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, 2001.
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.)
1850 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 30, 2001 was 52,906,658.
COPPER MOUNTAIN NETWORKS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at March 31, 2001 and
December 31, 2000 2
Condensed Statements of Operations for the three months
ended March 31, 2001 and 2000 3
Condensed Statement of Stockholders' Equity for the three
months ended March 31, 2001 4
Condensed Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 29
Part II. Other Information
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 86,795 $ 65,838
Short-term marketable investments 50,806 96,778
Accounts receivable, net 2,248 19,496
Inventory, net 22,622 26,405
Other current assets 3,485 7,961
-------- --------
Total current assets 165,956 216,478
Marketable investments ---- 6,161
Property and equipment, net 23,226 24,961
Other assets 2,031 11,126
Purchased intangibles, net 40,833 46,159
-------- --------
$232,046 $304,885
Total assets ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 5,018 $ 23,963
Adverse purchase commitment 44,661 28,600
Accrued liabilities 13,706 17,351
Current portion of obligations under capital leases
and equipment notes payable 3,173 3,177
-------- --------
Total current liabilities 66,558 73,091
Obligations under capital leases and equipment
notes payable, less current portion 5,862 6,654
Other accrued 391 314
Stockholders' equity:
Common stock 53 52
Additional paid in capital 237,428 236,675
Deferred compensation (1,732) (2,283)
Accumulated deficit (76,514) (9,618)
-------- --------
Total stockholders' equity 159,235 224,826
-------- --------
$232,046 $304,885
Total liabilities and stockholders' equity ======== ========
See accompanying notes to condensed financial statements
2
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended March 31,
-------------------------------
2001 2000
-------- -------
Net revenue $ 8,161 $60,824
Cost of revenue 39,528 28,102
-------- -------
Gross margin (31,367) 32,722
Operating expenses:
Research and development 11,667 6,771
Sales and marketing 7,010 5,663
General and administrative 7,796 2,662
Amortization of purchased intangibles 5,326 1,853
Amortization of deferred stock compensation* 555 1,033
Restructuring costs 4,382 ----
Write-off of in-process research and development ---- 6,300
-------- -------
Total operating expenses 36,736 24,282
-------- -------
Income (loss) from operations (68,103) 8,440
Other income (expense):
Interest and other income, net 1,425 1,951
Interest expense (218) (151)
-------- -------
Income (loss) before income taxes (66,896) 10,240
Provision (benefit) for income taxes ---- (3,433)
-------- -------
Net income (loss) $(66,896) $13,673
======== =======
Basic net income (loss) per share $ (1.27) $ 0.28
======== =======
Diluted net income (loss) per share $ (1.27) $ 0.24
======== =======
Basic common equivalent shares 52,590 48,593
======== =======
Diluted common equivalent shares 52,590 57,550
======== =======
* The following table shows how the Company's deferred stock compensation would
be allocated to cost of revenue and the respective expense categories:
Cost of revenue $ 19 $ 43
Research and development 142 419
Sales and marketing 92 157
General and administrative 302 414
-------- -------
Total $ 555 $ 1,033
======== =======
See accompanying notes to condensed financial statements.
3
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Common Stock
-----------------
Additional Total
Number of Paid in Deferred Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Equity
--------- ------ ---------- ------------- ------------ -------------
Balance at December 31, 2000 52,053 $ 52 $236,675 $(2,283) $ (9,618) $224,826
Options to purchase common stock for
consulting services ---- ---- 4 (4) ---- ----
Amortization related to deferred stock compensation ---- ---- ---- 555 ---- 555
Common stock issued under Employee Stock Purchase Plan 80 ---- 521 ---- ---- 521
Exercise of options to purchase common stock 270 1 228 ---- ---- 229
Net exercise of warrants to purchase common stock 354 ---- ---- ---- ---- ----
------ ----- -------- -------- -------- --------
Net loss ---- ---- ---- ---- (66,896) (66,896)
------ ----- -------- -------- -------- --------
Balance at March 31, 2001 52,757 $ 53 $237,428 $ (1,732) $(76,514) $159,235
====== ===== ======== ======== ======== ========
See accompanying notes to condensed financial statements
4
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
-----------------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net income (loss) $(66,896) $13,673
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization 8,161 3,209
Non-cash portion of restructuring costs 1,900 ----
Non-cash compensation 555 1,033
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 17,248 (9,813)
Inventory 3,783 4,083
Other current assets and other assets 13,571 905
Adverse purchase commitment 16,061 ----
Accounts payable and accrued liabilities (22,513) 8,268
-------- -------
Net cash (used in) provided by operating activities (28,130) 21,892
-------- -------
Cash flows from investing activities:
Maturities of marketable investments, net 52,133 17,688
Purchases of property and equipment (3,000) (3,425)
-------- -------
Net cash provided by investing activities 49,133 14,263
-------- -------
Cash flows from financing activities:
Proceeds from equipment notes payable ---- 316
Payments on capital leases and equipment notes payable (796) (445)
Proceeds from issuance of common stock 750 2,683
-------- -------
Net cash (used in) provided by financing activities (46) 2,554
-------- -------
Net increase in cash and cash equivalents 20,957 38,709
Cash and cash equivalents at beginning of period 65,838 25,405
-------- -------
Cash and cash equivalents at end of period $ 86,795 $64,114
======== =======
Supplemental information:
Interest paid $ 218 $ 151
======== =======
Issuance of stock options for consulting services $ 4 $ ----
======== =======
See accompanying notes to condensed financial statements
5
NOTE 1 - General and Summary of Significant Accounting Policy
In management's opinion, the accompanying unaudited condensed financial
statements for Copper Mountain Networks, Inc. (the "Company") for the three
month periods ended March 31, 2001 and 2000 have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and include all adjustments (consisting only of normal recurring accruals except
for a charge related to excess inventory on hand and on order of $35.0 million,
a restructuring charge of $4.4 million, a $2.6 million charge related to the
collectability of certain receivable and a charge related to the investment in
commercial paper of Southern California Edison of $0.6 million) 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, 2000 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 and
Amendment No. 1 on Form 10-K/A for the fiscal year ended December 31, 2000 (the
"2000 Annual Report"). Footnotes which would substantially duplicate the
disclosures in the Company's audited financial statements for the year ended
December 31, 2000 contained in the 2000 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, 2001.
Investments In Marketable Securities
At March 31, 2001, the Company held investments in investment grade debt and
money market securities with various maturities through January 2002.
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
March 31, 2001 totaled $126.3 million. The Company has included $75.5 million
of these securities in cash and cash equivalents, as of March 31, 2001, as they
have original maturities of less than 90 days. The remaining debt securities
totaling $50.8 million as of March 31, 2001 have been classified as short-term
marketable investments. The fair value of the Company's total investments in
marketable securities based upon the closing market prices of such securities as
of March 31, 2001 approximated the carrying value. The Company has designated
all of its investments as held-to-maturity, except for an investment with a cost
basis of $3.4 million in commercial paper issued by Southern California Edison,
which was transferred from being classified as held-to-maturity to available-
for-sale because the security had matured.
During the three months ended March 31, 2001, the Company reduced the carrying
value of the investment in commercial paper issued by Southern California Edison
Company to its indicated fair market value of approximately $2.8 million.
Included in other income, net for the three months ended March 31, 2001 is a
loss adjustment of $625,000 to adjust the carrying value of the investment to
fair market value. The ultimate net realizable value of this investment is not
practicably determinable.
Investments In Sales-Type Leases
During the year ended December 31, 2000, the Company entered into a $10.0
million credit facility with a customer for the purchase of the Company's
equipment under a capital lease agreement. During the three months ended March
31, 2001, this investment was sold at an amount that approximated the carrying
value.
During the year ended December 31, 2000, the Company entered into a $8.6 million
credit facility with another customer for the purchase of the Company's
equipment under a capital lease agreement. At December 31, 2000, the Company had
a net lease receivable from this customer of $4.7 million. During the three
months ended March 31, 2001, the Company received the lessee's quarterly lease
payment, however as a result of the continuing deterioration of the lessee's
financial position, the Company took a $2.6 million charge to reduce the
carrying value of the lease receivable. This charge is included in bad debt
expense for the three months ended March 31, 2001. As of March 31, 2001, the
remaining $1.4 million of the net lease receivable was classified in the
Company's balance sheet as other current assets.
6
Concentration of Credit Risk
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 three months
ended March 31, 2001 include revenue recognized from one significant
international customer totaling $2.4 million or 29% of net revenue.
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 30%, 29%, 17% and 17%
of total accounts receivable at March 31, 2001.
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.
Inventory
Inventory is stated at the lower of cost, principally standard costs, which
approximates actual costs on a first-in, first-out basis, or market. During the
first quarter of 2001, the Company recorded a charge of $35 million of which
$17.2 million relates to future inventory purchase commitments of finished
products and raw materials in excess of anticipated requirements and $17.8
million relates to excess inventory on hand at March 31, 2001. The reduction to
inventory value and loss on purchase commitments are included in cost of
revenues.
New Accounting Standard
On January 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("FAS 133"). This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives are recorded each period in income or
other comprehensive income, depending on whether the derivatives are designated
as hedges and, if so, the types of hedges. The Company did not use any
derivatives in the three months ended March 31, 2001 and there was no cumulative
effect adjustment upon adoption.
Reclassifications
Certain prior period amounts and balances have been reclassified to conform with
the current period presentation.
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. Examples include provisions for returns, bad debts, excess
inventory and adverse purchase commitments, restructuring; the ultimate
realizability of investments and intangible assets and the ultimate outcome of
litigation. Actual results could differ from those estimates.
NOTE 3 - Net Income (Loss) Per Share
7
Basic and diluted net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the period
including any dilutive common stock equivalents.
Common stock equivalents of 2,924,569 shares for the three months ended March
31, 2001 were excluded from the calculation because of their anti-dilutive
effect. Common stock equivalents of 8,956,650 shares for the three months ended
March 31, 2000 were used to calculate diluted earnings per share.
NOTE 4 - Composition of Certain Balance Sheet Captions (in thousands)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
Inventory:
Raw materials $ 32,101 $ 22,635
Work in process 3,262 1,529
Finished goods 17,578 14,569
Allowance for excess and obsolescence (30,319) (12,328)
-------- --------
$ 22,622 $ 26,405
======== ========
Accrued liabilities:
Accrued compensation $ 3,055 $ 4,126
Accrued warranty 2,396 3,714
Accrued vacation 2,241 2,203
Accrued restructuring costs 1,929 ----
Deferred revenue 636 2,554
Other 3,449 4,754
-------- --------
$ 13,706 $ 17,351
======== ========
NOTE 5 - Restructuring
On March 7, 2001, the Company announced that it had adopted a business plan to
re-size its business to reflect current and expected business conditions. The
restructuring plan is expected to largely be completed during 2001. As a result
of the adoption of this plan, the Company recorded charges of $4.4 million
during the first quarter of 2001. These charges (shown below in tabular format)
primarily relate to: consolidation of the Company's continuing operations
resulting in impairment of assets, anticipated losses on disposition of assets
as well as excess lease costs; and the elimination of job responsibilities,
resulting in costs incurred for employee severance. Employee reductions
occurred in almost all areas of the Company, including operations, marketing,
sales and administrative areas. At March 31, 2001, the Company had reduced its
non-temporary work force by approximately 100 positions. Substantially all
reductions occurred prior to March 31, 2001.
As a part of this plan, the carrying values of certain assets were written down.
The impaired assets include furniture, leasehold improvements, computers and
other assets used in certain of the areas of the Company impacted by the
reduction in force. The projected future cash flows from these assets were less
than the carrying values of the assets. The carrying values of the assets held
for sale and the assets to be held and used were reduced to their estimated fair
values based on the present value of the estimated expected future cash flows.
Estimated expected future cash flows for the impaired assets are not
significant. In the first quarter of 2001, the Company recorded losses from
impairment of assets of $1.9 million, which were recorded as restructuring
costs. Substantially all of the impaired assets are being held for disposition
and will not continue to be depreciated. The Company does not expect that the
effect on depreciation will materially impact future results of operations.
Also as part of this plan, the Company elected to consolidate its operations and
attempt to sub-lease certain of its facilities, which housed portions of its
operations, marketing, sales and administrative activities. In
8
the first quarter of 2001, the Company recorded estimated excess lease costs of
$886,000 which were recorded as restructuring costs. Estimated excess lease
costs are based on assumptions of differences between lease payments and
sublease receipts that could be realized on potential subleases and assumed
carrying terms. These assumptions are based on reasonable possible rates and
terms from other recent leases of comparable properties. The rates and terms of
the actual sub-leases may differ materially from these estimates which could
result in changes in the restructuring charge recognized during the three months
ended March 31, 2001.
Details of the restructuring charge are as follows (in 000s):
Cash/ Reserve Balance
Non-cash Charge Activity at March 31, 2001
-------------- ---------------- ------------ -----------------------
Impairment of assets Non-cash $1,900 $---- $1,900
Excess lease costs Cash 886 ---- 886
Elimination of job responsibilities Cash 1,596 (553) 1,043
------ ----- ------
$4,382 $(553) $3,829
At March 31, 2001, the portion of the reserve balance related to the impairment
of assets is included in property and equipment, net. Future cash outlays are
expected to be completed in 2001.
NOTE 6 - Litigation
Since October 2000, approximately twenty-four complaints have been filed in the
United States District Court for the Northern District of California against the
Company and two of its officers, along with two related derivative actions
against the Company and its directors, alleging violations of the federal
securities laws arising out of recent declines in the Company's stock price.
Specifically, the complaints allege claims in connection with various alleged
statements and omissions to the public and to the securities markets. No
assurances can be made that we will be successful in our defense of such claims.
If we are not successful in our defense of such claims, we could be forced to
make significant payments to our stockholders and their lawyers, and such
payments could have a material adverse effect on our business, financial
condition and results of operations if not covered by our insurance carrier.
Even if such claims are not successful, the litigation could result in
substantial costs and divert management's attention and resources, which could
adversely affect our business, results of operations and financial position.
NOTE 7 - Recent Events
Stock Option Cancel and Re-grant Program
In November 2000, the Company allowed employees holding options to purchase the
Company's common stock to cancel certain stock option grants in exchange for a
commitment that options to purchase the same number of common shares will be
granted in May 2001 with an exercise price equal to the fair market value on the
date of the new grant, provided that the participant has not terminated
employment prior to such time (the "Cancel and Re-grant Program"). Options
granted under the Cancel and Re-grant Program will vest ratably over a period of
36 months. All other terms of options granted under the Cancel and Re-grant
Program will be substantially the same as the cancelled options. Options to
purchase 4.8 million shares of common stock were cancelled under the Cancel and
Re-grant Program. At March 31, 2001, the Company is committed to grant options
to purchase 3.7 million shares of common stock in May 2001.
Stock Option Exchange Program
In April 2001, the Company's Board of Directors approved a plan to allow
employees holding options to purchase the Company's common stock to cancel
certain stock option grants in exchange for options to
9
purchase the same number of common shares which will be granted in May 2001 with
an exercise price equal to the fair market value on the date of the new grant
(the "Exchange Program"). Options granted under the Exchange Program will vest
ratably over a period of 36 months and have a life of five years from the date
of grant. All other terms of options granted under the Exchange Program will be
substantially the same as the cancelled options. The number of options to
purchase common stock to be cancelled is not yet determinable. The Exchange
Program will result in variable plan accounting for the options to purchase
common stock cancelled and granted under the plan. The intrinsic value of the
options to purchase common stock will be re-measured at the end of each period
for the life of the option and be amortized over the vesting period in
accordance with FASB Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans."
10
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 10-K for the year ended December 31,
2000 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
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, and the OnPrem(TM) 2400 Concentrator, or OP2400 to customers in the
multiple tenant unit, or MTU, market.
For the three months ended March 31, 2001, revenue recognized from our
largest customer, Versapoint, accounted for approximately 29% of our revenue.
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. Future sales, if any, to historically
significant customers may be substantially less than historical sales. The loss
of any one of our historically major customers or the delay of significant
orders from such customers, even if only temporary, could among other things
reduce or delay our net revenue, adversely impact our ability to achieve annual
or quarterly profitability and adversely impact our ability to generate positive
cashflow, and, as a consequence, could materially adversely affect our business,
financial condition and results of operations.
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 or sales type
leases upon shipment if collection of the resulting receivable is probable and
product returns are reasonably estimated and the sales-type lease criteria are
met. 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.
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 systems shipped in prior periods.
To date, gross margin on sales of our CE200, CE150 and OP2400 systems and
related wide area network and line cards, typically sold as combined systems,
have been higher than gross margin on sales of DSL CPE. Furthermore, combined
systems are not generally fully-populated (i.e., less than the total number of
line cards which each system can support) 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.
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
could consist 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 we will achieve or maintain the
volumes required to realize these economies of scale or 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 believe that continued investment in research and
development is critical to attaining our strategic product 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.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance, human resources, management information systems
and administrative personnel, recruiting expenses, professional fees and other
general corporate expenses.
Prior to the year ended December 31, 2000, amortization of deferred stock
compensation resulted from the granting of stock options to employees with
exercise prices per share determined to be below the fair values per share for
financial reporting purposes of our common stock at dates of grant. During the
year ended December 31, 2000, additional deferred compensation was recorded as
part of the purchase price of OnPREM Networks Corporation. The deferred
compensation is being amortized to expense in
11
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, $234,000 and $1.4
million in 1996, 1997, 1998, 1999 and 2000, respectively, and amortized
$189,000, $1.5 million, $3.9 million, $5.4 million, $3.7 million and $555,000 in
1996, 1997, 1998, 1999, 2000 and for the three months ended March 31, 2001,
respectively, leaving approximately $1.7 million to be amortized in future
periods. As a result of the Exchange Program (see Note 7 to Condensed Financial
Statements), deferred stock compensation and amortization of deferred stock
compensation could increase in future periods.
On March 7, 2001, the Company announced that it had adopted a business plan
to re-size its business to reflect current and expected business conditions. The
restructuring plan is expected to largely be completed during 2001. As a result
of the adoption of this plan, the Company recorded charges of $4.4 million
during the first quarter of 2001. These charges (shown below in tabular format)
primarily relate to: consolidation of the Company's continuing operations
resulting in impairment of assets, anticipated losses on disposition of assets
as well as excess lease costs; and the elimination of job responsibilities,
resulting in costs incurred for employee severance. Employee reductions occurred
in almost all areas of the Company, including operations, marketing, sales and
administrative areas. At March 31, 2001, the Company had reduced its non-
temporary work force by approximately 100 positions. Substantially all
reductions occurred prior to March 31, 2001.
As a part of this plan, the carrying value of certain assets were written
down. The impaired assets include furniture, leasehold improvements, computers
and other assets used in certain of the areas of the Company impacted by the
reduction in force. The projected future cash flows from these assets were less
than the carrying values of the assets. The carrying values of the assets held
for sale and the assets to be held and used were reduced to their estimated fair
values based on the present value of the estimated expected future cash flows.
Estimated expected future cash flows for the impaired assets are not
significant. In the first quarter of 2001, the Company recorded losses from
impairment of assets of $1.9 million, which were recorded as restructuring
costs. Substantially all of the impaired assets are being held for disposition
and will not continue to be depreciated. The Company does not expect that the
effect on depreciation will materially impact future results of operations.
Also as part of this plan, the Company elected to consolidate its operations
and attempt to sub-lease certain of its facilities, which housed portions of its
operations, marketing, sales and administrative activities. In the first
quarter of 2001, the Company recorded estimated excess lease costs of $886,000
which were recorded as restructuring costs. Estimated excess lease costs are
based on assumptions of differences between lease payments and sublease receipts
that could be realized on potential subleases and assumed carrying terms. These
assumptions are based on reasonable possible rates and terms from other recent
leases of comparable properties. The rates and terms of the actual sub-leases
may differ materially from these estimates which could result in changes in the
restructuring charge recognized during the three months ended March 31, 2001.
Details of the restructuring charge are as follows (in 000s):
Cash/ Reserve Balance
Non-cash Charge Activity at March 31, 2001
------------- ---------------- --------------- ----------------------
Impairment of assets Non-cash $1,900 $---- $1,900
Excess lease costs Cash 886 ---- 886
Elimination of job responsibilities Cash 1,596 (553) 1,043
------ ----- ------
$4,382 $(553) $3,829
At March 31, 2001, the portion of the reserve balance related to the
impairment of assets is included in property and equipment, net. Future cash
outlays are expected to be completed in 2001.
12
Results of Operations
The following table sets forth, as a percentage of net revenue, certain
statement of operations data for the periods indicated.
Three Months Ended
March 31,
------------------------------
2001 2000
------------ ------------
Net revenue 100.0% 100.0%
Cost of revenue 484.4 46.2
------------ ------------
Gross margin (384.4) 53.8
Operating expenses:
Research and development 143.0 11.1
Sales and marketing 85.9 9.3
General and administrative 95.5 4.4
Amortization of purchased intangibles 65.3 3.0
Amortization of deferred stock compensation 6.7 1.7
Restructuring costs 53.7 ----
Write-off of in-process research and development ---- 10.4
------------ ------------
Total operating expenses 450.1 39.9
------------ ------------
Income (loss) from operations (834.5) 13.9
Interest and other income, net 14.8 2.9
------------ ------------
Income (loss) before income taxes (819.7) 16.8
Provision (benefit) for income taxes ---- (5.6)
------------ ------------
Net income (loss) (819.7) 22.4
============ ============
Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000
Net Revenue. Net revenue decreased from $60.8 million for the three months
ended March 31, 2000 to $8.2 million for the three months ended March 31, 2001.
This decrease was due to decreased sales of our CE200 DSL access concentrators
and related line cards. Sales to our four largest customers for the three months
ended March 31, 2000, NorthPoint, Rhythms, Lucent, and DSL.NET, decreased from
$17.8 million, $7.8 million, $17.5 million, and $7.1 million, respectively, to
an aggregate of $980,000 for the three months ended March 31, 2001. Net revenue
for the three months ended March 31, 2001 includes $3.3 million of revenue
deferred from prior periods as during this period the criteria for revenue
recognition had been met. Revenue recognized from our largest customer for the
three months ended March 31, 2001, Versapoint, was $2.4 million.
Gross Margin. Our gross margin decreased from $32.7 million for the three
months ended March 31, 2000 to $(31.4) million for the three months ended March
31, 2001. The decrease in gross margin occurred primarily because of a decrease
in net revenue and an excess inventory charge of $35.0 million of which $17.8
million relates to inventory on hand at March 31, 2001 and $17.2 million relates
to future inventory purchase commitments of finished products and raw materials
in excess of anticipated requirements. Before the impact of these charges, gross
margin as a percentage of sales for the three months ended March 31, 2001 was
adversely impacted by production volumes and sales mix.
Research and Development. Our research and development expenses increased
from $6.8 million for the three months ended March 31, 2000 to $11.7 million for
the three months ended March 31, 2001. 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 increased from 11.1% for the
three months ended March 31, 2000 to 143.0% for the three months ended March 31,
2001. This increase in research and development expense as
13
a percentage of net revenue was primarily the result of a decrease in our net
revenue for the three months ended March 31, 2001.
Sales and Marketing. Our sales and marketing expenses increased from $5.7
million for the three months ended March 31, 2000 to $7.0 million for the three
months ended March 31, 2001. This increase was primarily due to an increase in
personnel expenses for sales and marketing staff. Sales and marketing expenses
as a percentage of net revenue increased from 9.3% of net revenue for the three
months ended March 31, 2000 to 85.9% for the three months ended March 31, 2001.
This increase was primarily the result of an decrease in our net revenue for the
three months ended March 31, 2001.
General and Administrative. Our general and administrative expenses increased
from $2.7 million for the three months ended March 31, 2000 to $7.8 million for
the three months ended March 31, 2001. This increase was due to increased
staffing for management information systems and administrative personnel,
increases in bad-debt expense, facilities costs and outside services. General
and administrative expenses as a percentage of net revenue increased from 4.4%
for the three months ended March 31, 2000 to 95.5% for the three months ended
March 31, 2001. This increase was primarily the result of a decrease in our net
revenue for the three months ended March 31, 2001.
Amortization of Purchased Intangibles. Amortization of purchased intangibles
increased from $1.9 million for the three months ended March 31, 2000 to $5.3
million for the three months ended March 31, 2001. 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 is being
amortized over a three-year period from the date of the acquisition.
Interest and Other Income. Interest and other income decreased from $2.0
million for the three months ended March 31, 2000 to $1.4 million for the three
months ended March 31, 2001. This decrease was primarily due to a $625,000 loss
adjustment to reduce the carrying value an investment in commercial paper
of Southern California Edison to the indicated fair market value as of March 31,
2001 (see Note 1 to Condensed Financial Statements).
Interest Expense. Our interest expense increased from $151,000 for the three
months ended March 31, 2000 to $218,000 for the three months ended March 31,
2001. 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.
Provision (Benefit) for Income Taxes. Our effective income tax rate for the
three months ended March 31, 2001 was 0% compared to 42% for the same period in
the prior year. The income tax provision for the three months ended March 31,
2000 was reduced by the reduction in the Company's valuation allowance related
to its deferred tax assets as the 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
At March 31, 2001, we had cash and cash equivalents of $86.8 million and
short-term marketable investments of $50.8 million.
Cash provided by/(used in) operating activities for the three months ended
March 31, 2001 and 2000 was $(28.1) million and $21.9 million, respectively.
The relative increase in cash used in operating activities for the three months
ended March 31, 2001 compared to cash provided by operating activities in the
same period in the prior year was primarily the result of a net change in net
income of $80.6 million partially off set by a decrease in accounts receivable
of $17.2 million and a decrease in other current assets and other assets of
$13.6 million.
14
Cash provided by investing activities for the three months ended March 31,
2001 and 2000 was $49.1 million and $14.3 million, respectively. The relative
increase in cash provided by investing activities for the three months ended
March 31, 2001 compared to the same period in the prior year was the result of
net maturities of marketable investments.
Cash provided by/(used in) financing activities for the three months ended
March 31, 2001 and 2000 was $(46,000) and $2.6 million, respectively. The
relative change in cash flow from financing activities for the three months
ended March 31, 2001 compared to the same period in the prior year was primarily
due to the decrease in proceeds received from the exercise of stock options.
We have no material commitments other than an obligation to purchase certain
finished product and raw materials in excess of anticipated requirements,
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 marketing efforts. We expect to
continue to expend amounts on property and equipment related to facility
infrastructure, computer equipment and for research and development laboratory
and test equipment to support on-going research and development operations.
We believe that our cash and cash equivalents balances and short-term
marketable investments 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.
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 and Amendment No. 1 on Form 10-K/A for the year ended
December 31, 2000, 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.
The difficulties experienced by many of Copper Mountain's current customers and
the challenges associated with penetrating new markets have had and are expected
to continue to have an adverse effect on Copper Mountain's business.
To date, Copper Mountain has sold the majority of its products to competitive
local exchange carrier or CLEC customers. In recent months many CLECs have
experienced difficulties continuing to finance their businesses. As a result,
these CLECs have been forced to scale back their operations, and some, including
our largest customer Northpoint Communications, Inc., have filed for bankruptcy
protection. Our business, financial condition and results of operations have
been materially and adversely affected by these difficulties in the CLEC
industry. We expect that our business will continue to suffer as long as the
CLEC industry is characterized by difficult financing conditions and may
continue to suffer even when financing conditions improve, or unless and until
we are able to diversify our customer base to derive a substantially greater
percentage of our revenues from other types of telecommunication service
providers, such as ILECs, who are not experiencing the same level of financial
difficulties.
The failure of our CLEC customers to raise sufficient capital to fund their
operations and continue to order and pay for our products has impaired and may
continue to impair Copper Mountain's revenues and profitability. In recent
months, we have had increased difficulty collecting outstanding accounts
receivable from some of our customers. To the extent we ship products to
customers who become unable to pay for the products, we may be required to
write-off significant amounts of our accounts receivable. Similarly, to the
extent that our customers order products and then suspend or cancel the orders
prior to shipping, we will not generate revenues from the products we build, our
inventories may increase and our expenses will
15
increase. Specifically, we may incur substantially higher inventory carrying
costs, as well as be faced with the risk of the excess inventory that could
become obsolete over time.
The uncertainties in the CLEC industry in general and among our CLEC
customers in particular, and the resulting impact on our business, has made it
increasingly difficult for us to reliably forecast our revenues and
profitability. We expect that we will continue to be faced with these challenges
for as long as the CLEC industry experiences financial difficulties, or until we
can successfully shift our business away from reliance on our CLEC customers.
In response to the financial difficulties experienced by our CLEC customers
and the resulting reduction in the demand for our products, we have focused our
marketing strategy on targeting international markets and ILECs as potential
customers. The future success of our business may substantially depend on our
ability to successfully penetrate international markets and domestic ILEC
customers. These markets have traditionally been characterized by longer sales
cycles and, in particular, ILECs have historically been slow to adopt new
products. Accordingly, we anticipate that we may continue to face challenges in
connection with our plan to more aggressively pursue these markets, and our
failure to successfully do so could materially adversely affect our business,
financial condition and results of operations.
Copper Mountain May Not Achieve Quarterly or Annual Profitability
Copper Mountain experienced a significant decline in revenues in the first
quarter of 2001 and anticipates a decline in its revenues in the full year 2001
and also expects to continue incurring significant sales and marketing, research
and development and general and administrative expenses and, as a result, we may
have difficulty sustaining or achieving profitibility. We cannot be certain
that we will realize sufficient revenues in the future to achieve 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 CLECs. Aggregate sales to
our largest customer, Versapoint accounted for approximately 29% of our net
revenue for the three months ended March 31, 2001. In January 2001, Northpoint
filed a petition for Chapter 11 protection with the U.S. Bankruptcy Court.
The Company does not expect to make any future sales to Northpoint. 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 larger CLEC 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.
Our revenue declined on a sequential basis from the third to the fourth
quarter of the year ended December 31, 2000 and from the fourth quarter of the
year ended December 31, 2000 to the first quarter of the year ending December
31, 2001. In light of the market dynamics of the telecommunication service
provider industry, it has become extremely difficult for us to forecast our
revenues. Future sales, if any, to our historically significant customers may
be less than historical sales. The loss of another major customer or the delay
of significant orders from any significant customer, even if only temporary,
could among other things reduce or delay our net revenue, adversely impact our
ability to sustain or achieve annual or quarterly profitability and adversely
impact our ability to generate positive cashflow, and, as a consequence, could
materially adversely affect our business, financial condition and results of
operations.
16
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 any given quarter.
Failure to ship products by the end of a quarter may adversely affect our
operating results. Furthermore, our customers may delay delivery schedules,
cancel their orders without notice or be unable to pay for delivered product.
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.
Failure to Effectively Manage Operations in Light of Copper Mountain's
Changing Revenue Base Will Adversely Affect Its Business
In the past, Copper Mountain has rapidly and significantly expanded its
operations and anticipates that in the future expansion in certain areas of its
business may be required to address potential growth in its client base and
market opportunities. In particular, we expect to face numerous challenges in
the implementation of our new business strategy to focus more on the domestic
ILEC market and international markets. In connection with this endeavor, 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 or reduction in growth effectively, our
business, financial condition and results of operations will be materially
adversely affected. The volatility in our business has placed a significant
strain on our managerial and operational resources. To maintain the level of our
operations and personnel, we may be required to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. install new management information and telecommunications systems; and
. train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.
As of March 31, 2001 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 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 to be comparable to our recent revenue on a quarterly or
annual basis. In addition, we believe that comparing different periods of our
operating results is not meaningful, and 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 attract new customers;
17
. to maintain a stable, sustainable customer base;
. to successfully penetrate international markets;
. to expand our addressable market by selling into the incumbent or ILEC
market;
. to 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 our 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:
. telecommunications and DSL market conditions and economic conditions
generally;
. the financial viability of our major customers;
. our ability to penetrate the ILEC and international markets;
. the loss of any one of our major customers or a significant reduction in
orders from those customers;
. fluctuations in demand for our products and services;
. the timing and amount of, or cancellation or rescheduling of, orders for
our products and services, particularly large orders from our key
customers and our strategic distribution partners;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. new product introductions or announcements and price reductions 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;
. increased competition, particularly from larger, better capitalized
competitors; and
18
. costs relating to possible acquisitions and integration of technologies or
businesses.
Copper Mountain Sells the Majority of Its Products to Telecommunications
Service Providers That May Reduce or Discontinue Their Purchase of Copper
Mountain's Products At Any Time
The purchasers of Copper Mountain's products to date have predominantly been
the emerging telecommunications service providers known as CLECs. 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 CLEC 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 unable to raise sufficient capital or forced to defer or curtail
their capital spending programs, our sales to those telecommunication service
providers may be adversely affected, which could have a material adverse effect
on our business, financial condition and results of operations. In addition,
many of our telecommunications service provider customers have recently
experienced consolidation, reduced access to the capital markets and in some
cases bankruptcy. The loss of one or more of our telecommunications service
provider customers due to the aforementioned factors could reduce or eliminate
our sales to such a customer and consequently could 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 defer purchases of our DSL solutions or 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. Furthermore, while we believe that the MTU
market will significantly expand the deployment of DSL technology, if this does
not occur, or if MTU service providers do not select our products, our business
may be adversely affected.
We Have Been Named as a Defendant in Securities Class Action Litigation That
Could Result In Substantial Costs and Divert Management's Attention and
Resources
Since October 2000, approximately twenty-four complaints have been filed in
the United States District Court for the Northern District of California against
the Company and two of its officers, along with one related derivative action
against the Company and its directors in Delaware, alleging violations of the
federal securities laws arising out of recent declines in the Company's stock
price. Specifically, the complaints allege claims in connection with various
alleged statements and omissions to the public and to the securities markets.
No assurances can be made that we will be successful in our defense of such
claims. If we are not successful in our defense of such claims, we could be
forced to make significant payments to
19
our stockholders and their lawyers, and such payments could have a material
adverse effect on our business, financial condition and results of operations if
these payments are not entirely covered by our insurance. Even if our defense
against such claims is successful, the litigation could result in substantial
costs and divert management's attention and resources, which could adversely
affect 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
and product sub-assemblies and to an excess of raw materials and finished goods
on hand and on order. 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 depend in part upon its strategic distribution
partnerships, including its original equipment manufacturer agreements with
Lucent Technologies, Inc., 3Com Corporation, and Marconi Communications, Inc.
under which we have agreed to manufacture, and sell our products to these
distribution partners. 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. In some cases,
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 has reduced the marketing and/or sales
of our products in favor of their own competitive products. Due to the
availability to Lucent of these alternative products Copper Mountain has been
exposed 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
continue to decline over time. Additionally, sales to customers through Lucent
may be adversely impacted by a decline in sales financing programs offered by
Lucent to these customers. Alternatively, other
20
customers may elect to purchase 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 or Achieving Annual Profitability
The market for telecommunications equipment is highly competitive. We compete
directly with the following companies: Cisco Systems, Inc., Lucent Technologies,
Inc., Alcatel S.A., Nokia Corporation and Paradyne Corporation, among others. If
we are unable to compete effectively in the market for DSL telecommunications
equipment, our revenue levels and future profitability could be materially
adversely affected. Many of our current and potential competitors have
significantly greater selling and marketing, technical, manufacturing,
financial, and other resources, including vendor-sponsored lease financing
programs. Moreover, our competitors may foresee the course of market
developments more accurately than we do and could in the future develop new
technologies that compete with our products or even render our products
obsolete. Although we believe we presently have certain technological and other
advantages over our competitors, realizing and maintaining such advantages will
require a continued high level of investment in research and development,
marketing and customer service and support. Due to the rapidly evolving markets
in which we compete, additional competitors with significant market presence and
financial resources, including other large telecommunications equipment
manufacturers, may enter those markets, thereby further intensifying
competition. We may not have sufficient resources to continue to make the
investments or achieve the technological advances necessary to compete
successfully with existing competitors or new competitors. Also, to the extent
we introduce new product offerings intended to capitalize on the anticipated
trend toward broad deployment of DSL services, including DSL services targeted
at residential subscribers seeking high-speed access to public communications
networks, we will encounter new competitors such as coaxial cable and wireless
equipment vendors. Even if we are successful in competing in the business DSL
market, we may not be able to compete successfully in the market for residential
subscribers.
Future Consolidation in the Telecommunications Equipment Industry May
Increase Competition That Could Harm Copper Mountain's Business
The markets in which Copper Mountain competes are characterized by increasing
consolidation both within the data communications sector and by companies
combining or acquiring data communications assets and assets for delivering
voice-related services. We cannot predict with certainty how industry
consolidation will affect our competitors. We may not be able to compete
successfully in an increasingly consolidated industry. Increased competition
and consolidation in our industry could require that we reduce the prices of our
products and result in our loss of market share, which would materially
adversely affect our business, financial condition and results of operations.
Additionally, because we are now, and may in the future be, dependent on
certain strategic relationships with third parties in our industry, any
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
21
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 accept or
order 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. We have already experienced these effects as a
result of the financial troubles facing many of our CLEC customers, including
the filing of a petition for Chapter 11 protection by our largest customer
Northpoint Communications, Inc. Factors that could, in the future, 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.
22
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 an agreement with our President
and Chief Executive Officer and General Manager of our Public Network business
unit 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.
23
If Copper Mountain is Unable to Retain and Hire Additional Qualified
Personnel As Necessary, It May Not Be Able to Successfully Achieve Its
Objectives
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 may receive notice of such claims 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.
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 alternative source vendors for each of these key components,
but any alternative 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.
Alternatively, as a result of the long lead times associated with ordering
certain materials or components, we may not be able to accurately forecast our
need for materials and components and this could result in excess inventory and
related write-offs, which could have a material adverse effect on our business.
In addition, the manufacture of certain of these single or sole source
components is extremely complex, and our reliance on the suppliers of these
components exposes us to potential production difficulties and quality
variations, which could negatively impact cost and timely delivery of our
products. Any significant interruption in the supply, or degradation in the
quality, of any component could have a material adverse effect on our business,
financial condition and results of operations.
Copper Mountain's Dependence on Independent Manufacturers Could Result in
Product Delivery Delays
Copper Mountain currently uses a small number of independent manufacturers to
provide certain printed circuit boards, chassis and subassemblies and, in
certain cases, to complete final assembly and testing of our products. Our
reliance on independent manufacturers involves a number of risks, including the
absence of adequate capacity, the unavailability of or interruptions in access
to certain process technologies and reduced control over delivery schedules,
manufacturing yields and costs. We have 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, including Flextronics, are unable or unwilling to continue
manufacturing our components in required volumes, it could take up to nine
months for an alternative manufacturer to supply the needed components
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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 the manufacturing by Flextronics
and all of our final assembly and tests are each performed in one location, any
fire or other disaster at either Flextronics manufacturing facility or 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
In certain cases, Copper Mountain's customers are larger than Copper Mountain
and are able to exert a high degree of influence over Copper Mountain. These
customers may 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
25
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 rate of growth in our client base, the
growth of our product lines, our ability to manage our inventory and accounts
receivable 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 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
26
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 have acquired or 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 has developed its products. It may turn out that there
are no advantages or "synergies" to adding OnPREM's 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 from OnPREM.
We Have Expanded and May Continue 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 began entering 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
27
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;
. differences in international telecommunications standards and regulatory
agencies;
. fluctuations in the value of foreign currencies; and
. unexpected domestic and international regulatory, economic or political
changes.
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 have recently experienced historical highs and multiples are
substantially above historical levels. Some of these trading prices and equity
valuations were not 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
28
companies. We have recently become the target of such litigation, and several
class action lawsuits have been filed against us and certain of our officers
alleging violation of Federal securities laws related to declines in our stock
price. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could 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, 2001, we had
approximately 53 million shares of common stock outstanding. We have filed
three registration statements on Form S-8 with the Securities and Exchange
Commission covering the 16.4 million shares of common stock reserved for
issuance under our 1996 Equity Incentive Plan, 1999 Non-Employee Directors'
Stock Option Plan, 1999 Employee Stock Purchase Plan, the OnPREM 1998 Stock
Option Plan, the 2000 Nonstatutory Stock Option Plan and for options issued
outside such plans. As of March 31, 2001, approximately 2.5 million shares are
currently subject to exercisable options. Also, as of March 31, 2001, the
Company is committed to grant as least 3.7 million options to purchase shares of
common stock. 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, 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 10,000,000 shares of preferred stock with terms set by the
Board of Directors; and
. the requirement that at least 10% of the outstanding shares are needed to
call a special meeting of stockholders.
Each of these provisions could discourage potential take-over attempts and
could adversely affect the market price of our common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily from our debt
arrangements and our investments in certain marketable 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, which represents
the Company's expectation for a reasonably possible near-term change in such
rates, would not materially affect the fair value of its interest sensitive
financial instruments at March 31, 2001.
At March 31, 2001, the Company held an investment in commercial paper issued
by Southern California Edison Company. The investment which matured in February
2001 and is currently in default is included in short-term marketable
investments at its indicated fair market value as of March 31, 2001 of
approximately
29
$2.8 million. The ultimate amount of the decline and the net realizable value of
this investment is not currently practicably determinable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 20, 2000 plaintiff Ariel Hernandez, on behalf of herself and
purportedly on behalf of a class of Company stockholders, filed a complaint in
the United States District Court for the Northern District of California against
the Company and two of its officers alleging violations of the federal
securities laws arising out of recent declines in the Company's stock price.
Thereafter, approximately twenty-three similar complaints were filed in the same
court (collectively, the "Northern District Complaints"); on November 9, 2000 a
related derivative action was filed in the Court of Chancery of the State of
Delaware and on April 25, 2001 a second related derivative action was filed in
the Supreme Court in Santa Clara County, California. The Northern District
Complaints have been consolidated into a single action. The complaints allege
claims in connection with various alleged statements and omissions to the public
and to the securities markets. No assurances can be made that we will be
successful in our defense of such claims. If we are not successful in our
defense of such claims, we could be forced to make significant payments to our
stockholders and their lawyers, and such payments could have a material adverse
effect on our business, financial condition and results of operations if not
covered by our insurance carrier. Even if our defense against such claims is
successful, the litigation could result in substantial costs and divert
management's attention and resources, which could adversely affect our business.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports filed on Form 8-K during the quarter ended March 31, 2001:
Report on Form 8-K dated March 7, 2001, which announced a restructuring
plan intended to reduce its overall cost structure and improve
operating efficiencies.
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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: May 9, 2001 /s/ Richard S. Gilbert
-----------------------------
Richard S. Gilbert
Chairman, President and
Chief Executive Officer
/s/ Michael O. Staiger
-----------------------------
Michael O. Staiger
Chief Financial Officer
Secretary
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