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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000.
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)
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
---- ----
The number of shares outstanding of the issuer's common stock, $.001 par
value, as of April 6, 2000 was 50,142,353.
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COPPER MOUNTAIN NETWORKS, INC.
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2000 and
December 31, 1999 2
Condensed Statements of Operations for the three
months ended March 31, 2000 and 1999 3
Condensed Statement of Stockholders' Equity for
the three months ended March 31, 2000 4
Condensed Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 27
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COPPER MOUNTAIN NETWORKS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2000 1999
-------- -----------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 64,114 $ 25,405
Short-term marketable investments 77,175 91,764
Accounts receivable, net 28,805 18,992
Inventory 8,718 12,801
Other current assets 2,029 1,530
-------- --------
Total current assets 180,841 150,492
Property and equipment, net 11,294 8,825
Purchased intangibles, net 62,187 --
Deferred tax assets 11,268 --
Other assets 3,467 6,458
-------- --------
Total assets $269,057 $165,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 15,666 $ 7,887
Accrued liabilities 13,413 8,752
Deferred tax liability 4,300 48
Current portion of obligations under capital
leases and equipment notes payable 1,556 1,618
-------- --------
Total current liabilities 34,935 18,305
Obligations under capital leases and equipment
notes payable, less current portion 3,977 4,044
Other accrued 122 105
Stockholders' equity:
Common stock 50 48
Additional paid in capital 232,370 159,149
Deferred compensation (4,759) (4,565)
Retained earnings (accumulated deficit) 2,362 (11,311)
-------- --------
Total stockholders' equity 230,023 143,321
-------- --------
Total liabilities and stockholders' equity $269,057 $165,775
======== ========
See accompanying notes to condensed financial statements.
2
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COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended March 31,
---------------------------
2000 1999
-------- -------
Net revenue $60,824 $13,217
Cost of revenue 28,102 6,384
------- -------
Gross profit 32,722 6,833
Operating expenses:
Research and development 6,771 2,564
Sales and marketing 5,663 2,581
General and administrative 2,662 1,130
Amortization of purchased intangibles 1,853 --
Amortization of deferred stock compensation 1,033 1,693
Write-off of in-process research and
development 6,300 --
------- -------
Total operating expenses 24,282 7,968
------- -------
Income (loss) from operations 8,440 (1,135)
Other income (expense):
Interest and other income 1,951 202
Interest expense (151) (55)
------- -------
Income (loss) before income taxes 10,240 (988)
Provision (benefit) for income taxes (3,433) 48
------- -------
Net income (loss) $13,673 $(1,036)
------- -------
Basic net income (loss) per share $0.28 $(0.23)
------- -------
Diluted net income (loss) per share $0.24 $(0.23)
------- -------
Basic common equivalent shares 48,593 4,417
------- -------
Diluted common equivalent shares 57,550 4,417
======= =======
See accompanying notes to condensed financial statements.
3
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COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------ Retained
Additional Earnings Total
Number of Paid in Deferred (Accumulated Stockholders'
Shares Amount Capital Compensation Deficit) Equity
--------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 47,662 $ 48 $ 159,149 $ (4,565) $ (11,311) $ 143,321
Common stock issued for acquisition of
OnPREM 1,142 1 70,130 -- -- 70,131
Deferred compensation related to
acquisition of OnPREM -- -- -- (1,288) -- (1,288)
Amortization related to deferred
stock compensation -- -- -- 1,033 -- 1,033
Common stock issued under Employee
Stock Purchase Plan 81 -- 721 -- -- 721
Tax benefit from the exercise of stock
options -- -- 1,250 -- -- 1,250
Exercise of options to purchase
common stock 1,200 1 1,120 -- -- 1,121
Remeasurement of unearned deferred
compensation -- -- -- 61 -- 61
Net income -- -- -- -- 13,673 13,673
--------- ------- ---------- ---------- --------- ---------
Balance at March 31, 2000 50,085 $ 50 $ 232,370 $ (4,759) $ 2,362 $ 230,023
========= ======= ========== ========== ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
4
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COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $13,673 $(1,036)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 3,209 489
Non-cash compensation 1,033 1,695
Write-off of in-process research and development 6,300 --
Tax benefit from the sale of stock options 1,250 --
Deferred income taxes (7,016) --
Changes in operating assets and liabilities:
Accounts receivable (9,813) 764
Inventory 4,083 (399)
Other current assets and other assets 905 (551)
Accounts payable and accrued liabilities 8,268 464
------- -------
Net cash provided by operating activities 21,892 1,426
------- -------
Cash flows from investing activities:
Maturities of marketable investments, net 17,688 865
Purchases of property and equipment (3,425) (1,509)
------- -------
Net cash provided by (used in) investing activities 14,263 (644)
------- -------
Cash flows from financing activities:
Proceeds from equipment notes payable 316 82
Payments on capital lease obligations (257) (33)
Payments on equipment notes payable (188) (71)
Proceeds from issuance of common stock 2,683 83
------- -------
Net cash provided by financing activities 2,554 61
------- -------
Net increase in cash and cash equivalents 38,709 843
Cash and cash equivalents at beginning of period 25,405 7,631
------- -------
Cash and cash equivalents at end of period $64,114 $ 8,474
======= =======
Supplemental information:
Interest paid $ 151 $ 46
======= =======
Issuance of stock for consulting services $ -- $ 2
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
5
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NOTE 1 - GENERAL
In management's opinion, the accompanying unaudited financial statements for
Copper Mountain Networks, Inc. (the "Company") for the three month periods ended
March 31, 2000 and 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of its financial position, results
of operations, and cash flows for such periods. However, the accompanying
financial statements do not contain all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All such financial statements are unaudited except for the December
31, 1999 balance sheet. This quarterly report and the accompanying financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto presented in its Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (the "1999 Annual Report"). Footnotes which
would substantially duplicate the disclosures in the Company's audited financial
statements for the year ended December 31, 1999 contained in the 1999 Annual
Report have been omitted. The interim financial information contained in this
quarterly report is not necessarily indicative of the results to be expected for
any other interim period or for the full year ending December 31, 2000.
NOTE 2 - MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 - 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
during the period including any dilutive common stock equivalents.
Common stock equivalents of 8,956,650 shares for the three months ending March
31, 2000 were used to calculate diluted earnings per share. Common stock
equivalents of 39,809,678 shares for the three months ending March 31, 1999 were
excluded from the calculation because of their anti-dilutive effect.
NOTE 4 - ACQUISITION
On February 29, 2000, the Company completed its acquisition of privately-held
OnPREM Networks Corporation ("OnPREM") of Fremont, California. OnPREM is a
developer of highly integrated DSL solutions for the small and medium building
Multi-Tenant Unit ("MTU") market. Under the terms of the agreement, Copper
Mountain acquired OnPREM in exchange for the issuance of approximately 1.1
million shares of Copper Mountain common stock and the assumption of options
outstanding under the OnPREM 1998 Stock Plan.
6
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The purchase price of the OnPREM acquisition, excluding acquisition costs, was
$70.1 million. The acquisition was accounted for as a purchase. On the date of
acquisition the purchase price was allocated as follows:
Purchased intangibles $65,360
In-process research and development 6,300
Current assets 1,000
Non-current assets 372
Current liabilities (488)
Accrued acquisition costs (3,700)
Deferred compensation 1,286
-------
$70,130
=======
In connection with the acquisition of OnPREM Networks, the Company wrote-off the
purchased in-process research and development of $6.3 million, which was charged
to operations upon completion of the acquisition. The purchased intangibles will
be amortized over their estimated useful life of three years.
NOTE 5 - PRO FORMA RESULTS OF ACQUISITION
If the OnPREM acquisition would have occurred on January 1, 1999, pro forma
financial information would have been as follows:
Three Months Ended March 31,
2000 1999
---------- ---------
(Unaudited)
Net revenue $60,824 $13,217
Net income (loss) 10,597 (6,731)
Basic net income (loss) per share 0.22 (1.52)
Diluted net income (loss) per share 0.18 (1.52)
NOTE 6 - INCOME TAXES
The Company decreased its valuation allowance related to its deferred tax assets
by $9.0 million as the realization of such assets became probable. The reduction
of the valuation allowance decreased the tax provision for the three months
ending March 31, 2000 by approximately $7.7 million and increased paid in
capital by $1.3 million. Excluding this adjustment, the Company currently
estimates its annual effective income tax rate to be approximately 42.0% for the
year ending December 31, 2000.
NOTE 7 - COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS (IN THOUSANDS)
March 31, December 31,
2000 1999
----------- -----------
(Unaudited)
Inventory:
Raw materials $ 5,154 $ 6,003
Work in process 2,258 3,148
Finished goods 1,306 3,650
------- -------
$ 8,718 $12,801
======= =======
Accrued liabilities:
Accrued compensation $ 2,365 $ 2,293
Accrued warranty 2,708 1,930
Accrued vacation 1,597 1,385
Other 6,743 3,144
------- -------
$13,413 $ 8,752
======= =======
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this 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 Annual Report on Form-10K for the year ended December 31,
1999 and other reports and filings made with the Securities and Exchange
Commission.
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
CopperEdge 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, or CE 150, and OnPREM 2400,
or OP 2400, DSL concentrators 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. This
concentration of revenue continued during the three months ended March 31, 2000,
with NorthPoint, Lucent, Rhythms, and DSL.NET accounting for approximately 29%,
29%, 13%, and 12% 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
8
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manufacturers, the mix of products or system configurations sold and the volume
and timing of sales of follow-on line cards for CopperEdge 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 CopperEdge products and related wide
area network and line cards, typically sold as a combined system, has been
higher than gross margins 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 be skewed more heavily toward sales of the Copper Edge family and
the related line cards. We expect gross margins for our CopperEdge systems and
follow-on line cards to improve due to lower component costs and improved costs
from our subcontractors as our revenue from these products increases. However,
we cannot be sure that we will achieve or maintain the revenue volumes required
for these increases in gross margin.
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 that such cost reductions will occur or to what extent they
may 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 market values per share for financial reporting purposes of our
common stock at dates of grant. The deferred compensation is being amortized to
expense in accordance with FASB Interpretation No. 28 over the vesting period of
the individual options, generally over four years. We recorded total deferred
stock compensation of $1.8 million, $2.4 million, $11.1 million, $234,000 and
$1.3 million in 1996, 1997, 1998, 1999 and for the three months ended March
9
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31, 2000, respectively, and amortized $189,000, $1.5 million, $3.9 million, $5.4
million and $1.0 million in 1996, 1997, 1998, 1999 and for the three months
ended March 31, 2000, respectively, leaving approximately $4.8 million to be
amortized in future periods.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenue, certain income
data for the periods indicated.
Three Months Ended
March 31,
------------------
2000 1999
------ ------
Net revenue 100.0% 100.0%
Cost of revenue 46.2 48.3
------ ------
Gross profit 53.8 51.7
Operating expenses:
Research and development 11.1 19.4
Sales and marketing 9.3 19.5
General and administrative 4.4 8.5
Amortization of purchased intangibles 3.0 --
Amortization of deferred stock compensation 1.7 12.8
Write-off of in-process research and development 10.4 --
------ ------
Total operating expenses 39.9 60.2
------ ------
Income (loss) from operations 13.9 (8.5)
Interest and other income, net 2.9 1.1
------ ------
Income (loss) before income taxes 16.8 (7.4)
Provision (benefit) for income taxes (5.6) 0.4
------ ------
Net income (loss) 22.4 (7.8)
====== ======
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
Net Revenue. Net revenue increased from $13.2 million for the three months
ended March 31, 1999 to $60.8 million for the three months ended March 31, 2000.
This increase was due to increased sales of our CE200 DSL access concentrators
and related line cards. Sales to our four largest customers, NorthPoint,
Rhythms, Lucent, and DSL.NET increased from $4.8 million, $6.4 million, $0.1
million and zero, respectively, for the three months ended March 31, 1999 to
$17.8 million, $7.8 million, $17.5 million, and $7.1 million, respectively, for
the three months ended March 31, 2000.
Gross Profit. Our gross profit increased from $6.8 million for the three
months ended March 31, 1999 to $32.7 million for the three months ended March
31, 2000. The increase in gross profit occurred primarily because of the
increase in net revenue for the period. Gross profit percentages also increased
on a year over year basis, from 51.7% for the quarter ended March 31, 1999 to
53.8% for the quarter ended March 31, 2000. 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
$2.6 million for the quarter ended March 31, 1999 to $6.8 million for the
quarter ended March 31, 2000. This increase was due to an increase in personnel
expenses related to an increase in our engineering staff, quality and technical
support costs and expensed prototype materials. Research and development
expenses as a percentage of net revenue decreased from 19.4% for the quarter
ended March 31, 1999 to 11.1% for the quarter ended March 31, 2000. This
decrease in research and development expense as a percentage of net revenue was
primarily the result of an increase in our net revenue for the quarter ended
March 31, 2000.
10
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Sales and Marketing. Our sales and marketing expenses increased from $2.6
million for the quarter ended March 31, 1999 to $5.7 million for the quarter
ended March 31, 2000. This increase was due to an increase in personnel expenses
for sales and marketing staff, increased sales commissions associated with
higher net revenue, and increased promotional and product marketing expenses
during the stated periods. Sales and marketing expenses as a percentage of net
revenue decreased from 19.5% of net revenue for the quarter ended March 31, 1999
to 9.3% for the quarter ended March 31, 2000. This decrease was primarily the
result of an increase in our net revenue for the quarter ended March 31, 2000.
General and Administrative. Our general and administrative expenses increased
from $1.1 million for the quarter ended March 31, 1999 to $2.7 million for the
quarter ended March 31, 2000. This increase was due to increased staffing for
management information systems, administrative and human resource personnel, and
growth in recruiting and other administrative expenses. General and
administrative expenses as a percentage of net revenue decreased from 8.5% for
the quarter ended March 31, 1999 to 4.4% for the quarter ended March 31, 2000.
This decrease was primarily the result of an increase in our net revenue for the
quarter ended March 31, 2000.
Interest and Other Income. Interest and other income increased from $202,000
for the quarter ended March 31, 1999 to $2.0 million for the quarter ended March
31, 2000. This increase was primarily due to higher average cash balances during
the quarter ended March 31, 2000, which included the proceeds from our initial
public offering completed in May of 1999.
Interest Expense. Our interest expense increased from $55,000 for the quarter
ended March 31, 1999 to $151,000 for the quarter ended March 31, 2000. This
increase was primarily due to an increase in the amount outstanding under
capital lease and equipment notes payable facilities as a result additional
financing of computers and other equipment.
Amortization of Purchased Intangibles. Amortization of purchased intangibles
increased from zero for the quarter ended March 31, 1999 to $1.9 million for the
quarter ended March 31, 2000. We purchased OnPREM Networks Corporation on
February 29, 2000 for approximately $73.8 million. As a result of the purchase
we recorded purchased intangibles of approximately $70.4 million. Immediately
following the purchase we wrote-off $6.3 million of in-process research and
development. The remaining purchased intangibles will be amortized over a
three-year period from the date of the acquisition.
Provision (Benefit) for Income Taxes. Our effective income tax rate for the
three months ended March 31, 2000 was 42%, which approximates the combined
federal and California (net of federal benefit) statutory rate. The income tax
provision was reduced by the reduction in the Company's valuation allowance
related to its deferred tax assets which realization of those assets became
probable. The reduction of the valuation allowance decreased the tax provision
for the three months ending March 31, 2000 by approximately $7.7 million.
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 March 31, 2000, we had cash and cash equivalents of $64.1 million, short-
term marketable investments of $77.2 million and long-term marketable
investments of $2.0 million.
Cash provided by operating activities for the three months ended March 31,
2000 and 1999 was $21.9 million and $1.4 million, respectively. The relative
increase in cash provided by operating activities for the quarter ended March
31, 2000 compared to the same period in the prior year was primarily the result
of an increase in net income of $14.7 million and an increase in non-cash
expenses of $8.4 million.
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Cash provided by/(used in) investing activities for the three months ended
March 31, 2000 and 1999 was $14.3 million and ($644,000), respectively. The
relative increase in cash provided by investing activities for the quarter ended
March 31, 2000 compared to the same period in the prior year was the result of
net maturities of marketable investments, which was partially offset by an
increase in the purchase of computers and other equipment.
Cash provided by financing activities for the three months ended March 31,
2000 and 1999 was $2.6 million and $61,000, respectively. The relative increase
in cash provided by financing activities for the quarter ended March 31, 2000
compared to the same period in the prior year was primarily due to the increase
in proceeds received from the exercise of stock options.
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 March 31, 2000, the full amount of funds
available under this credit facility had been utilized. The borrowings under the
equipment loans and the capital lease agreement are to be repaid in 48 equal
monthly installments and accrue interest at 10.8%. Both obligations are secured
by the related equipment.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. Our future capital requirements
will depend upon many factors, including the timing of research and product
development efforts and expansion of our marketing efforts. We expect to
continue to expend significant amounts on property and equipment related to the
expansion of facility infrastructure, computer equipment and for research and
development laboratory and test equipment to support on-going research and
development operations.
In future periods, we generally anticipate significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product revenue. In conjunction with the expected increase in revenue, we expect
higher relative levels of inventory and accounts receivable. While we also
expect an increase in accounts payable and other liabilities, we do not expect
that they will offset the increases in inventory and accounts receivable.
We believe that our cash and cash equivalents balances, short-term 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.
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RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
You should carefully consider the following risk factors and the other
information included herein as well as the information included in our Annual
Report on Form 10-K for the year ended December 31, 1999, and other reports and
filings made with the Securities and Exchange Commission 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 Sustain Annual
Profitability
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 four largest customers accounted for
approximately 83% of our net revenue for the three months ended March 31, 2000.
Sales to our most significant customers NorthPoint Communications, Inc., Lucent
Technologies, Inc., Rhythms NetConnections, Inc., and DSL.NET accounted for
approximately 29%, 29%, 13%, and 12% of Copper Mountain's net revenue,
respectively, for the three months ended March 31, 2000. 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 revenue, harm our reputation in the industry, and
reduce our ability to accurately predict cash-flow, and, as a consequence, could
materially adversely affect our business, financial condition and results of
operations.
Copper Mountain Has a Limited Operating History
Copper Mountain has a very limited operating history 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;
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. 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;
. 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
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results. Furthermore, our customers may delay delivery schedules or cancel their
orders without notice. Due to these and other factors, quarterly revenue,
expenses and results of operations could vary significantly in the future, and
period-to-period comparisons should not be relied upon as indications of future
performance.
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 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
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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 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
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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 effects of Lucent's
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 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.
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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
. 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.
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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 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.
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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 the first quarter of 2000, we have
increased the number of employees from 240 to 301. 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.
As of March 31, 2000 we operated our business from facilities in Palo Alto,
California, Fremont, 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.
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Copper Mountain's Dependence on Independent Manufacturers Could Result in
Product Delivery Delays
Copper Mountain currently uses a small number of independent manufacturers to
provide certain printed circuit boards, chassis and subassemblies and, in
certain cases, to complete final assembly and testing of our products. Our
reliance on independent manufacturers involves a number of risks, including the
absence of adequate capacity, the unavailability of or interruptions in access
to certain process technologies and reduced control over delivery schedules,
manufacturing yields and costs. Recently we entered into a formal manufacturing
agreement with Flextronics International, Ltd. located in Fremont, 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 periods manufacturers and suppliers who
provide such components to us experience supply shortages which may in turn
affect their ability to meet our production demands. While we seek to enter into
contracts with our suppliers which guarantee adequate supplies of components for
the manufacturing of our products, we cannot be certain that suppliers will
always be able to adequately meet our demands. To date, we have not experienced
any shortages of components or parts which have impacted our ability to meet the
shipment requirements of our customers. However, in the event that we receive
allocations of components from our suppliers or experience outright interruption
in the supply of components we could experience an inability to ship or deliver
our products to our customers in a timely fashion. Any significant allocation of
or interruption in the supply of any component could have a material adverse
effect on our business, financial condition and results of operations.
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which 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.
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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 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
22
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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;
. 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.
In February, 2000, we acquired OnPREM Networks Corporation. We operate in a
sector of the DSL equipment industry that is considerably different from the
sector for which OnPREM is developing its products. It may turn out that there
are no advantages or "synergies" to adding OnPREM's proposed products to our
product line. Moreover, there is no assurance that OnPREM's operations can be
successfully integrated into our operations or that all of the benefits expected
from the acquisition of OnPREM will be realized. Furthermore, there can be no
assurance that the operations, management and personnel of the two companies
will be compatible or that we or OnPREM will not experience the loss of key
personnel following the merger.
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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 collection 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 14.7% of the outstanding shares
of common stock as of March 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 or prevent our stockholders from realizing a premium over the market
prices for their shares of common stock.
Copper Mountain's stock price has been and may continue to be extremely
volatile
The trading price of our common stock has been and is likely to continue to be
extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by us or our competitors;
. changes in financial estimates by securities analysts;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
24
<PAGE>
. 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 March 31, 2000, we had 50.1
million shares of common stock outstanding. We filed two registration statements
on Form S-8 with the Securities and Exchange Commission covering the 14.5
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, the OnPREM 1998 Stock Option Plan and for options issued
outside such plans. As of March 31, 2000 at least 1.7 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.
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.
25
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our long-term debt
arrangements and, secondarily, our investments in certain held-to-maturity
securities. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of our interest sensitive
financial instruments at March 31, 2000.
26
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On February 29, 2000, the Company completed the acquisition of OnPREM
Networks Corporation ("OnPREM") in a merger pursuant to which the
Company issued 1,142,293 unregistered shares of its common stock to the
former shareholders of OnPREM in exchange for all outstanding shares of
OnPREM stock. As a result of the merger, OnPREM became a wholly-owned
subsidiary of the Company. The issuance of such securities was deemed
to be exempt from registration under the Securities Act of 1933, as
amended, by virtue of Regulation D promulgated thereunder. Each of the
former shareholders of OnPREM received adequate information about the
Company and was either an accredited investor or, through his or her
purchaser representatives, had such knowledge and experience in
financial matters that he or she was capable of evaluating the merits
and risks of the prospective investment in the Company.
(d) 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 $1,200,000. After deduction of the underwriters'
commissions and the expenses of the offering, the Company received net
proceeds of approximately $88,638,000.
As of March 31, 2000, the Company had used, all of the, net proceeds
from the offering to (i) pay for research and development expenses
(approximately $18.3 million), (ii) expand its sales and marketing
activities (approximately $17.8 million), and (iii) pay for general and
administrative expenses and for working capital (approximately $52.7
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K during the quarter ended March 31, 2000:
Report on Form 8-K dated February 22, 2000, voluntarily filing updated
financial statements and results of operations for the year ended
December 31, 1999.
Report on Form 8-K dated March 17, 1999, announcing the completion of
the acquisition of OnPREM Networks Corporation effective February 29,
2000.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Copper Mountain Networks, Inc.
Date: April 25, 2000 /s/ Richard S. Gilbert
-------------------------
Richard S. Gilbert
President
Chief Executive Officer
/s/ John A. Creelman
-------------------------
John A. Creelman
Vice President of Finance
Chief Financial Officer
Secretary
28
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
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ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
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<SECURITIES> 77,175
<RECEIVABLES> 29,392
<ALLOWANCES> 587
<INVENTORY> 8,718
<CURRENT-ASSETS> 180,841
<PP&E> 17,352
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<TOTAL-LIABILITY-AND-EQUITY> 269,057
<SALES> 60,824
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<OTHER-EXPENSES> 24,252
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