, gross receipts, and/or personal
property), duties, assessments and other charges and expenses of any nature
whatsoever imposed by any government authority in connection with the delivery
of the Equipment to Customer or the payment of the Purchase Price.
3.4 LATE CHARGES; OFFSETS. Copper Mountain reserves the right to
charge Customer a late payment fee on any past due amounts at the rate of
[...***...] percent ([...***...]%) per month or the maximum amount permitted by
law, whichever is less.
4. ORDERS AND DELIVERY
4.1 PROCEDURE. Customer shall purchase Equipment from Copper Mountain
by submitting a Purchase Order to Copper Mountain.
4.2 ACCEPTANCE OF PURCHASE ORDERS. All Purchase Orders submitted by
Customer to Copper Mountain shall be subject to acceptance by Copper Mountain at
its offices in San Diego, California. Copper Mountain shall, within one (1)
business day of receipt of each Purchase Order, confirm receipt of such Purchase
Order with Customer by facsimile or electronic mail. Additionally, Copper
Mountain shall, within three (3) business days of receipt of each Purchase Order
provide the committed date of shipment for each such Purchase Order to customer
by facsimile or electronic mail. Purchase Orders shall not be binding on Copper
Mountain until such written confirmation has been given. In the event the
committed date of shipment is not acceptable to Customer, Customer will notify
Copper Mountain within one (1) business day after receipt of the proposed
shipment date to negotiate and determine a new shipment date agreeable
* Confidential Treatment Requested
3
<PAGE>
to both parties. In the event an acceptable shipment date cannot be determined
between both parties, the order may be unilaterally cancelled by Customer with
no penalties or charges being incurred.
4.3 CONTROLLING TERMS. All Equipment purchased by Customer from
Copper Mountain during the Term shall be subject to the terms and conditions of
this Agreement. Any terms or conditions appearing on the face or reverse side of
any Purchase Order, acknowledgment, or confirmation that are different from or
in addition to those required hereunder shall not be binding on the parties,
even if signed and returned, unless both parties hereto agree in a separate
writing to be bound by such different or additional terms and conditions.
4.4 CANCELLATION OR POSTPONEMENT BY COPPER MOUNTAIN. Copper Mountain
may cancel or postpone any Purchase Order placed with, and accepted by, Copper
Mountain if Customer fails to make any payment when due as provided in Section
3.2 or is in default as set forth in Section 12.2.
4.5 CANCELLATION BY CUSTOMER. Customer shall be allowed to cancel any
Purchase Order placed with, and accepted by, Copper Mountain if the cancellation
is received at least [...***...] days prior to the requested delivery date;
provided, however, that in the event of such cancellation Customer shall be
liable to Copper Mountain for payment of Copper Mountain's costs (cost plus
shipping and handling) for any Special or Non-Standard Parts purchased or which
Copper Mountain is obligated to purchase, such payment to be made to Copper
Mountain within [...***...] days after the date of such cancellation. In the
event of such cancellation involving Special or Non-Standard Parts, then Copper
Mountain shall deliver such Special or Non-Standard Parts to Customer.
4.6 POSTPONEMENT BY CUSTOMER. Customer shall be allowed to postpone
any Purchase Order placed with, and accepted by, Copper Mountain if the
postponement is received at least [...***...] days prior to the requested
delivery date; provided, however, that in no event shall any such postponement
delay shipment of the Equipment for more than [...***...] days from the
delivery date in the original Purchase Order. Additionally, in the event of such
postponement, Customer shall be liable to Copper Mountain for payment of Copper
Mountain's costs for any Special or Non-Standard Parts purchased or which Copper
Mountain is obligated to purchase, such payment to be made to Copper Mountain
within [...***...] days after the date of such postponement.
4.7 EQUIPMENT AVAILABILITY. Copper Mountain will use reasonable
efforts to fill all Purchase Orders within [...***...] days of the date such
Purchase Orders are accepted by Copper Mountain. If Equipment is not timely
shipped by Copper Mountain, Customer shall have the right to terminate any
Purchase Order without any liability to Copper Mountain and, in any event, on or
prior to the committed shipment date. Should Purchase Orders for Equipment
exceed Customer's current Forecast, Copper Mountain will allocate its available
inventory and make deliveries on a basis Copper Mountain deems equitable, in its
sole discretion, and without liability to Customer on account of the method of
allocation chosen or its implementation. However, Copper Mountain shall not be
liable to Customer or any third party for any damages due to Copper Mountain's
failure to fill any Purchase Order or for any delay in delivery or error
* Confidential Treatment Requested
4
<PAGE>
in filling any Purchase Order for any reason whatsoever, except to the extent
such damages result from the gross negligence or willful misconduct of Copper
Mountain.
4.8 DELIVERY. All Equipment delivered pursuant to the terms of this
Agreement shall be suitably packaged, marked for shipment and delivered by
common carrier of Copper Mountain's choice, FOB Copper Mountain's plant in San
Diego, California, or any other plant or warehouse designated by Copper
Mountain.
4.9 TITLE; RISK OF LOSS; SHIPPING COSTS. Title to (exclusive of the
rights retained under the Agreement in the Firmware, patents, copyrights, trade
secrets and intellectual property) and all risk of loss or damage for any
Equipment purchased hereunder shall pass to Customer upon delivery of such
Equipment by Copper Mountain to a common carrier for shipment to Customer as set
forth in Section 4.8 hereof. All freight, handling, insurance, duties, taxes and
shipping expense shall be borne by Customer.
5. ACCEPTANCE
The Equipment shipped to Customer under any Purchase Order shall be
deemed accepted by Customer unless a written notice of defect is received by
Copper Mountain within thirty (30) days following receipt of the Equipment by
Customer. Under no circumstances shall acceptance or lack thereof affect the
warranties set forth in Section 7. For Equipment that has been initially
accepted by Customer but not placed into service within such thirty-day period,
Customer will notify Copper Mountain immediately if the Equipment is found to be
Defective, and Customer shall have the right to return such Equipment that is
Defective to Copper Mountain using the customary RMA/DOA process used by the
parties.
6. DOCUMENTATION
On or before delivery of the Equipment to which such documentation
applies, Copper Mountain shall provide to Customer, at no additional charge, the
documentation for such Equipment. Customer shall use and reproduce such
documentation solely for the purpose of operating and maintaining the System.
Copper Mountain shall supply Customer with additional quantities of
documentation as Customer shall reasonably request from time to time.
7. WARRANTIES
(a) NETWORK EQUIPMENT LIMITED WARRANTY. During the applicable Warranty
Period for Network Equipment, Copper Mountain warrants to Customer that the
Network Equipment shall be free from material defects in workmanship and
materials under normal use and service and shall operate substantially in
accordance with the specifications set forth in the documentation provided to
Customer. This warranty does not apply to any item of Network Equipment that (a)
has been altered, modified, or improperly repaired by someone other than a
representative of Copper Mountain; (b) has been the subject of misuse,
negligence, accident, or improper storage or installation; or (c) has been used
or maintained in any manner other than in accordance with documentation provided
by Copper Mountain. Any installation of Upgrades by Customer in accordance with
the Software License Agreement (and any
5
<PAGE>
instructions set forth therein) shall not result in any termination of, or
adversely affect, any warranties by Copper Mountain relating to the Equipment.
(b) YEAR 2000 COMPLIANCE. Copper Mountain represents that the Equipment
is "Year 2000 Compliant," meaning that, as delivered to Customer:
A. The Equipment accurately processes data and time calculations
before and during the years 1999, 2000 and 2001;
B. All manipulation of time-related data yields the desired
results for valid date values within the application domain;
C. Date elements in the Equipment use four digit storage and
indicate century to eliminate the chance for errors;
D. If a date element exists without a century indication, the
correct century continues to be unambiguous and produces
accurate results; and
E. Firmware accurately processes date and time data when used in
conjunction with other Year 2000 compliant software Equipment.
Should any Equipment that is so identified as "Year 2000 Compliant" not be Year
2000 Compliant or should Copper Mountain otherwise breach the foregoing
representation, Copper Mountain shall, as Customer's sole and exclusive remedy,
repair or replace the Equipment so that it becomes Year 2000 Complaint or, if
Copper Mountain is unable to repair or replace the Equipment to make it Year
2000 Compliant, Copper Mountain will refund the purchase price of the Equipment
paid to Copper Mountain by Customer, provided that Customer returns the
Equipment to Copper Mountain as originally delivered by Copper Mountain (except
for normal wear and tear) and pursuant to Copper Mountain's then-current RMA
policy. The foregoing representation and remedy shall only apply to Equipment
returned prior to [...***...], or to Equipment returned before the Equipment is
no longer supported pursuant to Copper Mountain's standard support policies,
whichever event first occurs. In the event Customer believes a failure has
occurred due to the Equipment's failure to conform to this Year 2000 warranty,
Customer shall notify Copper Mountain and Copper Mountain shall, as soon as
practical after such notification, confirm if the Equipment is non-compliant and
begin appropriate corrective actions which shall be diligently pursued and
promptly accomplished by Copper Mountain at no additional cost to Customer.
7.2 WARRANTY CLAIMS FOR NETWORK EQUIPMENT. Before submitting any
warranty claim to Copper Mountain, Customer shall perform first echelon
diagnosis (including identification and isolation of Network Equipment problems
to the board level and removal and replacement of hardware, firmware and
software). Copper Mountain shall provide Customer with reasonably requested aid
in performing such diagnosis. At Copper Mountain's request, Customer shall
return allegedly Defective Network Equipment to Copper Mountain at Customer's
expense; if such Network Equipment is determined by Copper Mountain to be
Defective, Copper Mountain shall reimburse Customer within thirty (30) days
following receipt
* Confidential Treatment Requested
6
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of such Network Equipment for the expenses of shipping such Network Equipment to
Copper Mountain. If Copper Mountain does not request Customer to return
Defective Network Equipment to Copper Mountain, Copper Mountain shall repair or
replace such Network Equipment, in accordance with Section 7.3.
7.3 EXCLUSIVE REMEDIES FOR NETWORK EQUIPMENT. If, during the
applicable Warranty Period, Customer reports in writing a claim that any Network
Equipment is Defective in breach of the warranty in Section 7.1, Copper Mountain
shall, as Customer's sole and exclusive remedy for breach of this limited
warranty and at Copper Mountain's option, either (a) repair or replace the
Defective Network Equipment, or (b) if Copper Mountain determines that it cannot
repair or replace such Network Equipment within [...***...] days following
receipt of Customer's warranty claim, Copper Mountain shall refund to Customer
that portion of the Purchase Price attributable to such Network Equipment.
Within seven business days after receipt of such warranty claim, Copper Mountain
shall communicate its decision to take such action to Customer and shall bear
all travel, lodging and related out-of-pocket expenses for required on-site
repair and replacement of Defective Network Equipment covered by the warranty in
Section 7.1. Any Network Equipment which is repaired by Copper Mountain pursuant
to this Section 7.3 shall be warranted for the remainder of the applicable
Warranty Period as provided in Section 7.1; provided, however, that any System
subcomponents replaced by Copper Mountain hereunder shall be warranted for
[...***...] months after shipment of such System subcomponents to Customer.
7.4 LIMITED WARRANTY FOR SUBSCRIBER EQUIPMENT. The sole and exclusive
warranty for Subscriber Equipment is set forth in this Article 7 and in Exhibit
D hereto. All warranties provided herein with respect to Subscriber Equipment
shall be transferable to any purchaser of such Subscriber Equipment from
Customer, but in no event shall warranty on such Subscriber Equipment exceed
[...***...] months from shipment to Customer.
7.5 DISCLAIMER OF WARRANTIES.
(a) EXCEPT AS EXPRESSLY SET FORTH IN SECTION 7.1 AND EXHIBIT D,
COPPER MOUNTAIN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO ANY
EQUIPMENT PROVIDED BY COPPER MOUNTAIN UNDER THIS AGREEMENT, INCLUDING, BUT NOT
LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
(b) Customer acknowledges that it has not relied on any
representations or warranties regarding the Equipment other than those in
Section 7.1 and Exhibit D.
* Confidential Treatment Requested
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7.6 END-USER WARRANTIES. Subject to Section 9 hereof, Customer shall
indemnify, defend and hold harmless Copper Mountain for and against any end user
warranty claim offered by Customer that is outside the warranties of Copper
Mountain in this Agreement or concurrently delivered with the Equipment
(including, but not limited to, consumer warranty claims arising outside the
applicable Warranty Period).
8. INFRINGEMENT CLAIMS
8.1 INDEMNIFICATION. Subject to Sections 8.3 and 9, Copper Mountain
shall defend and indemnify at its own expense and shall hold Customer harmless
from any damages, losses, liabilities, costs and expenses (including reasonable
attorney fees and expenditures and court costs) incurred by Customer in
connection with any claim that Customer's authorized and proper use of any
Equipment infringes a patent, copyright, trademark, trade secret or other
intellectual property of any third party, and shall pay any damages finally
awarded in an action against Customer as a result of, or in connection with, any
such claim and any amounts agreed to in settlement of such a claim, provided
that Customer (a) promptly notifies Copper Mountain in writing of the claim, (b)
gives Copper Mountain the sole authority to control the defense and settlement
of the claim, and (c) cooperates and, at Copper Mountain's request and expense,
assists in the defense of the claim. Settlement of any such claim by Copper
Mountain shall include a complete and unconditional release in favor of
Customer.
8.2 MITIGATION. If any infringement claim covered by Section 8.1
arises or in Copper Mountain's opinion is likely to occur, Copper Mountain may,
at its option, (a) procure for Customer the right to use the infringing
Equipment, (b) replace the infringing Equipment with non-infringing substitute
equipment of equal grade, functionality and quality, or (c) refund to Customer
the Purchase Price paid for the infringing Equipment. If Customer continues to
use Equipment after (a) receiving notice of a claim or a ruling that Customer's
use of such Equipment infringes a third party's rights, and (b) Copper Mountain
shall have taken all steps to replace such equipment with non-infringing
Equipment in accordance with Section 8.2 hereof, and Customer shall have refused
to comply with such replacement program, Customer shall be responsible for any
liability resulting from such continued use of the Equipment after such offer of
replacement.
8.3 EXCLUSIONS. Copper Mountain shall have no liability to Customer
for any claim described in Section 8.1 if the claim is based on or arises from
Customer's (a) improper or unauthorized use or modification of the Equipment, or
(b) combination or use of the Equipment with equipment, software, data or other
items not furnished by Copper Mountain (or authorized by Copper Mountain in
writing for such combination or use), if the claim would not have arisen but for
the combination. Customer shall indemnify and hold Copper Mountain harmless for
and against any and all liability, damages, losses, costs and expenses
(including attorney's fees) arising from any claim described in this Section
8.3.
8.4 ENTIRE LIABILITY. Section 8 sets forth Customer's exclusive
remedy and Copper Mountain's entire liability of any infringement claim relating
to the Equipment.
8
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9. LIMITATION OF LIABILITY
9.1 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES OF ANY KIND,
INCLUDING, BUT NOT LIMITED TO, ANY LOST PROFITS, LOST SAVINGS, OR LOST DATA,
ARISING FROM OR RELATING TO THIS AGREEMENT, EVEN IF THE PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR CLAIMS FOR PERSONAL INJURY OR
PROPERTY DAMAGE AND/OR CLAIMS UNDER ARTICLE 8 HEREOF, THE TOTAL CUMULATIVE
LIABILITY OF EITHER PARTY TO THE OTHER PARTY FOR ANY CLAIMS OR CAUSES OF ACTION
ARISING FROM OR RELATING TO THIS AGREEMENT, COPPER MOUNTAIN'S DELIVERY OF THE
EQUIPMENT OR CUSTOMER'S USE OF THE EQUIPMENT (WHETHER IN CONTRACT, IN TORT OR
OTHERWISE) SHALL NOT EXCEED THE AGGREGATE AMOUNT PAID TO COPPER MOUNTAIN UNDER
THIS AGREEMENT.
9.2 Customer understands that Copper Mountain's pricing is predicated
on the limitations of Copper Mountain's liability set forth in Section 9.1 and
acknowledges that Copper Mountain would not enter into this Agreement without
such limitations.
10. CONFIDENTIALITY
The obligations of the parties with respect to "Confidential
Information" exchanged pursuant to this Agreement are as described in the Mutual
Non-Disclosure Agreement dated May __, 1999 between the parties attached hereto
as Exhibit E.
11. INTELLECTUAL PROPERTY RIGHTS
Except for the right to use the System contemplated by this Agreement,
the delivery of the Equipment to Customer (a) does not convey to Customer or any
third party any intellectual property rights in the Equipment or System Software
(including, but not limited to, any patent, trademark, trade secret or
copyright), and (b) does not grant to Customer or any third party any license
under any patents or patent applications of Copper Mountain. Customer shall not,
and shall not authorize any third party to, disassemble or analyze the physical
construction of any Equipment (or any component thereof) for any purpose.
Customer agrees not to remove or destroy any copyright, logo, trademark, trade
name, proprietary markings or confidentiality legends placed upon or contained
within the Equipment or System Software, its containers or any related materials
or documentation. Customer agrees to comply with all legends that appear on or
in the Equipment and/or System Software or related materials or documentation to
the extent consistent with this Agreement and the intended use and purpose of
the Equipment and System Software.
12. TERM AND TERMINATION
12.1 TERM. This Agreement shall commence on the Effective Date and
shall expire on [...***...], unless terminated earlier as provided herein (the
"Term").
* Confidential Treatment Requested
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12.2 TERMINATION FOR DEFAULT. Either party may terminate this
Agreement if the other party fails to perform any material obligation under this
Agreement and such failure is not cured within [...***...] days following
written notice of such failure to the defaulting party.
12.3 TERMINATION BY CUSTOMER. Customer may terminate this Agreement by
giving ninety (90) day written notice to Copper Mountain at Customer's sole
discretion.
12.4 EFFECTS OF TERMINATION. Upon termination of this Agreement for
any reason:
(a) for all Equipment for which Acceptance occurred before
termination, the full unpaid balance of the Purchase Price for such Equipment
shall become immediately due and payable so long as the termination did not
result from a default by Copper Mountain, and such Equipment has been received
by Customer and is not Defective;
(b) for all Equipment delivered to Customer before termination
for which Acceptance has not yet occurred, Customer may either (i) return such
Equipment (and related documentation) to Copper Mountain in its original
condition and at the expense of the defaulting party (in which case Customer
shall not be required to pay the unpaid balance of the Purchase Price for such
Equipment), or (ii) keep such Equipment and pay the unpaid balance of the
Purchase Price for such Equipment; and
(c) Copper Mountain shall have no further obligation to deliver
any Equipment to Customer other than Copper Mountain's satisfaction of its
warranty obligations under this Agreement and its obligation to replace
Defective or infringing Equipment.
12.5 SURVIVAL. The rights and obligations of the parties under
Sections 7.1 through 7.4 (solely for the duration of the applicable Warranty
Periods), 7.5, 7.6, 8, 9, 10, 11, 12.4, 12.5 and 16 shall survive termination of
this Agreement for any reason. Unless Copper Mountain terminates this Agreement
pursuant to Section 12.2, Section 13 shall also survive termination of this
Agreement for the time period specified therein.
13. SPARE PARTS
13.1 AVAILABILITY. Customer may purchase spare parts for the Equipment
from time to time upon the same terms and conditions as set forth in this
Agreement. Copper Mountain shall use its best efforts to make available spare
parts (or compatible substitutes for such spare parts) for the Network Equipment
(but not for third party components or equipment) for a period of five years
after the Effective Date. If Copper Mountain discontinues manufacturing the
Network Equipment before the end of such five-year period or discontinues
manufacturing Subscriber Equipment at any time, Copper Mountain shall notify
Customer at least six months in advance to permit Customer to procure a
sufficient stock of spare parts.
13.2 SUPPLY FOR REPAIRS. In the event that Customer requests that a
non-warranty service or repair be performed by Copper Mountain, Customer shall
be responsible for purchasing and maintaining an adequate supply of spare parts
as discussed in the Customer Technical Support Service Agreement (which has been
executed by the parties concurrently with this Agreement) in order to complete
non-warranty repairs in a timely fashion. If Customer fails
* Confidential Treatment Requested
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to maintain an adequate supply of spare parts, the time allowed for Copper
Mountain to complete non-warranty repairs shall be extended by the amount of
time needed for Copper Mountain to assemble and ship the necessary spare parts
to the location where the Network Equipment is installed and operated.
14. PRODUCT ADDITIONS
As Copper Mountain develops and offers for sale and licenses to its
customers additional or next generation Network Equipment products and
Subscriber Equipment products during the Term, Copper Mountain shall offer such
Network Equipment for sale and license to Customer under this Agreement. In such
case, the parties shall negotiate in good faith the pricing and other
appropriate terms and conditions relating specifically to such products in a
manner consistent with each party's obligations under this Agreement.
15. AUTHORITY
Each party represents and warrants to the other party that (a) such
party is duly organized, validly existing, and in good standing under the laws
of the place of its establishment or incorporation; (b) such party has taken all
action necessary to authorize it to enter into this Agreement and perform its
obligations under this Agreement; (c) this Agreement shall constitute the legal,
valid and binding obligations of such party; and (d) neither the execution of
this Agreement, nor the performance of such party's obligations hereunder, shall
conflict with, result in a breach of, or constitute a default under, any
provision of the Articles of Incorporation, business license, Bylaws or similar
organizational documents of such party, or of any law, rule, regulation,
authorization or approval of any government entity, or of any agreement to which
it is a party or by which it is bound.
16. GENERAL PROVISIONS
16.1 FORCE MAJEURE. Neither party shall be liable to the other party,
under this Agreement or otherwise, for any delay or lack of performance (other
than non-payment) resulting from an event of Force Majeure (as defined below).
If a Force Majeure event occurs, the party prevented from performing its
obligations under this Agreement shall inform the other party as soon as
possible and the time period for performance shall be extended by a period
equivalent to the delay caused by the Force Majeure event plus any additional
period reasonably necessary to allow the prevented party to resume performance
of its obligations. The prevented party shall inform the other party as soon as
possible after the Force Majeure event ends. If the Force Majeure event lasts
for more than [...***...] consecutive days after the initial notice of such
event, the parties shall attempt in good faith to solve the problem of further
performance of this Agreement through friendly consultation. If the parties
cannot solve the problem of further performance within an additional [...***...]
days, either party may terminate this Agreement without penalty. As used above,
an event of "Force Majeure" means any act of God, war, fire, typhoon, flood,
earthquake, natural disasters, governmental action, industrywide labor
disruptions, industrywide materials shortages, or any other event beyond the
reasonable control of the prevented party.
* Confidential Treatment Requested
11
<PAGE>
16.2 ASSIGNMENT. Neither party may assign this Agreement or any right
under this Agreement, nor delegate any obligation under this Agreement, without
the other party's prior written consent (which shall not be unreasonably
withheld), except that either party may, without the other party's consent, (a)
assign this entire Agreement in connection with a merger, reorganization, or
sale of all or substantially all of its assets to a third party; or (b)
subcontract portions of its obligations under this Agreement as long as the
assigning party remains responsible for such obligations. Any attempted
assignment or delegation in contravention of this Section 16.2 shall be void.
16.3 NON-WAIVER; SEVERABILITY. Any delay or failure by either party to
exercise any right or remedy under this Agreement shall not constitute a waiver
of such right or remedy thereafter or of any other right or remedy. If any
provision of this Agreement is determined to be unenforceable, the remaining
provisions shall remain in full force and effect.
16.4 NOTICES. All notices and other communications provided for
hereunder shall be in writing and shall be mailed by first-class, registered or
certified mail, postage paid, or delivered personally, by overnight delivery
service or by facsimile, computer mail or other electronic means, with
confirmation of receipt, addressed as follows:
If to Copper Mountain: Copper Mountain Networks, Inc.
10145 Pacific Heights Boulevard, Suite 100
San Diego, California 92121
Attn: John A. Creelman
Fax No: (619) 410-7281
If to Customer: Rhythms Links, Inc.
6933 S. Revere Parkway
Suite 200
Englewood, CO 80112
Attn: Tom Hartzell
Fax No: (303) 476-5701
Either party may by like notice specify or change an address to which
notices and communications shall thereafter be sent. Notices sent by facsimile,
computer mail or other electronic means shall be effective upon confirmation of
receipt, notices sent by mail or overnight delivery service shall be effective
upon receipt or upon refusal of delivery, and notices given personally shall be
effective when delivered or when delivery is refused.
16.5 PUBLICITY. Copper Mountain and Customer agree that neither party
shall originate any press release or other public announcement related to this
Agreement, written or oral, without the prior written consent of the other
party, except as required by law or a court order.
16.6 NONDISCLOSURE. Copper Mountain and Customer agree that either
party may disclose the existence of this Agreement, but neither party shall make
any disclosure relating to the terms of or performance under this Agreement to
any third party (other than their
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independent public accountants and attorneys) without the prior written consent
of the other party, except as required by law or a court order.
16.7 GOVERNING LAW AND VENUE. All matters arising in connection with
this Agreement or the enforcement or construction thereof shall be governed by
(without regard to conflict-of-laws provisions) and resolved in accordance with
the laws of the State of California. Copper Mountain and Customer each hereby
irrevocably (a) agrees that any suit, action or other legal proceeding arising
from or relating to this Agreement shall be brought in a court of competent
jurisdiction in San Francisco, California, which court shall have exclusive
jurisdiction over any controversy arising from or related to this Agreement; (b)
consents to the jurisdiction of such court in any such suit, action or
proceeding; and (c) waives any objection it may have to the laying of venue of
any such suit, action or proceeding in such court and waives any claim that any
such suit, action or proceeding has been brought in an inconvenient forum.
Service of process in any suit, action or proceeding may be made in any manner
permitted by law.
16.8 DISPUTE RESOLUTION. If any dispute arises between the parties
relating to the interpretation, breach or performance of this Agreement or the
grounds for the termination thereof, and the parties cannot resolve the dispute
within thirty (30) days of a written request by either party to the other party,
the parties agree to hold a meeting, attended by individuals with
decision-making authority regarding the dispute, to attempt in good faith to
negotiate a resolution of the dispute prior to pursuing other available
remedies. If, within sixty (60) days after such meeting, the parties have not
succeeded in negotiating a resolution of the dispute, such dispute shall be
submitted to final and binding arbitration under the then current commercial
rules and regulations of the American Arbitration Association (the "AAA")
relating to voluntary arbitrations. The arbitration shall be held in San
Francisco, California. The arbitration shall be conducted by one arbitrator, who
is knowledgeable in the subject matter at issue in the dispute and who will be
selected by mutual agreement of the parties or, failing such agreement, shall be
selected in accordance with AAA rules. Each party shall initially bear its own
costs and legal fees associated with such arbitration. The prevailing party in
any such arbitration shall be entitled to recover from the other party actual
attorneys' fees, costs and expenses incurred by the prevailing party in
connection with such arbitration. The decision of the arbitrator shall be final
and binding on the parties. The arbitrator shall prepare and deliver to the
parties a written, reasoned opinion conferring its decision. The arbitrator
shall have no power or authority to make any award that provides for punitive or
exemplary damages or other damages excluded by this Agreement, or that otherwise
departs from the plain meaning of this Agreement. Judgment on the award so
rendered may be entered in any court having competent jurisdiction thereof.
Notwithstanding the foregoing, Copper Mountain shall have the unequivocal right
to obtain timely injunctive from a court of law pursuant to Section 16.9.
16.9 INJUNCTIVE RELIEF. Both parties agree that unauthorized
duplication, distribution or disclosure of any Confidential Information received
by the other party will cause actual and material damage, and that such damages
are difficult to calculate. In addition, notwithstanding any of the provisions
of this Agreement, each party shall have the unequivocal right to obtain timely
injunctive relief to protect its intellectual property rights and/or other
Confidential Information.
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16.10 ATTORNEY'S FEES. The prevailing party in any litigation between
the parties relating to this Agreement shall be entitled to recover its
reasonable attorney's fees and court costs, in addition to any other relief it
may be awarded, from the other party.
16.11 CONSTRUCTION. The headings of sections and subsections of this
Agreement are for convenience only and shall not be construed to affect the
meaning of any provision of this Agreement. Any inconsistency between provisions
in this Agreement and the exhibits shall be resolved in favor of the main body
of this Agreement.
16.12 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which will be deemed an original and which together shall constitute one
and the same agreement.
16.13 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, together with
the exhibits attached hereto, constitutes the entire agreement between the
parties and supersedes all prior oral or written negotiations and agreements
between the parties with respect to the subject matter hereof. No modification,
variation or amendment of this Agreement shall be effective unless made in
writing and signed by the parties.
IN WITNESS WHEREOF, Copper Mountain and Customer have each caused this
Agreement to be executed by their duly authorized representatives.
COPPER MOUNTAIN NETWORKS, INC. RHYTHMS LINKS, INC.
/s/ Richard S. Gilbert By: /s/ Rand Kennedy
- -------------------------------- --------------------------------
Richard S. Gilbert Name: Rand Kennedy
Chief Executive Officer Title: SVP Networks
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EXHIBIT A
STANDARD COMMERCIAL PRICE LIST
Copper Mountain Networks
<TABLE>
<CAPTION>
Product Name and Description Version Part No List Price
================================================================= =========== ===================== ===============
<S> <C> <C> <C>
COPPER EDGE FAMILY
SYSTEMS
Copper Edge 150 System 1.0 800-010-10 $[...***...]
Chassis & Fan 1.0 810-001-10
SDSL Module-H (24 Port) 1.0 820-021-10
120VAC Power Module 1.0 810-010-10
Buffer Control Module 1.0 810-020-10
System Control Module/E 1.0 810-100-10
Documentation 1.0 155-100-10
Copper Edge 200 Basic System 2.0 200-010-10 $[...***...]
Chassis & Backplane 2.0 100-010-10
DC Power Module 2.0 100-510-10
Buffer Control Module 2.0 105-010-10
System Control Module 2.0 105-110-20
Alarm Module 2.0 100-130-10
Documentation 2.0 155-010-10
Copper Edge 200 CopperBay System 2.0 200-020-10 $[...***...]
Chassis & Backplane 2.0 100-010-10
DC Power Module 2.0 100-510-10
Buffer Control Module 2.0 105-010-10
CopperBay Control Module 2.0 105-120-10
Documentation (CD-ROM) 2.0 155-010-10
Alarm Module 2.0 100-130-10
CE150 SPARES (810)
Chassis & Fan for CE 150 1.0 810-001-10 $[...***...]
120 VAC Power Module for CE150 1.0 810-010-10 $[...***...]
Buffer Control Module for CE150 1.0 810-020-10 $[...***...]
System Control Module/E for CE150 - 200 1.0 810-100-10 $[...***...]
Fan Assembly for CE150 1.0 810-030-10 $[...***...]
CE150 OPTIONS (810)
Mount kit for 23" rack for CE150 1.0 810-220-10 $[...***...]
SDSL Module-H (24 port) 1.0 820-021-10 $[...***...]
CE150 System Software v1.0 1.0 811-001-00 $[...***...]
CE150 DOCUMENTATION (155)
CE150 Documentation (Spare Set) 1.0 155-100-10 $[...***...]
CE200 CHASSIS, POWER SUPPLIES (100)
Chassis & Backplan (+ fan tray & alarm panel) for CE 200 2.0 100-010-10 $[...***...]
Redundant DC Power Module for CE 200 2.0 100-510-10 $[...***...]
External AC Power Shelf and one Supply 2.0 100-610-10 $[...***...]
AC Power Supply for external shelf 2.0 100-611-10 $[...***...]
Alarm Panel for CE200 2.0 100-130-10 $[...***...]
Fan Assembly for CE200 2.0 100-020-14 $[...***...]
CE200 PROCESSOR, BUFFER (105)
System Control Module for CE 200 1.0 105-110-10 $[...***...]
System Control Module for CE 200-200/32 2.0 105-110-20 $[...***...]
</TABLE>
* Confidential Treatment Requested
<PAGE>
<TABLE>
<CAPTION>
Product Name and Description Version Part No List Price
================================================================= =========== ===================== ===============
<S> <C> <C> <C>
CopperBay Control Module for CE 200 1.0 105-120-10 $[...***...]
Buffer Control Module for CE 200 1.0 105-010-10 $[...***...]
CE200 SOFTWARE (111)
CE200 System Software v1.3 1.3 111-001-30 $[...***...]
CE200 System Software v1.4 1.4 111-001-40 $[...***...]
CE200 System Software v1.6 1.6 111-001-60 $[...***...]
CE200 System Software v2.0 2.0 111-002-00 $[...***...]
CE200 LINE CARDS / DSL MODULES (120)
SDSL 30x Module (24 port) 1.0 120-021-10 $[...***...]
IDSL Line Module (24 Port) 1.0 120-030-10 $[...***...]
CE200 WAN I/O (130)
V.35 WAN Module (2 port) 1.0 130-020-10 $[...***...]
HSSI WAN Module 1.0 130-030-10 $[...***...]
DS3 Frame Module 1.0 130-035-10 $[...***...]
DS3 ATM Module 1.0 130-040-10 $[...***...]
CE200 OTHER HARDWARE (140)
COPPERVIEW SOFTWARE (112)
CopperView Element Manager v1.3 1.3 112-301-13 $[...***...]
CopperView Element Manager v1.4 1.4 112-301-14 $[...***...]
CopperView Element Manager v1.6 1.6 112-301-16 $[...***...]
CopperView AMS v2.0 (1-9 nodes) 2.0 112-400-20 $[...***...]
CopperView AMS v2.0 (10-49 nodes) 2.0 112-400-20 $[...***...]
CopperView AMS v2.0 (50-149 nodes) 2.0 112-400-20 $[...***...]
CopperView AMS v2.0 (150-399 nodes) 2.0 112-400-20 $[...***...]
CopperView AMS v2.0 (400-999 nodes) 2.0 112-400-20 $[...***...]
CopperView AMS v2.0 (1000-2499 nodes) 2.0 112-400-20 $[...***...]
CV AMS node upgrade (1-9 to 10-49) 2.0 112-401-20 $[...***...]
CV AMS node upgrade (10-49 to 50-149) 2.0 112-401-20 $[...***...]
CV AMS node upgrade (50-149 to 150-399) 2.0 112-401-20 $[...***...]
CV AMS node upgrade (150-399 to 400-999) 2.0 112-401-20 $[...***...]
CV AMS node upgrade (400-999 to 1000-2499) 2.0 112-401-20 $[...***...]
CUSTOMER SERVICE (150)
DOCUMENTATION (155)
CE200 Documentation Set 1.0 155-010-10 $[...***...]
CopperView EMS documentation (hardcopy) 2.0 155-020-20 $[...***...]
DSL Troubleshooting Guide 1.0 155-030-10 $[...***...]
CABLES
DC Power Cable (10 feet) 1.0 160-010-10 $[...***...]
DSL Connector Cable (25 feet) 1.0 160-015-05 $[...***...]
DSL Connector Cable (10 feet) 1.0 160-015-10 $[...***...]
DSL Connector Cable (6 feet) 1.0 160-015-15 $[...***...]
DSL Connector Cable (3 feet) 1.0 160-015-20 $[...***...]
Ethernet Cable (10 feet) 1.0 160-020-10 $[...***...]
RS232 Craft Interface Cable (6 feet) 1.0 160-021-10 $[...***...]
V.35 Cable (25 feet) 1.0 160-030-10 $[...***...]
HSSI Cable (25 feet) 1.0 160-035-10 $[...***...]
OTHER (170)
CE200 Mount kit for 23" rack 1.0 170-010-10 $[...***...]
COPPERROCKET FAMILY
CopperRocket 201 SDSL 1.0 700-030-30 $[...***...]
CopperRocket 201 SDSL (RJ11-RJ45) 1.0 700-030-31 $[...***...]
CopperRocket 201 IDSL 1.0 700-050-10 $[...***...]
</TABLE>
* Confidential Treatment Requested
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CopperRocket 201 IDSL (RJ11-RJ45) 1.0 700-050-11 $[...***...]
CopperRocket 201 SDSL CCA Board 1.0 700-930-30 $[...***...]
CopperRocket 201 IDSL CCA Board 1.0 700-950-10 $[...***...]
</TABLE>
* Confidential Treatment Requested
<PAGE>
EXHIBIT B
[...***...]
[...***...]
Customer hereby agrees to [...***...] for [...***...] of [...***...] of the
[...***...] in the most [...***...] for the [...***...]. The [...***...] shall
relate [...***...] and shall [...***...].
[...***...]
In [...***...] for the [...***...] of the [...***...] by Customer, Copper
Mountain [...***...] to Customer a [...***...] of [...***...] on [...***...],
with the [...***...] for which [...***...].
* Confidential Treatment Requested
<PAGE>
EXHIBIT C
INITIAL FORECAST
<PAGE>
EXHIBIT D
SUBSCRIBER EQUIPMENT WARRANTY
1. LIMITED WARRANTY
During the applicable Warranty Period for Subscriber Equipment, Copper
Mountain warrants to Customer that the Subscriber Equipment (excluding
Pre-Production Units) shall be free from material defects in material and
workmanship. This warranty is not transferable to any third party, other than
any subsequent purchaser, owner, lessee or licensee of Subscriber Equipment
arising in the ordinary course of Customer's business (a "permitted
transferee").
2. WARRANTY CLAIMS
All Subscriber Equipment returned under warranty must be returned to
the designated Copper Mountain authorized repair facility (an "Authorized
Service Center").
3. EXCLUSIVE REMEDY
If Customer or any permitted transferee returns Defective Subscriber
Equipment to an Authorized Service Center within the applicable Warranty Period
and Copper Mountain reasonably determines that such Subscriber Equipment is in
fact Defective, Copper Mountain shall, within [...***...] days following receipt
of such Defective Subscriber Equipment, as Customer's sole and exclusive remedy
for breach of warranty and at Copper Mountain's option, either (a) repair the
Defective Subscriber Equipment, (b) replace the Defective Subscriber Equipment
with a new or a rebuilt unit, which may contain refurbished parts of similar
quality and functionality, or (c) if Copper Mountain determines that it is
unable to repair or replace the Defective Subscriber Equipment, refund the
purchase price for the Defective Subscriber Equipment. After the applicable
Warranty Period, Customer must pay all shipping, parts and labor charges. Copper
Mountain's warranty service does not include customer instruction or the cost of
installation, removal or reinstallation of Subscriber Equipment. Copper
Mountain's obligations hereunder shall be completed, and the repaired or
replaced Subscriber Equipment reshipped at Copper Mountain's sole expense to the
Customer or such permitted transferee, within [...***...] days after initial
receipt of the Defective Subscriber Equipment.
4. EXCLUSIONS
The warranty set forth above does not apply to: (a) Subscriber
Equipment that has been installed, repaired, maintained or modified other than
in compliance with the documentation furnished to Customer; (b) Subscriber
Equipment that has been subjected to misuse (including use in conjunction with
electrically or mechanically incompatible hardware), abuse, accident, physical
damage, abnormal operation, improper handling, neglect, exposure to fire, water
or excessive moisture or dampness or extreme changes in climate or temperature;
(c) cosmetic damage; (d) Subscriber Equipment on which warranty stickers or
serial numbers have been
* Confidential Treatment Requested
<PAGE>
removed, altered, or rendered illegible; (e) damage as a result of fire, flood,
acts of God or other acts which are not the fault of Copper Mountain and which
the Subscriber Equipment is not specified to tolerate, including damage caused
by mishandling, shipping and blown fuses; or (f) any Subscriber Equipment that
has been invaded, repaired, modified or altered by anyone other than Copper
Mountain or a Copper Mountain Authorized Service Center.
<PAGE>
EXHIBIT E
MUTUAL NON-DISCLOSURE AGREEMENT
<PAGE>
MUTUAL NON-DISCLOSURE AGREEMENT
THIS AGREEMENT governs the disclosure of information by and between Copper
Mountain Networks, Inc. and Rhythms NetConnections, Inc. as of May____ , 1999
(the "Effective Date").
1. As used herein, "Confidential Information" shall mean any and all technical
and non-technical information provided by either party to the other, including
but not limited to (a) patent and patent applications, (b) trade secrets, and
(c) proprietary information - ideas, samples, media, techniques, sketches,
drawings, works of authorship, models, inventions, know-how, processes,
apparatuses, equipment, algorithms, software programs, software source
documents, and formulae related to the current, future, and proposed products
and services of each of the parties, and including, without limitation, their
respective information concerning research, experimental work, development,
design details and specifications, engineering, financial information,
procurement requirements, purchasing, manufacturing, customer lists, investors,
employees, business and contractual relationships, business forecasts, sales and
merchandising, marketing plans and information the disclosing party provides
regarding third parties.
2. If the Confidential Information is embodied in tangible material (including
without limitation, software, hardware, drawings, graphs, charts, disks, tapes,
prototypes and samples), it shall be labeled as "Confidential" or bear a similar
legend. If the Confidential Information is disclosed orally or visually, it
shall be identified as such at the time of disclosure and be confirmed in a
writing to the receiving party within thirty (30) days of such disclosure,
referencing the place and date of oral or visual disclosure and the names of the
employees of the receiving party to whom such oral or visual disclosure was
made, and including therein a brief description of the Confidential Information
disclosed.
3. Each party agrees that at all times and notwithstanding any termination or
expiration of this Agreement it will hold in strict confidence and not disclose
to any third party Confidential Information of the other, except as approved in
writing by the other party to this Agreement, and will use the Confidential
Information for no purpose other than evaluating or pursuing a business
relationship with the other party to this Agreement. Each party shall only
permit access to Confidential Information of the other party to those of its
employees or authorized representatives having a need to know and who have
signed confidentiality agreements or are otherwise bound by confidentiality
obligations at least as restrictive as those contained herein.
4. Each party shall immediately notify the other upon discovery of any loss or
unauthorized disclosure of the Confidential Information of the other party.
5. Each party's obligations under this Agreement with respect to any portion of
the other party's Confidential Information shall terminate when the party to
whom Confidential Information was disclosed (the "Recipient") can document that:
(a) it was in the public domain at the time it was communicated to the Recipient
by the other party; (b) it entered the public domain subsequent to the time it
was communicated to the Recipient by the other party through no fault of the
Recipient; (c) it was in the Recipient's possession free of any obligation of
confidence at the time it was communicated to the Recipient by the other party;
(d) it was rightfully communicated to the Recipient free of any obligation of
confidence subsequent to the
1
<PAGE>
time it was communicated to the Recipient by the other party; (e) it was
developed by employees or agents of the Recipient independently of and without
reference to any information communicated to the Recipient by the other party;
(f) it was communicated by the other party to an unaffiliated third party free
of any obligation of confidence; (g) the communication was in response to a
valid order by a court or other governmental body, was otherwise required by
law, or was necessary to establish the rights of either party under this
Agreement; or (h) it was not legended as Confidential Information of the
disclosing party and if disclosed orally or visually, it was not identified as
Confidential Information of the disclosing party at the time of such
communication and followed by a writing within thirty (30) days of such
disclosure.
6. Upon termination or expiration of the Agreement, or upon written request of
the other party, each party shall promptly return to the other all documents and
other tangible materials representing the other's Confidential Information and
all copies thereof.
7. The parties recognize and agree that nothing contained in this Agreement
shall be construed as granting any property rights, by license or otherwise, to
any Confidential Information of the other party disclosed pursuant to this
Agreement, or to any invention or any patent, copyright, trademark, or other
intellectual property right that has issued or that may issue, based on such
Confidential Information. Neither party shall make, have made, use or sell for
any purpose any product or other item using, incorporating or derived from any
Confidential Information of the other party.
8. Confidential Information shall not be reproduced in any form except as
required to accomplish the intent of this Agreement. Any reproduction of any
Confidential Information of the other party by either party shall remain the
property of the disclosing party and shall contain any and all confidential or
proprietary notices or legends which appear on the original, unless otherwise
authorized in writing by the other party.
9. This Agreement shall terminate two (2) years after the Effective Date, or
may be terminated by either party at any time upon thirty (30) days written
notice to the other party. The Recipient's obligations under this Agreement
shall survive termination of the Agreement between the parties and shall be
binding upon the Recipient's heirs, successors and assigns. The Recipient's
obligations hereunder shall continue in full force and effect with respect to
non-technical sales, marketing, and financial Confidential Information for two
(2) years from the date of disclosure of such Confidential Information. The
Recipient's obligations with respect to all technical Confidential Information
shall be terminated only pursuant to Section 5.
10. This Agreement shall be governed by and construed in accordance with the
laws of California without reference to conflict of laws principles. Any
disputes under this Agreement may be brought in the state courts and the Federal
courts located in San Diego County, California, and the parties hereby consent
to the personal jurisdiction and venue of these courts. This Agreement may not
be amended except by a writing signed by both parties hereto.
11. Each party acknowledges that its breach of the Agreement will cause
irreparable damage and hereby agrees that the other party shall be entitled to
seek injunctive relief under this Agreement, as well as such further relief as
may be granted by a court of competent jurisdiction.
2
<PAGE>
12. If any provision of this Agreement is found by a proper authority to be
unenforceable or invalid such unenforceability or invalidity shall not render
this Agreement unenforceable or invalid as a whole and in such event, such
provision shall be changed and interpreted so as to best accomplish the
objectives of such unenforceable or invalid provision within the limits of
applicable law or applicable court decisions.
13. Neither party shall communicate any information to the other in violation
of the proprietary rights of any third party.
14. Neither party will assign or transfer any rights or obligations under this
Agreement without the prior written consent of the other party.
15. Neither party shall export, directly or indirectly, any technical data
acquired from the other pursuant to this Agreement or any product utilizing any
such data to any country for which the U.S. Government or any agency thereof at
the time of export requires an export license or other governmental approval
without first obtaining such license or approval.
16. All notices or reports permitted or required under this Agreement shall be
in writing and shall be delivered by personal delivery, electronic mail,
facsimile transmission or by certified or registered mail, return receipt
requested, and shall be deemed given upon personal delivery, five (5) days after
deposit in the mail, or upon acknowledgment of receipt of electronic
transmission. Notices shall be sent to the addresses set forth at the end of
this Agreement or such other address as either party may specify in writing.
17. Each of the parties agrees that the software programs of the other party
contain valuable confidential information and each party agrees it will not
modify, reverse engineer, decompile, create other works from, or disassemble any
software programs contained in the Confidential Information of the other party
without the prior written consent of the other party.
IN WITNESS WHEREOF, the parties hereto have caused this Mutual Non-Disclosure
Agreement to be executed as of the Effective Date.
COPPER MOUNTAIN NETWORKS, INC.
---------------------------------------
Company name
By: By:
---------------------------------- ------------------------------------
Name: Name:
-------------------------------- ----------------------------------
Title: Title:
------------------------------- ---------------------------------
Date: Date:
-------------------------------- ----------------------------------
Address: 3931 Sorrento Valley Blvd. Address:
---------------------------- ---------------------------------
San Diego, CA 92121
---------------------------- ---------------------------------
3
<PAGE>
EXHIBIT F
GUARANTY
Reference is made to the Equipment Purchase Agreement, dated as of
December , 1999, (the "Agreement") by and between Rhythms Links Inc., a Delaware
corporation ("RLI"), and Copper Mountain Networks, Inc., through its division
Copper Mountain Networks, a California corporation ("Copper Mountain").
The undersigned, Rhythms NetConnections Inc., a Delaware corporation
and the parent company of RLI, hereby guarantees the complete satisfaction of
(a) all monetary payments of RLI due to Copper Mountain under the Agreement in
accordance with the terms of, and subject to the terms and conditions set forth
in, the Agreement, and (b) any and all losses or damages of RLI arising under
the Agreement as a result of RLI's breach of any representations or warranties
in, or its failure to perform any of its obligations under, the provisions set
forth in the Agreement. The provisions of this Guaranty shall be solely for the
benefit of RLI and Copper Mountain and application for payment pursuant to this
Guaranty shall be made only after RLI shall have failed to make the applicable
payment required under the Agreement after the expiration of all applicable cure
periods specifically set forth in the Agreement relating to any such failure or
default. Nothing herein shall create or grant any right to any person or entity
(other than Copper Mountain) or impose any other duty or obligation upon the
undersigned except as expressly set forth herein.
This Guaranty is provided by the undersigned in satisfaction of the
delivery obligation of RLI set forth in Section 2.1 of the Agreement.
Dated: December 10, 1999
RHYTHMS NETCONNECTIONS INC.
By: /s/ Rand Kennedy
----------------------------------
Title: SVP Networks
-------------------------------
<PAGE>
EXHIBIT 10.37
SOFTWARE LICENSE AGREEMENT
THIS SOFTWARE LICENSE AGREEMENT (the "Agreement") is entered into as of
December 10, 1999 (the "Effective Date"), by and between Rhythms Links, Inc. a
company duly organized and existing under the laws of the State of Delaware
("Customer"), and COPPER MOUNTAIN NETWORKS, INC., a company duly organized and
existing under the laws of the State of Delaware ("Copper Mountain").
RECITALS
WHEREAS, concurrently with the execution of this Agreement, Customer
and Copper Mountain are entering into an Equipment Purchase Agreement (the
"Equipment Purchase Agreement") pursuant to which Customer is purchasing from
Copper Mountain a Digital Subscriber Line ("DSL") networking system and
subscriber equipment;
WHEREAS, the DSL networking Equipment and Subscriber Equipment contains
software in executable code; and
WHEREAS, Copper Mountain desires to furnish such software to Customer,
and Customer desires to receive such software from Copper Mountain, on the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, Copper Mountain and Customer agree as follows:
AGREEMENT
1. DEFINITIONS
All capitalized terms used but not otherwise defined in this Agreement
shall have the meanings given such terms in the Equipment Purchase Agreement.
"FIRMWARE" means the software in executable code contained in the
Equipment.
"NETWORK FIRMWARE" means the Firmware contained in the Network
Equipment.
"SUBSCRIBER FIRMWARE" means the Firmware contained in the Subscriber
Equipment.
"WARRANTY PERIOD" means the following: (a) for Network Firmware, the
same warranty period as for Network Equipment under the Equipment Purchase
Agreement; and (b) for Subscriber Firmware, the same warranty period as for
Subscriber Equipment under the Equipment Purchase Agreement.
2. DELIVERY OF SOFTWARE
Copper Mountain shall deliver to Customer one (1) copy of the Network
Firmware and Subscriber Firmware in machine-readable object code form with the
Network Equipment and Subscriber Equipment.
1.
<PAGE>
3. GRANT OF LICENSE
Subject to the terms and conditions of this Agreement, Copper Mountain
hereby grants to Customer, and its customers which use the Equipment, a
perpetual, non-exclusive, royalty-free, worldwide license, effective upon
Customer's acceptance of the Equipment containing such Firmware, to use the
Firmware solely in conjunction with the use of such Equipment for the duration
of the useful life of such Equipment.
4. RESTRICTIONS ON USE
All use of the Firmware not expressly permitted by this Agreement is
prohibited. Without limiting the generality of the foregoing:
4.1 COPYING. Customer may make up to two (2) copies of the Network
Firmware and the Subscriber Firmware solely for archival or back-up purposes.
All other copying is prohibited.
4.2 OTHER RESTRICTIONS. Customer may not (and shall not authorize any
third party to) alter, modify, adapt or translate any of the Firmware or create
any derivative work based thereon. Customer may not reverse engineer, decompile,
disassemble, or otherwise attempt to derive the human-readable source code for
the Firmware. Customer may not alter or remove any copyright, trade secret,
patent, proprietary, or other legal notice on or in copies of the Firmware.
4.3 TRANSFERS. Customer may not sublicense, rent, loan, lease, or
otherwise transfer to any third party any of the Firmware, except that the
Subscriber Firmware may be transferred to, and Customer's rights under this
Agreement to use the Subscriber Firmware may be assigned to a purchaser of the
Subscriber Equipment containing the Subscriber Firmware. Any attempted transfer
or assignment in violation of the foregoing shall be void, except as otherwise
provided in Section 15.1 of this Agreement.
5. NO LICENSE FEES
The right to use the Firmware is included in the purchase price of the
Equipment and there are no separate license fees or royalties for the Firmware.
6. UPGRADES
This Agreement does not require Copper Mountain to provide any software
support services to Customer or to provide Customer with any enhancements,
updates, upgrades, new versions, or new releases (collectively, "Upgrades") of
the Firmware. Software support services shall be provided under a separate
agreement. If Copper Mountain furnishes any Upgrades to Customer, whether under
a separate agreement or otherwise, and Customer elects to receive such upgrades,
Customer shall promptly install (or permit Copper Mountain to install) and begin
using the Upgrade, and Customer's use of the Upgrade shall be subject to the
terms and conditions of this Agreement. Copper Mountain agrees to assist in
Customer's testing of new software releases and Upgrades when requested by
Customer, and Customer's decision to implement new software releases or Upgrades
will be based upon the successful completion of those tests. For support
purposes, the "current" software release is defined as the last software release
not known
2.
<PAGE>
to contain any problems, errors or bugs. Copper Mountain also agrees that
Customer may elect to use the current software release or Upgrade, or one of the
two previous software releases or Upgrades not known to contain problems, errors
or bugs, and that Copper Mountain will support those releases and Upgrades. Any
installation of Upgrades by Customer in accordance with procedures and
instructions provided by Copper Mountain shall not result in any termination of,
or adversely affect, any warranties by Copper Mountain relating to the
Equipment.
7. REPRESENTATIONS AND WARRANTIES
7.1 REPRESENTATIONS. Copper Mountain represents that the Firmware and
all documentation related thereto does not infringe upon any copyright, patent,
trademark, services mark, trade name, trade secret, or other proprietary right
of any third party. Copper Mountain represents that, to the best of its
knowledge, it has the necessary rights and licenses required to grant Customer
the right to purchase the Equipment and license the Firmware as provided under
this Agreement.
7.2. LIMITED WARRANTY. During the applicable Warranty Period, Copper
Mountain warrants that the Firmware shall be free from programming errors that
impair the proper and intended performance and operation of the Equipment
containing such Firmware, and that all Equipment when using such Firmware and/or
Upgrades shall be Year 2000 Compliant (as provided in the Equipment Purchase
Agreement). All warranties provided herein with respect to Subscriber Firmware
shall be transferable to any permitted transferee of the Subscriber Equipment
containing such Firmware, but in no event shall the warranty on such Subscriber
Firmware exceed the Warranty Period applicable to the related Subscriber
Equipment as provided in the Equipment Purchase Agreement.
7.2 LIMITATIONS. The warranty in Section 7.2 does not apply to
Firmware that has been altered, modified, or improperly installed by anyone
other than Copper Mountain, (except Firmware or Upgrades installed in accordance
with the documentation provided by Copper Mountain). The warranty in Section 7.2
may not be transferred to any subsequent purchaser of the Equipment or any other
third party except by a subsequent purchaser from Customer in its ordinary
course of business, except as otherwise provided in Section 15.1 of this
Agreement.
7.3 REMEDIES. If, during the applicable Warranty Period, Customer
reports a malfunction in any Equipment containing Firmware and returns such
Equipment to the designated Copper Mountain facility, and Copper Mountain
determines that the malfunction is covered by the warranty in Section 7.2
(subject to the limitations in Section 7.3), Copper Mountain shall, as
Customer's sole and exclusive remedy for breach of these warranties and at
Copper Mountain's cost and option, either (a) correct the programming errors in
the Firmware, (b) furnish replacement Equipment with equivalent grade,
functionality and quality to Customer, or (c) if Copper Mountain determines that
(a) and (b) are not feasible, refund the purchase price paid for the Equipment
containing the defective Firmware. This action will be accomplished in a
3.
<PAGE>
commercially reasonable timeframe, and in no circumstances shall Copper Mountain
be obligated to procure substitute equipment for Customer.
7.4 DISCLAIMERS.
(a) EXCEPT AS EXPRESSLY SET FORTH IN SECTION 7.2, COPPER
MOUNTAIN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE FIRMWARE,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
(b) Customer acknowledges that it has not relied on any
representations or warranties other than those in Section 7.2 or in any
documentation accompanying the Equipment.
8. INFRINGEMENT CLAIMS
8.1 INDEMNIFICATION. Subject to Section 8.3 below, Copper Mountain
agrees to defend, indemnify and hold harmless Customer, its officers, directors,
employees, agents and representatives from and against all claims, demands,
losses, damages, liabilities, costs and expenses (including reasonable
attorney's fees) arising out of or relating to any claim, demand or judgment
that the authorized and proper use of the Firmware or the contents of any
documentation related thereto infringe any patent, copyright, trademark, service
mark, trade secret or other proprietary right of a third party; provided,
however, that Customer (a) promptly notifies Copper Mountain in writing of the
claim, (b) gives Copper Mountain the sole authority to control the defense and
settlement of the claim, and (c) cooperates and, at Copper Mountain's request
and expense, assists in the defense of the claim. Settlement of any such claim
by Copper Mountain shall include a complete and unconditional release in favor
of Customer.
8.2 MITIGATION. If any infringement claim covered by Section 8.1
arises or in Copper Mountain's opinion is likely to occur, Copper Mountain shall
immediately, at its option, (a) procure for Customer the right to use the
infringing Firmware, (b) replace the infringing Firmware with a non-infringing
substitute product that does not adversely affect the functionality of the
Equipment, or (c) refund to Customer the purchase price of the Equipment
containing the infringing Firmware. If Customer continues to use Firmware after
receiving notice of a claim or a ruling that Customer's use of such Firmware
infringes a third party's rights and after Customer shall have refused to comply
with Copper Mountain's proposed solution to such infringement in accordance with
this Section 8.2, Customer shall be responsible for any liability resulting from
such continued use after such refusal.
8.3 EXCLUSIONS. Copper Mountain shall have no liability for any claim
described in Section 8.1 if the claim is based on or arises from Customer's (a)
improper or unauthorized use or modification of any Firmware; (b) use of a
superseded or altered release of any Firmware if the claim would have been
avoided by use of current or unaltered versions or releases of such Equipment
that Copper Mountain provided to Customer; or (c) combination or use of any
Firmware with equipment, computer programs, data or other items not furnished by
Copper Mountain (or authorized by Copper Mountain in writing for such
combination or use), if the claim would have been avoided by use of the Firmware
without such equipment, computer
4.
<PAGE>
programs, data or other items. Customer shall indemnify and hold Copper Mountain
harmless for and against any and all liability, damages, losses, costs and
expenses (including attorney's fees) arising from any claim described in this
Section 8.3.
8.4 ENTIRE LIABILITY. Section 8 states Customer's exclusive remedy
and Copper Mountain's entire liability of any infringement claim relating to the
Firmware.
9. LIMITATION OF LIABILITY
9.1 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES OF ANY KIND,
INCLUDING, BUT NOT LIMITED TO, ANY LOST PROFITS, LOST SAVINGS, OR LOST DATA,
ARISING FROM OR RELATING TO THIS AGREEMENT, EVEN IF THE PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR CLAIMS UNDER ARTICLE 8 HEREOF,
THE TOTAL CUMULATIVE LIABILITY OF EITHER PARTY TO THE OTHER PARTY FOR ANY CLAIMS
OR CAUSES OF ACTION ARISING UNDER OR RELATING TO THIS AGREEMENT OR THE EQUIPMENT
CONTAINING FIRMWARE (WHETHER IN CONTRACT, IN TORT OR OTHERWISE) SHALL NOT EXCEED
THE AGGREGATE AMOUNT PAID BY CUSTOMER TO COPPER MOUNTAIN FOR THE EQUIPMENT.
9.2 Customer understands that Copper Mountain's pricing is predicated
on the limitations of Copper Mountain's liability set forth in Section 9.1 and
acknowledges that Copper Mountain would not enter into this Agreement without
such limitations.
10. CONFIDENTIALITY INFORMATION
Customer acknowledges that all technical documentation and information
delivered to Customer by Copper Mountain under this Agreement, and all other
information relating to the design, development, configuration, use,
installation, operation and maintenance of the System, constitute confidential
or proprietary information of Copper Mountain (collectively, "Confidential
Information"). Customer shall not duplicate or disclose to any third person, and
shall not use for any purpose other than operation and maintenance of the
System, any Confidential Information without the prior written consent of a duly
authorized officer of Copper Mountain or unless required pursuant to any
process, proceeding or other action by any governmental, law enforcement agency
or judicial authority. The foregoing restrictions shall not apply to any
Confidential Information that Customer can demonstrate: (a) was or is wholly and
independently developed by Customer or lawfully received by Customer free of
restriction from another source having the rights to furnish such Confidential
Information; (b) has become generally available to the public without breach of
this Agreement; or (c) at the time of disclosure to Customer was known to
Customer free of restriction, as evidenced by documentation in Customer's
possession.
5.
<PAGE>
11. INTELLECTUAL PROPERTY RIGHTS
This Agreement confers upon Customer only certain limited rights to use
the Firmware. Except for such rights, Copper Mountain retains all rights, title
and interest in and to the Firmware and any and all maintenance releases,
enhancements, updates, upgrades, new versions, or new releases, modifications,
and derivative works, including, but not limited to, any patent, trademark,
trade secrets, copyright and any other intellectual property or proprietary
rights related thereto.
12. TAXES
Copper Mountain shall pay all taxes, export duties, and other charges
and expenses imposed by any government authority within the United States in
connection with the delivery of the Firmware to Customer.
13. TERM AND TERMINATION
13.1 TERM. This Agreement shall become effective as of the Effective
Date and shall remain in effect until and unless terminated as set forth below.
13.2 TERMINATION. Customer may terminate this Agreement with or
without cause at any time, effective immediately upon notice to Copper Mountain.
Copper Mountain may terminate this Agreement, effective immediately upon notice
to Customer, if Customer breaches Section 4, or if Customer breaches any
material obligation under this Agreement and fails to cure the breach within
forty-five (45) days after Copper Mountain gives Customer written notice of the
breach.
13.3 EFFECTS OF TERMINATION. Upon termination of this Agreement for
any reason, all license rights granted to Customer in this Agreement shall
expire immediately (except for Equipment and Firmware with respect to Equipment
already purchased by Customer, for which the rights granted hereunder shall
continue), and Customer must return all copies of the Firmware not already
installed in Equipment owned by Customer or permitted transferees to Copper
Mountain promptly after any such termination, and Customer shall only retain one
copy of Firmware not loaded in Equipment previously.
13.4 SURVIVAL. The rights and obligations of the parties under
Sections 4, 7.2 through 7.4 (solely for the duration of the applicable Warranty
Period), 7.5, 8, 9, 10, 11, 12, 13.3, 13.4 and 15 shall survive termination of
this Agreement for any reason.
14. AUTHORITY
Each party hereby represents and warrants to the other party that (a)
such party is duly organized, validly existing and in good standing under the
laws of the place of its establishment or incorporation; (b) such party has
taken all action necessary to authorize it to enter into this Agreement and
perform its obligations under this Agreement; (c) this Agreement shall
constitute the legal, valid and binding obligations of such party; and (d)
neither the execution of this Agreement, nor the performance of such party's
obligations hereunder, shall conflict with, result
6.
<PAGE>
in a breach of, or constitute a default under, any provision of the Articles of
Incorporation, business license, Bylaws or similar organizational documents of
such party, or of any law, rule, regulation, authorization or approval of any
government entity, or of any agreement to which it is a party or by which it is
bound.
15. GENERAL PROVISIONS
15.1 ASSIGNMENT. Subject to Section 4.3, neither party may assign this
Agreement or any right or interest under this Agreement, nor delegate any
obligation to be performed under this Agreement, without the other party's prior
written consent (which shall not be unreasonably withheld), except that either
party may, with or without the other party's consent, (a) assign this entire
Agreement in connection with a merger, reorganization, or sale of all or
substantially all of its assets to a third party; (b) assign part or all of this
Agreement to one or more of its affiliates; and (c) subcontract portions of its
obligations under this Agreement as long as the assigning party remains
responsible for such obligations. Any attempted assignment in contravention of
this Section 15.1 shall be void.
15.2 NON-WAIVER; SEVERABILITY. Any delay or failure by either party to
exercise any right or remedy under this Agreement shall not constitute a waiver
of such right or remedy thereafter or of any other right or remedy. If any
provision of this Agreement is determined to be unenforceable, the remaining
provisions shall remain in full force and effect.
15.3 NOTICES. All notices and other communications provided for
hereunder shall be in writing and shall be mailed by first-class, registered or
certified mail, postage paid, or delivered personally, by overnight delivery
service or by facsimile, computer mail or other electronic means, with
confirmation of receipt, addressed as follows:
If to Copper Mountain: Copper Mountain Networks, Inc.
10145 Pacific Heights Boulevard, Suite 100
San Diego, California 92121
Attn: John A. Creelman
Fax No: (619) 410-7281
If to Customer: Rhythms Links, Inc.
6933 S. Revere Parkway
Suite 200
Englewood Colo. 80112
Attn: Tom Hartzell
Fax No: (303) 476-5701
Either party may by like notice specify or change an address to which
notices and communications shall thereafter be sent. Notices sent by facsimile,
computer mail or other electronic means shall be effective upon confirmation of
receipt, notices sent by mail or overnight delivery service shall be effective
upon receipt or when delivery is refused, and notices given personally shall be
effective when delivered or when delivery is refused.
7.
<PAGE>
15.4 PUBLICITY. Copper Mountain and Customer agree that neither party
shall originate any press release or other public announcement related to this
Agreement, written or oral, without the prior written consent of the other
party, except as required by law or a court order.
15.5 NONDISCLOSURE. Copper Mountain and Customer agree that either
party may disclose the existence of this Agreement, but neither party shall make
any disclosure relating to the terms of or performance under this Agreement to
any third party (other than their accountants and attorneys) without the prior
written consent of the other party, except as required by law or a court order.
15.6 GOVERNING LAW AND VENUE. All matters arising in connection with
this Agreement or the enforcement or construction thereof shall be governed by
(without regard to conflict-of-laws provisions) and resolved in accordance with
the laws of the State of California. Copper Mountain and Customer each hereby
irrevocably (a) agrees that any suit, action or other legal proceeding arising
from or relating to this Agreement shall be brought in a court of competent
jurisdiction in San Francisco, California, which court shall have exclusive
jurisdiction over any controversy arising from or related to this Agreement, (b)
consents to the jurisdiction of such court in any such suit, action or
proceeding, and (c) waives any objection it may have to the laying of venue of
any such suit, action or proceeding in such court and waives any claim that any
such suit, action or proceeding has been brought in an inconvenient forum.
Service of process in any suit, action or proceeding may be made in any manner
permitted by law.
15.7 ATTORNEY'S FEES. The prevailing party in any litigation between
the parties relating to this Agreement shall be entitled to recover its
reasonable attorney's fees and court costs, in addition to any other relief it
may be awarded, from the non-prevailing party.
15.8 CONSTRUCTION. The headings of sections and subsections of this
Agreement are for convenience only and shall not be construed to affect the
meaning of any provision of this Agreement.
15.9 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original and which together shall be one and
the same agreement.
15.10 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, together with
the exhibits attached hereto, constitutes the entire agreement between the
parties and supersedes all prior oral or written negotiations and agreements
between the parties with respect to the subject matter hereof. No modification,
variation or amendment of this Agreement shall be effective unless made in
writing and signed by the parties. Any additional or different terms stated in
any purchase order or other document delivered to Copper Mountain by Customer in
connection with this Agreement shall have no effect.
15.11 DISPUTE RESOLUTION. If any dispute arises between the parties
relating to the interpretation, breach or performance of this Agreement or the
grounds for the termination thereof, and the parties cannot resolve the dispute
within thirty (30) days of a written request by either party to the other party,
the parties agree to hold a meeting, attended by individuals with
8.
<PAGE>
decision-making authority regarding the dispute, to attempt in good faith to
negotiate a resolution of the dispute prior to pursuing other available
remedies. If, within sixty (60) days after such meeting, the parties have not
succeeded in negotiating a resolution of the dispute, such dispute shall be
submitted to final and binding arbitration under the then current commercial
rules and regulations of the American Arbitration Association (the "AAA")
relating to voluntary arbitrations. The arbitration shall be held in San
Francisco, California. The arbitration shall be conducted by one arbitrator, who
is knowledgeable in the subject matter at issue in the dispute and who will be
selected by mutual agreement of the parties or, failing such agreement, shall be
selected in accordance with AAA rules. Each party shall initially bear its own
costs and legal fees associated with such arbitration. The prevailing party in
any such arbitration shall be entitled to recover from the other party actual
attorneys' fees, costs and expenses incurred by the prevailing party in
connection with such arbitration. The decision of the arbitrator shall be final
and binding on the parties. The arbitrator shall prepare and deliver to the
parties a written, reasoned opinion conferring its decision. The arbitrator
shall have no power or authority to make any award that provides for punitive or
exemplary damages or other damages excluded by this Agreement, or that otherwise
departs from the plain meaning of this Agreement. Judgment on the award so
rendered may be entered in any court having competent jurisdiction thereof.
Notwithstanding the foregoing, Copper Mountain shall have the unequivocal right
to obtain timely injunctive from a court of law pursuant to Section 15.11.
9.
<PAGE>
IN WITNESS WHEREOF, Copper Mountain and Customer have caused this
Agreement to be executed by their duly authorized representative.
COPPER MOUNTAIN NETWORKS, INC. RHYTHMS LINKS, INC.
By: /s/ Richard S. Gilbert By: /s/ Rand Kennedy
---------------------------- ----------------------------
Name: Richard S. Gilbert Name: Rand Kennedy
---------------------------- ----------------------------
Title: President and CEO Title: SVP Networks
---------------------------- ----------------------------
10.
<PAGE>
EXHIBIT 10.38
*Confidential Treatment Requested
Under 17 C.F.R. (S)(S)200.80(b)(4),
200.83 and 240.24b-2
CUSTOMER TECHNICAL SUPPORT SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") is entered into as of
December 10, 1999 (the "Effective Date"), by and between Rhythms Links Inc., a
company duly organized and existing under the laws of the State of Delaware
("Customer"), and COPPER MOUNTAIN NETWORKS, INC., a company duly organized and
existing under the laws of the State of Delaware ("Copper Mountain").
RECITALS
WHEREAS, concurrent with the execution of this Agreement, Customer and
Copper Mountain are entering into an Equipment Purchase Agreement (the "Purchase
Agreement") pursuant to which Customer is purchasing from Copper Mountain, among
other things, Digital Subscriber Line ("DSL") networking system equipment and
subscriber equipment (collectively, the "Equipment"); and
WHEREAS, Customer desires that Copper Mountain perform certain services
(the "Services") related to the implementation and operation of the Equipment,
for the fees and Level of Service set forth in Exhibit A and on the terms and
conditions in this Agreement.
NOW, THEREFORE, Copper Mountain and Customer agree as follows:
AGREEMENT
1. DEFINITIONS
All capitalized terms used but not otherwise defined in this Agreement
shall have the meanings given such terms in the Purchase Agreement.
2. SERVICES
2.1 PURPOSE OF THE AGREEMENT. This Agreement sets forth the terms and
conditions under which Services described in Exhibits A, B, C, D, F, G and H
shall be governed for all Copper Mountain Products purchased by Customer unless
such Copper Mountain products are excluded from this Agreement as described in
Exhibit E.
2.2 CHANGE ORDERS. Customer may, by submitting written orders
("Change Orders") to Copper Mountain, request modifications to this Agreement.
No Change Order shall be binding until accepted in writing by Copper Mountain;
such acceptance may be conditioned upon such adjustments to the Service Fees or
the schedule for performing the Services as Copper Mountain deems necessary or
appropriate. If Copper Mountain and Customer fail to agree to any Change Order,
this Agreement shall continue unmodified.
Page 1 of 31
<PAGE>
3. LIMITATION OF SERVICES
3.1 THIRD-PARTY EQUIPMENT. Customer is solely responsible for third
party equipment. Neither this Agreement nor the Services provided hereunder
shall cover any (a) third party equipment (e.g., hardware, cabling, etc.)
provided by any party other than Copper Mountain or (b) Equipment modified by
any party other than Copper Mountain (except pursuant to, and in accordance
with, instructions issued by Copper Mountain) which impacts the performance of
the Equipment or Copper Mountain's ability to diagnose and troubleshoot the
Equipment. Copper Mountain shall invoice Customer at Copper Mountain's standard
rate for time and material (T&M) or rate for a site visit as described in
Exhibit A for any products provided or services rendered (e.g., a site visit)
that are the direct result of the failure or existence of third party equipment
or the unauthorized modification of the Equipment.
3.2 MAINTAINING PROPER ENVIRONMENT. Customer shall provide a proper
environment for the Equipment (e.g., temperature and humidity, stability and
reliability of power provisioning, and physical installation and access) in
accordance with Copper Mountain's published requirements. Any failure, service
interruption, or damage to the Equipment that results from adverse environmental
conditions unrelated to any inherent aspects of the Equipment (a) is not covered
by this Agreement, (b) may void any warranty provided by Copper Mountain, and
(c) may require additional services and/or replacement equipment at Customer's
expense.
4. SERVICE FEES AND PAYMENT TERMS
4.1 ADDITIONAL FEES. Copper Mountain may charge additional fees to
Customer, to be based upon mutual agreement, for work not included in the
Services, including, but not limited to, additional technical support as
described in Section 8.
4.2 ORDERS AND SERVICE FEES. Customer shall indicate the Level of
Service as described in Exhibit D to be provided for all products purchased from
Copper Mountain upon execution of this Agreement. The Level of Service may be
modified after the first year of service. Service fees are based on the Level of
Service to be provided as well as the Customer's equipment base at the beginning
of each calendar quarter. The Customers equipment base will include all
equipment shipped to the Customer as of the 1st day of each calendar quarter. If
the Agreement is executed after the first day of a calendar quarter then the fee
for the initial quarter will be pro rated based on the number of days which
remain in that quarter. Fees will not be refunded in the event that the
Agreement is terminated during any subsequent calendar quarter unless
termination is a result of Copper Mountain's non-performance or breach of its
obligations. Service fees will be calculated as follows:
[...***...]
* Confidential Treatment Requested
Page 2 of 31
<PAGE>
[...***...]
4.3 PAYMENT TERMS. Seller shall invoice Customer upon execution of
this Agreement and on the 1st day of each calendar quarter thereafter. All
payments are due 30 days from the date of invoice.
4.4 LATE CHARGES; OFFSETS. Copper Mountain reserves the right to
charge Customer a late payment fee on any past due amounts at the rate of
[...***...] percent ([...***...]%) per month or the maximum amount permitted by
law, whichever is less.
5. TRAINING
Customer will be required to have designated trained staff at an
appropriate experience level to support Products covered by this Agreement
including Tier 1 and Tier 2 support staff as described in Exhibit B. The
appropriate experience level includes knowledge of the Product and technology as
well as an understanding of networking and telecommunications in order to
resolve common and/or known problems.
6. CUSTOMER RESPONSIBILITIES
6.1 GENERAL RESPONSIBILITIES. The Purchase Agreement and this
Agreement assign to Customer responsibility for certain matters relating to the
use of the Equipment generally. Copper Mountain shall not be liable for any
delay in performing or completing the Services due to Customer's failure to
fulfill its responsibilities in a timely and satisfactory manner.
6.2 ACCESS TO THE EQUIPMENT. Customer shall ensure that Copper
Mountain has access to the Equipment, including, but not limited to, a high
speed modem, a telephone line for dial-up access and an operator ID and password
If on-site access is required to service or repair the Equipment, Customer shall
ensure that Copper Mountain has physical site access to the Equipment as
necessary to perform such service or repair.
6.3 THIRD PARTY EQUIPMENT CONNECTED TO THE EQUIPMENT. Customer shall
take all reasonable and necessary precautions to ensure that (a) equipment
connected to the Equipment conforms to electrical and environmental standards,
and (b) all interfaces to the Equipment (e.g., power, DSL, WAN, etc.) employ
appropriate protective measures to provide a stable operating environment. If,
in Copper Mountain's reasonable opinion based upon generally accepted industry
standards, additional measures should be taken at a particular site, Customer
shall take all reasonable and necessary steps to implement such measures or
Copper Mountain will not remain responsible for problems arising from the
environmental problems Copper Mountain specifies in writing to Customer with
respect to the designated Equipment at that site.
* Confidential Treatment Requested
Page 3 of 31
<PAGE>
6.4 SUPPORTED RELEASE OF OPERATING SYSTEM. Customer is not required to
---
install every new release of the Operating System Software as it becomes
available from Copper Mountain; provided, however, the Customer shall maintain a
supported release version of either the current software release or one of the
[...***...] preceding generic/software releases not known to contain errors or
bugs. In the event that Customer wishes support for software releases other than
the current software release or one of the [...***...] preceding
generic/software releases not known to contain errors or bugs, then
modifications to this Agreement will be contingent upon successful negotiation,
on a case by case basis, of mutually acceptable modifications to this Agreement.
7. WARRANTIES
7.1 SERVICES WARRANTY. Copper Mountain represents and warrants to
Customer that the Services shall be performed in a workmanlike manner and in
accordance with reasonable commercial standards, and any Services rendered will
not adversely affect the Year 2000 Compliance of any Equipment. Any claim by
Customer against Copper Mountain with respect to this warranty must be made
within a period of [...***...] after the performance of the relevant Services.
Copper Mountain's sole warranty obligation, and Customer's exclusive remedy, for
any breach of this warranty shall be to have Copper Mountain perform the
Services at no charge to Customer or have Copper Mountain perform remedial
Services to correct the continuing problem.
7.2 DISCLAIMERS.
7.2.1.1. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 7.1, COPPER
MOUNTAIN MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE SERVICES,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
7.2.1.2. Customer acknowledges that it has not relied on any
representations or warranties regarding the Services other than those in Section
7.1.
7.3 ADDITIONAL TECHNICAL SUPPORT. Additional technical assistance and
equipment repairs made outside the applicable Warranty Periods shall be
provided, if available, at Copper Mountain's then-current standard rates and
charges under the terms and conditions of a separate agreement and at the sole
discretion of Copper Mountain. Copper Mountain reserves the right to decline to
accept orders for or provide Additional Technical Support Services on third
party equipment at Customer locations where the cost of implementation of such
services is deemed by Copper Mountain in its sole discretion to be cost
prohibitive. Additional Technical Support Services at such Customer locations by
Copper Mountain will be contingent upon successful negotiation, on a case by
case basis, of a mutually acceptable Services compensation agreement.
* Confidential Treatment Requested
Page 4 of 31
<PAGE>
8. LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
CONSEQUENTIAL, INCIDENTAL, SPECIAL OR INDIRECT DAMAGES OF ANY KIND, INCLUDING
BUT NOT LIMITED TO ANY LOST PROFITS, LOST SAVINGS, OR LOST DATA, ARISING FROM OR
RELATING TO THIS AGREEMENT, EVEN IF THE PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. THE TOTAL CUMULATIVE LIABILITY OF EITHER PARTY TO
THE OTHER PARTY FOR ANY CLAIMS OR CAUSES OF ACTION ARISING UNDER OR RELATING TO
THIS AGREEMENT OR PERFORMANCE OF THE SERVICES (WHETHER IN CONTRACT, IN TORT OR
OTHERWISE) SHALL NOT EXCEED THE AGGREGATE AMOUNT PAID TO COPPER MOUNTAIN UNDER
THIS AGREEMENT.
8.1 Customer understands that Copper Mountain's pricing is predicated
on these limitations of Copper Mountain's liability and acknowledges that Copper
Mountain would not enter into this Agreement without such limitations.
9. CONFIDENTIALITY
Customer acknowledges that all technical documentation and information
delivered to Customer by Copper Mountain in the performance of Services under
this Agreement which Copper Mountain reasonably designates as proprietary shall
be considered "Confidential Information". Customer shall not duplicate or
disclose to any third person, and shall not use for any purpose other than
operation and maintenance of the Equipment, any Confidential Information without
the prior written consent of the duly authorized officer of Copper Mountain as
described in Section 15.3 - Notices. The foregoing restrictions shall not apply
to any Confidential Information that Customer can demonstrate: (a) was or is
wholly and independently developed by Customer or lawfully received by Customer
free of restriction from another source having the rights to furnish such
Confidential Information; (b) has become generally available to the public
without breach of this Agreement; or (c) at the time of disclosure to Customer
was known to Customer free of restriction, as evidenced by documentation in
Customer's possession.
10. TAXES
Copper Mountain shall pay all taxes, export duties, and other charges
and expenses imposed by any government authority within the United States in
connection with the performance of the Services or the payment of the Service
Fees (other than taxes on Copper Mountain's net income, gross receipts and/or
personal property).
Page 5 of 31
<PAGE>
11. TERM AND TERMINATION
11.1 TERM. This Agreement shall have an initial Term of [...***...]
commencing with the effective date (hereinafter "Initial Term"). This Agreement
shall become effective as of the Effective Date and unless earlier terminated
pursuant to Sections 12.1, 12.2 or 14, shall terminate upon Copper Mountain's
completion of the Services and Customer's payment in full of the Service Fees to
Copper Mountain, and shall include services ordered and not yet completed as of
last day of the Initial Term. Any such uncompleted services ordered during the
initial term shall be considered to be covered under the terms of this
Agreement.
11.2 TERMINATION FOR DEFAULT. Either party may terminate this
Agreement if the other party fails to perform any material obligation under this
Agreement in a timely manner and such failure is not cured within [...***...]
days after the non-defaulting party gives notice of such failure to the
defaulting party.
11.3 EFFECTS OF TERMINATION. Upon termination of this Agreement for
any reason:
11.3.1.1. Customer shall remain obligated to pay all unpaid and
undisputed Service Fees for Services completed before termination, and such
undisputed fees shall become immediately due and payable;
11.3.1.2. Copper Mountain may invoice Customer for, and Customer
shall pay to Copper Mountain, fees based on Copper Mountain's then-current
standard rates and charges for Services begun, but not completed, before
termination, provided that such fees shall not exceed the Service Fees that
would have been due for such Services had the Services been completed before
termination, and the termination of any uncompleted work is mutually agreeable
to both parties; and
11.3.1.3. Copper Mountain shall have no further obligation to
perform any Services under this Agreement.
12. SURVIVAL.
The rights and obligations of the parties under Sections 4.3, 7.1
(solely for the duration of the applicable Warranty Period), 7.2, 9, 10, 12.3,
12.4, 13 and 15 shall survive termination of this Agreement for any reason.
13. AUTHORITY
Each party hereby represents and warrants to the other party that (a)
such party is duly organized, validly existing and in good standing under the
laws of the place of its establishment or incorporation; (b) such party has
taken all action necessary to authorize it to enter into this Agreement and
perform its obligations under this Agreement; (c) this Agreement shall
constitute the legal, valid and binding obligations of such party; and (d)
neither the execution of this Agreement, nor the performance of such party's
obligations hereunder, shall conflict with, result in a breach of, or constitute
a default under, any provision of the Articles of Incorporation, business
license, Bylaws or similar organizational documents of such party, or of any
law, rule, regulation, authorization or approval of any government entity, or of
any agreement to which it is a party or by which it is bound.
* Confidential Treatment Requested
Page 6 of 31
<PAGE>
14. FORCE MAJEURE
Neither party shall be liable to the other party, under this Agreement
or otherwise, for any delay or lack of performance (other than non-payment)
resulting from an event of Force Majeure (as defined below). If a Force Majeure
event occurs, the party prevented from performing its obligations under this
Agreement shall inform the other party as soon as possible and the time period
for performance shall be extended by a period equivalent to the delay caused by
the Force Majeure event plus any additional period reasonably necessary to allow
the prevented party to resume performance of its obligations. The prevented
party shall inform the other Party as soon as possible after the Force Majeure
event ends. If the Force Majeure event lasts for more than [...***...]
consecutive days after the initial notice of such event, the parties shall
attempt in good faith to solve the problem of further performance of this
Agreement through friendly consultation. If the parties cannot solve the problem
of further performance within an additional [...***...] days, either party may
terminate this Agreement without penalty. As used above, an event of "Force
Majeure" means any act of God, war, fire, typhoon, flood, earthquake, natural
disasters, governmental action, labor disruptions, industry-wide materials
shortages, or any other event beyond the reasonable control of the prevented
party.
15. GENERAL PROVISIONS
15.1. ASSIGNMENT. Neither party may assign this Agreement or any right
under this Agreement, nor delegate any obligation under this Agreement, without
the other party's prior written consent (which shall not be unreasonably
withheld), except that either party may, without the other party's consent, (a)
assign this entire Agreement in connection with a merger, reorganization, or
sale of all or substantially all of its assets to a third party; (b) assign part
or all of this Agreement to one or more of its affiliates; and/or (c)
subcontract portions of its obligations under this Agreement as long as the
assigning party remains responsible for such obligations. Any attempted
assignment or delegation in contravention of this Section 15.1 shall be void.
15.2. NON-WAIVER; SEVERABILITY. Any delay or failure by either party to
exercise any right or remedy under this Agreement shall not constitute a waiver
of such right or remedy thereafter or of any other right or remedy. If any
provision of this Agreement is determined to be unenforceable, the remaining
provisions shall remain in full force and effect.
15.3. NOTICES. All notices and other communications provided for
hereunder shall be in writing and shall be mailed by first-class, registered or
certified mail, postage paid, or delivered personally, by overnight delivery
service or by facsimile, computer mail or other electronic means, with
confirmation of receipt, addressed as follows:
* Confidential Treatment Requested
Page 7 of 31
<PAGE>
If to Copper Mountain: Copper Mountain Networks, Inc.
10145 Pacific Heights Blvd Suite 100
San Diego, California 92121
Attn: John A. Creelman
Fax No: (619) 410-7281
If to Customer: Rhythms Links
6933 S. Revere Parkway
Suite 200
Englewood Colorado 80112
Attn: Tom Hartzell
Fax No.: (303) 476-5701
Either party may by like notice specify or change an address to which notices
and communications shall thereafter be sent. Notices sent by facsimile, computer
mail or other electronic means shall be effective upon confirmation of receipt,
notices sent by mail or overnight delivery service shall be effective upon
receipt or when delivery is refused, and notices given personally shall be
effective when delivered or when delivery is refused.
15.4. PUBLICITY. Copper Mountain and Customer agree that neither party
shall originate any press release or other public announcement related to this
Agreement, written or oral, without the prior written consent of the other
party, except as required by law or a court order.
15.5. NONDISCLOSURE. Copper Mountain and Customer agree that either
party may disclose the existence of this Agreement, but neither party shall make
any disclosure relating to the terms of or performance under this Agreement to
any third party (other than their accountants and attorneys) without the prior
written consent of the other party, except as required by law or a court order.
15.6. GOVERNING LAW AND VENUE. All matters arising in connection with
this Agreement or the enforcement or construction thereof shall be governed by
(without regard to conflict-of-laws provisions) and resolved in accordance with
the laws of the State of California. Copper Mountain and Customer each hereby
irrevocably (a) agrees that any suit, action or other legal proceeding arising
from or relating to this Agreement shall be brought in a court of competent
jurisdiction in San Francisco, California. which court shall have exclusive
jurisdiction over any controversy arising from or related to this Agreement; (b)
consents to the jurisdiction of such court in any such suit, action or
proceeding; and (c) waives any objection it may have to the laying of venue of
any such suit, action or proceeding in such court and waives any claim that any
such suit, action or proceeding has been brought in an inconvenient forum.
Service of process in any suit, action or proceeding may be made in any manner
permitted by law.
Page 8 of 31
<PAGE>
15.7. DISPUTE RESOLUTION. If any dispute arises between the parties
relating to the interpretation, breach or performance of this Agreement or the
grounds for the termination thereof, and the parties cannot resolve the dispute
within thirty (30) days of a written request by either party to the other party,
the parties agree to hold a meeting, attended by individuals with
decision-making authority regarding the dispute, to attempt in good faith to
negotiate a resolution of the dispute prior to pursuing other available
remedies. If, within sixty (60) days after such meeting, the parties have not
succeeded in negotiating a resolution of the dispute, such dispute shall be
submitted to final and binding arbitration under the then current commercial
rules and regulations of the American Arbitration Association (the "AAA")
relating to voluntary arbitrations. The arbitration shall be held in San
Francisco, California. The arbitration shall be conducted by one arbitrator, who
is knowledgeable in the subject matter at issue in the dispute and who will be
selected by mutual agreement of the parties or, failing such agreement, shall be
selected in accordance with AAA rules. Each party shall initially bear its own
costs and legal fees associated with such arbitration. The prevailing party in
any such arbitration shall be entitled to recover from the other party actual
attorneys' fees, costs and expenses incurred by the prevailing party in
connection with such arbitration. The decision of the arbitrator shall be final
and binding on the parties. The arbitrator shall prepare and deliver to the
parties a written, reasoned opinion conferring its decision. The arbitrator
shall have no power or authority to make any award that provides for punitive or
exemplary damages or other damages excluded by this Agreement, or that otherwise
departs from the plain meaning of this Agreement. Judgment on the award so
rendered may be entered in any court having competent jurisdiction thereof.
Notwithstanding the foregoing, Copper Mountain shall have the unequivocal right
to obtain timely injunctive from a court of law pursuant to Section 15.9.
15.8. ATTORNEY'S FEES. The prevailing party in any litigation between
the parties relating to this Agreement shall be entitled to recover its
reasonable attorney's fees and court costs, in addition to any other relief it
may be awarded, from the other party.
15.9. INJUNCTIVE RELIEF. Both parties agree that unauthorized
duplication, distribution or disclosure of any Confidential Information received
by the other party will actually and materially damage the injured party, and
such damages are difficult to calculate. In addition, notwithstanding any of the
provisions of this Agreement, both parties shall have the right to obtain timely
injunctive relief to protect their intellectual property rights. NOTE: Rhythms'
forecast is considered Confidential Information.
15.10. CONSTRUCTION. The headings of sections and subsections of this
Agreement are for convenience only and shall not be construed to affect the
meaning of any provision of this Agreement. Any inconsistency between provisions
in this Agreement and the exhibits shall be resolved in favor of the main body
of this Agreement.
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<PAGE>
15.11. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original and which together shall be the same
agreement.
15.12. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement, together with
the exhibits attached hereto, constitutes the entire agreement between the
parties and supersedes all prior oral or written negotiations and agreements
between the parties with respect to the subject matter hereof. No modification,
variation or amendment of this Agreement shall be effective unless made in
writing and signed by the parties. Any additional or different terms stated in
any purchase order or other document delivered to Copper Mountain by Customer in
connection with this Agreement shall have no effect.
Page 10 of 31
<PAGE>
IN WITNESS WHEREOF, Copper Mountain and Customer have each caused this
Agreement to be executed by their duly authorized representatives.
COPPER MOUNTAIN NETWORKS, INC. RHYTHMS LINKS INC.
By: /s/ Richard S. Gilbert By: /s/ Rand Kennedy
------------------------------------ --------------------------
Name: Richard S. Gilbert Name: Rand Kennedy
---------------------------------- -------------------------
Title: President and CEO Title: SVP Networks
--------------------------------- -----------------------
Page 11 of 31
<PAGE>
EXHIBIT A
SERVICE FEES
The following are the Service Fees and Level of Service to be provided for all
Copper Mountain Equipment purchased by the Customer. Any Equipment excluded from
this Agreement shall be described in Exhibit E.
- -----------------------------------------------------------
SERVICE PLAN % OF LIST PRICE AS
OF SHIP DATE
- -----------------------------------------------------------
GOLD [...***...]%
- -----------------------------------------------------------
SILVER [...***...]%
- -----------------------------------------------------------
BRONZE [...***...]%
- -----------------------------------------------------------
- -------------------------------------------------------------------------------
OTHER SERVICES PRICE
- -------------------------------------------------------------------------------
TIME AND MATERIAL $[...***...] per Hour
- -------------------------------------------------------------------------------
ON-SITE $[...***...] per Hour, minimum of
[...***...] hours plus Travel and
Expenses
- -------------------------------------------------------------------------------
OUT OF WARRANTY REPAIR OR [...***...]% of the list price. The warranty
REPLACEMENT for the refurbished item is [...***...] days.
- -------------------------------------------------------------------------------
* Confidential Treatment Requested
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<PAGE>
EXHIBIT B
DEFINITIONS
Unless otherwise defined in the Agreement, all capitalized terms used herein
shall have the meanings set forth in this Exhibit B or as set forth in the
Equipment Purchase Agreement as the case may be.
AR means Assistance Request. A Customer AR results from a failure of the Product
to perform to expectations or a need for an answer to a technical question.
ARM means Assistance Request Management.
CALL RECEIPT means Seller's process of ensuring that the Customer Assistance
Request is referred to the appropriate Seller technical support group
responsible for an answer to a technical question. This task involves answering
the telephone (or electronic inquiry), gathering pertinent Customer and
technical data, determining whether the Customer will be billed for the service
provided, and transferring the request to the appropriate group for analysis.
CUSTOMER NOTIFICATION BULLETINS mean the proactive activity of alerting the
Customer of potential Product conditions or configurations which could have a
negative affect on Customer operations.
INITIAL RESPONSE TIME means the time it takes for the Customer to reach a
Subject Matter Expert once the Customer contacts the Seller Call Receipt group.
LICENSED SOFTWARE PRODUCT means the Software that Customer has been granted a
license to use by Seller.
MAJOR USA HOLIDAYS (or Company-designated day of observance)
New Years Day
Memorial Day
Independence Day
Labor Day
Thanksgiving Day
Day Following Thanksgiving
Christmas Day
MANAGEMENT NOTIFICATION means the internal Seller process that sets the minimum
standards by which Seller management will become aware of a problem. The intent
of escalating
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<PAGE>
a problem is 1) to bring additional resources together to resolve it, 2) to
apprise management of the situation, or 3) to acknowledge notification by
contacting the Customer.
ON-SITE ASSISTANCE means technical assistance provided by Seller at Customer's
site at Customer's request, and as agreed to by Seller.
PERFORMANCE METRICS means the commitments that the Seller agrees to Respond,
Restore, and Resolve Customer's request for Customer Technical Support called in
through the Seller's Call Receipt function. Customer requests that do not go
through the Seller's Call Receipt function will be excluded from the Performance
Metrics.
PRODUCT means Copper Mountain Network Equipment and/Firmware, Seller Licensed
Software, and Third Party Software that are embedded and active with respect to
Copper Mountain equipment and/or software at Customer sites at the time this
Agreement is executed.
PROBLEM MANAGEMENT means the procedures and actions performed or required to be
performed by Seller upon written or oral request of Customer to investigate and
manage the resolution of a reported condition in a manner that provides the
Customer with a single interface.
PROBLEM RESOLUTION means the analysis of the technical data to determine at
least a short-term resolution. Depending upon the analysis results, the response
to the Customer may be in the form of technical advice, a procedure performed by
Seller support personnel, a software product update, or a hardware fix.
Technical questions regarding operation/use of Product is handled under this
task.
RESOLVE means that a permanent solution to the problem has been provided and is
acceptable to the Customer. Resolution to problems requiring a software design
change means either that a final correction to the problem has been made
Generally Available to Customer or that Seller has notified Customer that the
Product will not be repaired. Resolution to problems requiring a hardware design
change will be provided according to standard customer agreements on Product
change notices.
RESOLVE TIME means elapsed time between the time the Customer contacts Seller
through the Seller's Call Receipt function and the time the Customer is supplied
with an acceptable permanent solution.
RESPOND means a Seller's Subject Matter Expert has contacted the Customer
regarding a particular Assistance Request.
RESTORE means that the Product or major feature of the Product is temporarily
operative, although a permanent resolution may not have been provided. Restore
may mean that a software fix has been provided to temporarily correct the
problem, or a workaround has been implemented.
SELLER means Copper Mountain
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<PAGE>
SERVICE PERFORMANCE REPORTS (SPR) mean reports that validate the agreed to
Respond, Restore, and Resolve Customer's request for Customer Technical Support.
SERVICE RESTORATION TIME means the elapsed time between the time Customer
contacts Seller through the Seller's Call Receipt function and the time the
system is returned to operational service.
SEVERITY LEVEL means the condition of the system when the Customer makes an
Assistance Request.
SEVERITY LEVEL ONE means the condition which exists when the system is
inoperative and Customer's inability to use the Product has a critical effect on
Customer's operations. The condition is generally characterized by complete
system failure and requires immediate correction. In addition, any condition
that may critically impact human safety is considered a Severity Level One
problem.
SEVERITY LEVEL TWO means a condition which exists when the system is partially
inoperative, but the system is still usable by the Customer. The inoperative
portion of the Product severely restricts the Customer's operations but has a
less critical effect than a Severity Level One condition.
SEVERITY LEVEL THREE means the condition which exists when the system is usable
by the Customer, but with limited impact on Customer operations. The condition
is not critical to overall Customer operations and does not severely restrict
such operations.
SEVERITY LEVEL FOUR means the condition which exists when the system is usable
and a means of circumventing the condition has been found. This condition does
not materially affect Customer's operations.
SOFTWARE RELEASE is a new revision of a Product including problem, error and/or
bug fixes and/or enhancements.
SOFTWARE PRODUCT DEFECT means an error condition that causes the Licensed
Software to fail to operate in compliance with Seller's documented
specifications available at time of Licensed Software Product sale.
SOFTWARE PRODUCT UPDATES means changes to the original Licensed Software and
Third Party Software to correct defects or provide features not originally
included in Seller's documented specifications available at the time of the
Licensed Software sale. Software Product Updates include both corrections and
accommodations requested by Customer as well as corrections and accommodations
requested by other customers. Software Product Updates may be distributed
through point issue releases or other on-line delivery mechanism.
Page 15 of 31
<PAGE>
SUPPORT SERVICES means Seller's assistance at Seller's location analyzing the
applicable Software or Network Equipment/Firmware problem and handling service
calls reported by Customer through the Call Receipt function. Support Services
may be purchased by Customer pursuant to the provisions set forth in this
Agreement.
THIRD PARTY SOFTWARE means software not initially designed or developed by
Seller but embedded in Seller's Product.
TIER 1 SUPPORT means the first level of technical support which has a working
knowledge of the Product and technology as well as an understanding of
networking and telecommunications in order to resolve common and or known
problems. Tier 1 technical support communicates with customers to gather all
appropriate technical information needed and then attempt to find a solution.
TIER 2 SUPPORT means the second level of technical customer support to which
Tier 1 escalates issues that cannot be resolved at Tier 1. Tier 2 level support
is comprised of Product experts who have at least 18 to 24 months of Tier 1
support or related experience.
TIER 3 SUPPORT means technical support that addresses issues escalated from Tier
2 when either the source of the issue cannot be identified or the issue is
identified and must be addressed by the manufacturer of the Product.
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<PAGE>
EXHIBIT C
DESCRIPTION OF SUPPORT SERVICES
1.0 PRODUCTS
--------
1.1 All Copper Mountain Products purchased by the customer shall be
included in the Support Services unless described in Exhibit E.(1)
Support Services will be provided in accordance with the General
Support Services as described in Exhibits A, B, C, D, F, G, and H and
Levels of Service and Fees as described in Exhibit A as ordered by the
Customer. Customer will ensure that all products are in good operating
condition at current specified revision levels as of the Effective Date
of this Agreement.
1.2 Unless otherwise agreed by Seller in writing and specified in Exhibit
E, Software Support Services shall only be available for the
[...***...] not known to contain errors or bugs. Copper Mountain plans
to release [...***...] new software releases per year, however, it is
under no obligation to due so.
2.0 GENERAL SUPPORT SERVICES
2.1 The following Support Services will be supplied to Customer in
accordance with the Level of Service ordered and described in the
order.
A. CALL RECEIPT AND ROUTING - The Seller will provide a call receipt and
routing function for use by the Customer. Customer may access
twenty-four (24) hours a day, seven- (7) days a week telephone support
for all Severity Level problems by calling [...***...]. The Seller
will maintain an entitlement database to determine Customer
entitlements (i.e., Service Level) and how the call should be routed.
B. EMAIL - Customer may Email questions or support requests to the Support
Center using the address [email protected]. Email sent to that
---------------------------
address is forwarded to all members of Copper Mountain's support
organization. A support engineer will log the request and send Customer
an acknowledgement of the request within one (1) business day.
C. RETURN MATERIAL PROCEDURE
After Copper Mountain identifies a failed component, Copper Mountain
shall issue a Return Materials Authorization ("RMA") number to Customer
and shall deliver, in its discretion, either a new or refurbished
functionally-equivalent replacement unit to Customer. If Customer fails
to return the defective unit to Copper Mountain within [...***...]
days, Copper Mountain shall issue an invoice at discounted price for
the unit shipped to Customer. Any defective unit returned to Copper
Mountain shall be the property of Copper Mountain. Copper Mountain
shall repair, if possible, any defective unit returned by Customer
which (a) is outside of the scope of the warranty
- ---------
(1) Insert Products/Releases not covered under this Agreement in Exhibit D.
* Confidential Treatment Requested
Page 17 of 31
<PAGE>
provided by Copper Mountain, (b) has been damaged by events unrelated
to the System, or (c) has been abused, misused, or used under
environmental conditions outside those set forth in the specifications
for the System, and shall invoice Customer the costs incurred to repair
such defective unit (but in any event not more than the discounted
price of the replacement unit shipped to Customer).
D. ASSISTANCE REQUEST DATABASE ACCESS - Pursuant to this Agreement and
subject to availability, Customer will be given access to automated
trouble reporting tools. Customized trouble reporting features are
fee-based.
E. CONSULTATIVE SUPPORT - Seller will deliver technical assistance
and advice by telephone from Seller's location for AR's initiated by
Customer via the Call Receipt function.
F. DIAGNOSTIC SUPPORT - Seller shall support Customer in analyzing
Customer problems, including isolation of problems to one of the
following areas:
1. Problems arising as a result of Products or their associated
materials or documentation and
2. Other problems not directly related to Products, such as
Customer operations problems, data base problems, as well as
any other interfacing system problems.
G. THIRD PARTY SOFTWARE SUPPORT - If a condition is caused by the Third
Party Software covered by this Agreement, Seller shall support Customer
in analyzing Customer Third Party Software problems.
H. WORKING LOCATION - Seller's working location is remote from Customer's
Product site. As described in C.2.N and at Customer's request, and as
agreed to by Seller, Seller will provide on-site assistance in
resolving a problem. Such assistance will be billed at a minimum of
[...***...] hours a day at the then current Seller's Time and Material
(T&M) rate for non-warranty related problems. Reasonable travel and
living expenses incurred by Seller in accordance with Seller's
Corporate Travel Policy will also be billed. There will be no fees or
charges for warranty related problems.
I. SEVERITY LEVEL AND PRIORITIZATION - Seller shall perform Problem
Management in accordance with the Severity Level condition identified
by Customer in accordance with Section 5.0 hereof. The priority for
problem resolution will be based on the Severity Level of outstanding
reported conditions. Severity Level One- (1) conditions on production
systems will receive top priority support.
J. PROBLEM MANAGEMENT - Seller shall perform procedures and actions upon
written or oral request of Customer to investigate and develop the
resolution of a reported condition in a manner that provides Customer a
single interface. This service is performed for all Copper Mountain
Products unless excluded in Exhibit E.
K. MANAGEMENT NOTIFICATION - Seller will observe the following escalation
procedures:
* Confidential Treatment Requested
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<PAGE>
(1) Severity Level One - In the event of a Severity Level One
condition that is still not restored [...***...] after the
condition is reported, Seller will notify Seller's supervisory
management or next level of expertise of the un-restored
condition. If the condition is still un-restored within
[...***...] after the condition is reported, the next higher
level of Seller supervisory management or level of expertise
will be notified of the un-restored condition.
(2) Severity Level Two - In the event of a Severity Level Two
condition that is still un-restored [...***...] after the
condition is reported, Seller will notify Seller's supervisory
management or next level of expertise of the un-restored
condition.
L. SERVICE PERFORMANCE REPORTS (SPR) - Seller will provide reports of
Seller's performance against the objectives stated in this contract on
a quarterly basis.
M. CUSTOMER NOTIFICATION BULLETINS - Seller will provide Customer
Notification Bulletins to Customer on an as available basis.
N. ON-SITE ASSISTANCE - At Customer's request, a Seller's customer Support
engineer may be dispatched to a Customer's site for resolution of a
Severity Level One condition that is un-restored within [...***...]
after the condition has been reported and after all efforts to solve
the condition by the replacement of known working hardware or software
have failed to resolve the condition. . Copper Mountain shall invoice
Customer for any products provided or services rendered (e.g., a site
visit) that are the direct result of the failure or existence of third
party equipment or the unauthorized modification of the Equipment.
On-Site Assistance will be billed at minimum of [...***...] hours a day
at the then current Seller Time and Material (T&M) rate. Reasonable
travel and living expenses incurred by Seller in accordance with Seller
Corporate Travel Policy will also be billed. Customer will not be
billed for resolution of any warranty-related problems.
O. UPGRADES. At Customer's request, a Seller's customer support engineer
may be dispatched to Customer's Network Operation's Center to assist
with major software or hardware upgrades. On-site assistance will be
limited to a maximum of [...***...] working days per on-site request
and any additional technical support shall negotiated according to the
terms of Section 8 -Additional Technical Support.
* Confidential Treatment Requested
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<PAGE>
3.0 CUSTOMER RESPONSIBILITIES
-------------------------
3.1 Customer Responsibilities include:
A. MAINTAINING APPROPRIATE TRAINING LEVEL - Customer will be
required to have designated trained staff at an appropriate
experience level to support Products covered by this Agreement
including Tier 1 and Tier 2 support staff as described in
Exhibit B. The appropriate experience level includes knowledge
of the Product and technology as well as an understanding of
networking and telecommunications in order to resolve common
and/or known problems.
B. PROVIDING INFORMATION TO CALL RECEIPT:
(1) Identification of the condition and its isolation to
a particular component of the system believed to be
the Seller's responsibility.
(2) Collection of sufficient supporting documentation
from the Product for inclusion in the AR database.
(3) Determination that there are no outstanding
conforming Software Product updates that correct the
condition.
(4) The calling Customer personnel shall provide the
following information, if applicable:
(a) Caller's name, Location, and Company;
(b) Callback Telephone Number;
(c) Remote Dial Access to Customer System;
(d) System name and Location;
(e) Processor Location, Type, and Serial Number;
(f) Nature of the Question or Situation;
(g) The Calling Party's Alternate Contact;
(h) Description and History of Problem and
Efforts to solve it by Customer.
(i) Contract number or other proof of coverage
as requested by Seller.
C. PROVIDING PROBLEM DIAGNOSTIC MATERIALS - If Customer reports a
condition, Customer will be responsible for providing adequate
support material to enable the diagnosis of the condition.
Such support materials shall include, but not be limited to, a
description of the circumstances, a dump of system logs or
buffers, a listing of data base contents, and console
printouts as required by Seller.
D. MAINTAINING THE PRODUCT:
(1) Make no modifications other than those approved by
Seller. This includes updates from manufacturers of
Third Party Software that have not been validated by
Seller.
(2) Seller acknowledges Customer may elect not to install
the latest Software Product Updates, and that Seller
will support the previous [...***...] Product
Upgrades not known to contain errors or bugs as part
of this Agreement.
(3) Follow all Seller's and relevant Third Party Software
manufacturer's applicable installation, operation,
administration, and maintenance instructions.
* Confidential Treatment Requested
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<PAGE>
(4) Provide the proper environment and electrical and
telecommunications connections as specified by
Seller.
(5) Install most recent Class A Change Notices.
E. ASSISTING SELLER PERSONNEL PROVIDING ON-SITE ASSISTANCE
(1) Have a Customer representative at the equipment
location during any on-site Seller service activity.
Customer may be subject to additional incurred time
and material charges if Customer fails to have a
representative at the equipment location at the
agreed upon time.
(2) Provide adequate communication facilities and work
space for Seller.
(3) Provide test equipment and maintenance documentation
sufficient for maintenance of products not covered by
this Agreement that interface with the Products
covered under this Agreement.
(4) Ensure that work done at the site by Customer does
not interfere with Seller's performance of On-Site
Assistance.
F. TIER 1 AND TIER 2 SUPPORT
The customer is responsible for providing Tier 1 and Tier 2
-----------------------
support.
4.0 SUPPORT SERVICES EXCLUSIONS
---------------------------
4.1 Unless expressly agreed to by Seller, Support Services to be provided
under this Agreement do not include:
A. Performing preventive maintenance to System;
B. Repair of Product due to normal Product attrition;
C. Making corrections to user-defined reports;
D. Making specification changes or performing Services connected
with relocation of the Product;
E. Service which is impractical for Seller to render because of
changes not authorized by Seller in the hardware
configuration, Seller's Product or the Product environment in
which Seller's Product operates; and
F. Modification, repair or replacement of Product, repair of
damage, or increase in Seller service time caused by:
(1) Failure to continually provide a suitable operational
environment with all facilities prescribed by the
applicable document including, but not limited to,
the failure to provide, or the failure of, adequate
electrical power, air conditioning, or humidity
control;
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<PAGE>
(2) The use of the Product in a manner not in accordance
with its specifications, operating instruction or
license-to-use;
(3) Accident or disaster, which shall include, but not be
limited to, fire, flood, earthquake, water, wind and
lightning; transportation; neglect or misuse; pest
damage; or power failures or surges from sources
external to the Product;
(4) Modifications, maintenance, or repair performed by
other than Seller or by Customer or others not in
compliance with Seller's published instructions.
(5) Attachment of unspecified or non-approved products to
the Product, including updates from manufacturers of
Third Party Software that have not been verified by
Seller, or failure of a processor or other equipment
or software not maintained by Seller, or failure of
removable or rotating storage media.
G. Problem Management as defined below:
(1) Database Problems - If the condition is determined to
be the result of corruption of the Licensed Software
Product data base, and such corruption is not the
direct result of the Product, the condition will be
referred back to Customer for resolution. At
Customer's request, and at Seller's option, Seller
may prepare a proposal for billable corrective action
to correct Customer's database. However, if
corruption is the result of, or caused by another of
Seller's Products, Seller shall initiate Problem
Management regardless of whether such Licensed
Software Product is covered under this Agreement.
(2) Hardware/Firmware Problems - When a condition has
been isolated to a problem in hardware or firmware
not covered under this Agreement or caused by Seller
or its Products, the condition will be referred back
to Customer for disposition under whatever
arrangements Customer may have for such hardware or
firmware.
(3) Other/Interfacing Problems - If the condition is
determined to be caused by systems other than the
Products covered under the existing Order, including,
but not limited to, systems which interface with the
Product, the condition will be referred to Customer
for corrective action unless such other system has
been furnished by Seller, in which case, Seller shall
initiate Problem Management. However, if a defect is
identified with Licensed Software or Products covered
by the Order which is documented or advertised to
interface or work with other systems, hardware,
Products or Licensed Software, Seller shall conduct
restoral and correction procedures as required for a
defect and not as Problem Management.
(4) Additional Services - Additional services, including
but not limited to custom feature development,
training, planning sessions, and other value-added
services, are not included in the fees paid under
this Agreement.
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<PAGE>
At the request of Customer, Seller, at its option, may perform Support Services
in the excluded conditions listed above, at Seller's rates and terms in effect
at the time of such request.
5.0 PERFORMANCE METRICS FOR SUPPORT SERVICES
----------------------------------------
5.1 The Performance Metrics described in this section shall apply to
Products covered under the Bronze, Silver and Gold Service Levels. The
problem must be reproducible at either Seller's location or on
Customer's system verifiable by Seller. The Severity Level of any
problem shall be determined by Customer; however, if during analysis
Seller determines that the severity level of the problem claimed by
Customer to be inaccurate, the Severity Level may be changed by Seller
with Customer notification. Customer requests which do not go through
the Seller's Call Receipt function will be excluded from the
Performance Metrics.
5.2 INITIAL RESPONSE
During the term of this Agreement, and upon expiration of any Product
warranty, Seller agrees to respond to Customer's request for Support
Service called in through the Seller's Call Receipt function as
described under General Support Services for the Silver and Gold
Service Levels within [...***...], twenty-four (24) hours a day, seven
(7) days a week, for all Severity Levels reported in the Assistance
Request database during the ARM coverage period. Problems may be worked
outside of ARM Coverage Period at Customer request and Customer will be
billed Seller Time & Material rates. Response time will be validated
through the use of the Service Performance Report (SPR) on a quarterly
basis. Customer requests which do not go through the Seller's Call
Receipt function will be excluded from the Performance Metrics.
5.3 SERVICE RESTORATION
1. Severity Level One - Service for Severity Level One shall be
restored within [...***...]. Restoral time will be validated
quarterly, through the use of the Service Performance Report
(SPR).
2. Severity Level Two - Service for Severity Level Two shall be
restored within [...***...]. Restoral time will be validated
quarterly through the use of the Service Performance Report
(SPR).
5.4 RESOLVE
1. Severity Level One through Four - SERVICE ARs - A permanent
solution for Severity Level One through Four ARs by means of
either a documented work-around or via a maintenance release
shall be provided to Customer within [...***...]. Resolution
time will be validated quarterly through the use of the
Service Performance Report (SPR).
2. Severity Level One through Four - Software Design Changes - A
permanent solution for Severity Level One through Four Defect
ARs requiring a Software design change shall be
* Confidential Treatment Requested
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<PAGE>
provided to Customer within [...***...] days. Resolution time
will be validated quarterly, through the use of the Service
Performance Report (SPR).
3. Severity Level One through Four - Hardware Design Changes - A
permanent solution for Severity Level One through Four
requiring a hardware design change will be provided according
to standard customer agreements on product change notices.
6.0 PERFORMANCE METRICS
-------------------
The following table represents the Performance Objectives and
Commitments to the Metrics listed in Section 5.0. Commitments are
expressed as a percentage of assistance requests meeting the
performance metric.
<TABLE>
<CAPTION>
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
METRIC BRONZE SILVER GOLD OBJECTIVE
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
<S> <C> <C> <C> <C>
Initial Response percentage less than [...***...]; [...***...] [...***...]% [...***...]% [...***...]%
[...***...]
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
Restore Severity Level 1 AR less than [...***...] [...***...] [...***...]% [...***...]% [...***...]%
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
Restore Severity Level 2 AR less than [...***...] [...***...] [...***...]% [...***...]% [...***...]%
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
Resolve AR(1) less than [...***...] [...***...] [...***...]% [...***...]% [...***...]%
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
Resolve SW Design AR less than [...***...] [...***...] [...***...]% [...***...]% [...***...]%
- ---------------------------------------------------------- -------------- ---------------- --------------- --------------------
</TABLE>
(1) ARs not requiring a design change
* Confidential Treatment Requested
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<PAGE>
EXHIBIT D
LEVEL OF SERVICE
- ------------------------------------ ---------------- -------------------------
DESCRIPTION BRONZE SILVER AND GOLD
- ------------------------------------ ---------------- -------------------------
Call Receipt and Routing [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Working Location [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Initial Response [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Service Restoration [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Problem Resolution [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Maintenance and new Software [...***...] [...***...]
Releases (2)
- ------------------------------------ ---------------- -------------------------
Problem Escalation and Notification [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Performance Objectives [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Service Performance Reports [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Customer Notification Bulletins [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
Web Access [...***...] [...***...]
- ------------------------------------ ---------------- -------------------------
- ------------------------------- -------------- ---------------- ---------------
BRONZE SILVER GOLD
- ------------------------------- -------------- ---------------- ---------------
"Spare in the Air Hardware" [...***...] [...***...] [...***...]
Replacement
- ------------------------------- -------------- ---------------- ---------------
On Site Assistance [...***...] [...***...] [...***...]
- ------------------------------- -------------- ---------------- ---------------
Factory Repair Time [...***...] [...***...] [...***...]
- ------------------------------- -------------- ---------------- ---------------
ARM Coverage (3) [...***...] [...***...] [...***...]
[...***...] [...***...]
- ------------------------------- -------------- ---------------- ---------------
Out-of-Hours Fee (4) [...***...] [...***...] [...***...]
- ------------------------------- -------------- ---------------- ---------------
Training Discounts [...***...] [...***...] [...***...]
- ------------------------------- -------------- ---------------- ---------------
Performance Commitments [...***...] [...***...] [...***...]
- ------------------------------- -------------- ---------------- ---------------
(1) Assistance Requests not requiring a design change.
(2) Provided for current and [...***...] back releases only.
(3) Problems may be worked outside of Coverage Period at Customer request
and Customer will be billed Seller Time & Material rates.
(4) Hourly rate charged for each call outside of contracted Coverage
period.
(5) As specified by Exhibit C 2.1 N
* Confidential Treatment Requested
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EXHIBIT E
PRODUCTS NOT COVERED UNDER AGREEMENT
The terms and conditions of this Agreement shall govern all Copper Mountain
products purchased by Customer unless such products are excluded from this
Agreement as detailed below:
ALL SUBSCRIBER EQUIPMENT
For those installations of Subscriber Equipment where ownership of the
Subscriber Equipment and the related Software License will transfer to an end
user, Seller agrees to implement the following support infrastructure and
service levels within [...***...] days of the Effective Date of this Agreement:
1. 800# support for end user assistance and trouble calls
2. Establishment of a web site for end user support and FAQ
3. Next-day advanced replacement of defective Subscriber
Equipment
4. Email support for end user assistance
5. Escalation procedures
* Confidential Treatment Requested
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<PAGE>
EXHIBIT F
SOFTWARE PRODUCT UPDATE SERVICES
Seller agrees to provide the Software Product Update Services listed below:
1.0 DEFECT REPORTING
----------------
Any defects found in the Licensed Software Product may be reported by
calling the Seller's Call Receipt function. An assistance request will
be entered into the AR tracking database and referred to Seller's
technical support.
2.0 SOFTWARE PRODUCT UPDATES
------------------------
Seller will correct defects in the Licensed Software Product and Third
Party Software Product in accordance with the Support Services as
described in Exhibit C. Seller will correct defects as follows:
a) Seller may when and if available provide Software Product
Updates to the standard Software Product to correct defect
conditions. If necessary, Seller shall provide documentation
to enable Customer to train its personnel in the operation of
the Licensed Software Product modified by such release. Seller
shall make modifications to the documentation to clarify
issues or items not clear to Customer, as required.
(b) Fees paid under this Agreement cover only Product Updates made
Generally Available during the term of this Agreement.
(c) Due to the nature of Licensed Software, Software Product
Updates may require all previous Software Product Updates for
the particular generic/software release as prerequisites
unless noted in Exhibit E. It may not be possible to install
some of the Software Product Updates unless the previous
Software Product Updates have been installed.
(d) If the condition is isolated to the related documentation for
the Product, the fix will be given to Customer as part of the
defect correction or Product Update procedure. A permanent fix
will be published in the following release of the related
documentation.
3.0 NOTIFICATION OF CORRECTIONS
---------------------------
Page 27 of 31
<PAGE>
Seller agrees to notify the Customer of the availability of a
resolution or work-around to a defect reported by Customer.
Communication format and venue will be based upon mutual agreement.
4.0 CUSTOMER CORRECTIVE MAINTENANCE RESPONSIBILITY
----------------------------------------------
Customer agrees to install the corrections or replacements provided
under this Agreement within a reasonable period of time. Customer's
failure to install emergency fixes, work-arounds, patches or releases
will cause the Licensed Software Product to be considered non-standard
until all such fixes are installed, unless Customer has previously
notified Seller of problems with such emergency fixes, work-arounds,
patches or releases.
In those instances where a fix, work-around, patch or release is found
to contain a problem, Seller will still be responsible for support of
the last Software release not known to contain problems, as well as for
support of the previous [...***...] Software releases not known to
contain problems.
* Confidential Treatment Requested
Page 28 of 31
<PAGE>
EXHIBIT G
COPPER MOUNTAIN PERFORMANCE REPORTING
1. Performance Reporting
---------------------
The purpose of the performance reporting is to continuously improve the quality
of Copper Mountain service to the Customer at the highest possible level, as
well as to identify areas for improvement within the Customer's technical
support structure and operations.
This report is prepared for the Customer's in three major areas:
. Detailing list of all Assistance Request (AR) called into the
Technical Assistance Center
. Product reports identifying status (i.e. closed, restored. escalated,
open) by Severity level and AR Type (i.e. service, enhancement,
defect)
. AR Summary by product
With Customer customized performance reports, the Customer will receive a
detailed listing of call by AR number made during the contract period. This may
include at a minimum:
. Open Date
. Close Date
. Status
. Confirmed Severity
. Originator
. Location
. AR Type
. Description
. Resolution
Copper Mountain has a firm commitment to exceeding the Customer's expectations,
based upon Customer's definition of quality. Customer feedback is encouraged to
maintaining high quality service and Copper Mountain invites Customer inputs and
comments on a regular basis.
Page 29 of 31
<PAGE>
EXHIBIT H
COVERAGE
1. COVERAGE
(a) Copper Mountain Networks will provide to Customer, and the Customer will
pay for, on the terms and conditions set forth in this Agreement,
maintenance service for the Products identified on the face of this
Agreement and on any Supplement(s) and on subsequent orders for maintenance
signed by Customer and accepted by Copper Mountain Networks. Such orders
when accepted by Copper Mountain Networks shall become part of this
Agreement.
(b) Maintenance service shall be provided in accordance with the options
selected on the face of this Agreement and as amended in supplements to
this Agreement.
(c) Any equipment purchased from Copper Mountain Networks by Customer and
co-located with similar equipment covered under this Agreement, including
equipment acquired subsequent to the effective date of this Agreement,
shall upon expiration of any applicable warranty be included in maintenance
provided under this Agreement subject to the effective maintenance charges
for such equipment, and the period of maintenance for such equipment shall
be coterminous with the period of maintenance for the covered equipment.
Maintenance work requested to be performed at a time or in a manner beyond
the coverage selected by Customer or maintenance work required as a result
of an action or condition listed in Section 6 "Maintenance Not Covered" may
be provided subject to additional charges.
2. OWNERSHIP/LICENSEE Customer warrants that it is the owner of any equipment
covered by this Agreement or that it has the product owner's authorization to
enter into this Agreement. Customer further warrants that it is the Licensee of
the software programs covered by this Agreement and that the software programs
are properly registered with Copper Mountain Networks.
3. CUSTOMER'S RESPONSIBILITIES Throughout the term of this Agreement Customer
agrees to:
(a) Follow all Copper Mountain Networks' or relevant equipment manufacturer's
applicable installation, operation, administration, and maintenance
instructions.
(b) Provide the proper environment, electrical and telecommunications
connections as specified by Copper Mountain Networks or relevant equipment
manufacturer.
(c) Provide access to the products to enable Copper Mountain Networks to
perform maintenance.
(d) Provide adequate communications facilities, workspace, and storage space
for Copper Mountain Networks spare parts, if required.
(e) Maintain a procedure external to the software program(s) and host computer
for reconstruction of lost or altered files, data or programs to the extent
deemed necessary by the Customer.
(f) Customer shall provide test equipment and maintenance documentation
sufficient for maintenance of the Copper Mountain Subscriber Equipment
products that are listed in Exhibit E of this Agreement.
(g) Assure that work done at the site by Customer or by others shall not
interfere with Copper Mountain Networks' performance of maintenance
services.
Page 30 of 31
<PAGE>
4. MOVES AND MODIFICATIONS Customer may move or modify any Product being
maintained, but must promptly notify Copper Mountain Networks of such move or
modification. Customer agrees to pay additional charges if the move or
modification increases Copper Mountain Networks' costs or expenses of providing
maintenance services. If in the opinion of Copper Mountain Networks the move or
modification might create a safety hazard or product malfunction, Copper
Mountain Networks may either terminate this Agreement as to that product if such
action is mutually agreeable to both parties or, with the Customer's concurrence
and at its expense, eliminate the risk of such safety hazard or product
malfunction and continue to provide maintenance services. Copper Mountain
Networks reserves the right to inspect any moved or modified product.
5. RELOCATION, MODIFICATION OR IMPROPER USAGE OF SOFTWARE Copper Mountain
Networks shall be under no obligation to continue provision of service for
software under this Agreement if:
(a) The software program(s) has been modified without the prior written
approval of Copper Mountain Networks;
(b) The original software program identification marks have been removed or
altered;
(c) The software program(s) is moved from the street address where it was
initially installed without the prior notification to Copper Mountain
Networks;
(d) System software (i.e., core operating system utilities and libraries,
drivers, etc.) are not supported by Copper Mountain Networks.
(e) Host computer does not conform to the update level necessary to support the
software or has been modified other than by Copper Mountain Networks
personnel, so as not to conform to the specifications for which the
software was designed;
(f) The software program is being used by Customer in violation of Customer's
software license.
6. MAINTENANCE NOT COVERED This Agreement does not cover maintenance required to
repair damages, malfunctions or service failures caused by:
(a) Customer's failure to follow Copper Mountain Networks' or relevant
manufacturer's installation, operation, administration, and maintenance
instructions;
(b) Attachment of covered products to non-Copper Mountain Networks equipment,
or failure of a host computer, other equipment or software not maintained
by Copper Mountain Networks, or of removable rotating storage media;
(c) Abuse, misuse or negligent acts by anyone other than Seller or its
authorized representatives; or
(d) Power failure or surges from sources external to covered equipment,
lightening, fire, flood, pest damage, accident, actions of third parties
and other events outside Copper Mountain Networks' reasonable control or
not arising under normal operating conditions;
(e) Repairs or maintenance by non-Copper Mountain Networks authorized personnel
that are not performed in compliance with Copper Mountain's published
procedures and instructions.
Page 31 of 31
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
--------------------------------------------------
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-80333) pertaining to the 1996 Equity Incentive Plan, 1999 Employee
Stock Purchase Plan, 1999 Non-employee Directors' Stock Option Plan and Options
Granted Outside Any Plan of Copper Mountain Networks, Inc. and in the
Registration Statement (Form S-8 No. 333-32218) pertaining to the Common Stock
Issuable Upon Exercise of Options Assumed by Copper Mountain Networks, Inc.,
Originally Granted Under the OnPrem Networks Corporation 1998 Stock Option
Plan of our report dated January 28, 2000 (except for Note 12, as to which the
date is February 29, 2000), with respect to the financial statements of Copper
Mountain Networks, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1999.
Our audits also included the financial statement schedule of Copper Mountain
Networks, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
March 15, 2000
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<ALLOWANCES> 140
<INVENTORY> 12,801
<CURRENT-ASSETS> 150,492
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<COMMON> 48
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<TOTAL-LIABILITY-AND-EQUITY> 165,775
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