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 September 30, 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 September 30, 2001 was 56,880,622.
COPPER MOUNTAIN NETWORKS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2001 and
December 31, 2000 2
Condensed Statements of Operations for the three and nine
months ended September 30, 2001 and 2000 3
Condensed Statement of Stockholders' Equity for the nine
months ended September 30, 2001 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 34
Part II. Other Information
Item 1. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 35
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 35,731 $ 65,838
Short-term marketable investments 45,475 96,778
Accounts receivable, net 2,894 19,496
Inventory, net 13,376 26,405
Other current assets 1,645 7,961
----------- -----------
Total current assets 99,121 216,478
Marketable investments ---- 6,161
Property and equipment, net 11,271 24,961
Other assets 2,166 11,126
Purchased intangibles, net ---- 46,159
----------- -----------
Total assets $ 112,558 $ 304,885
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 20,609 $ 23,963
Adverse purchase commitment 11,173 28,600
Accrued liabilities 7,413 17,351
Accrued restructuring costs 6,023 ----
Current portion of obligations under capital
leases and equipment notes payable 3,133 3,177
----------- -----------
Total current liabilities 48,351 73,091
Obligations under capital leases and equipment
notes payable, less current portion 4,320 6,654
Other accrued 234 314
Stockholders' equity:
Common stock 57 52
Additional paid in capital 244,586 236,675
Deferred compensation (6,675) (2,283)
Accumulated deficit (178,655) (9,618)
Other comprehensive income 340 ----
----------- -----------
Total stockholders' equity 59,653 224,826
----------- -----------
Total liabilities and stockholders' equity $ 112,558 $ 304,885
=========== ===========
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 Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net revenue $ 5,112 $ 93,522 $ 19,327 $ 234,530
Cost of revenue 3,469 44,083 63,178 108,263
---------- ---------- ---------- ----------
Gross margin 1,643 49,439 (43,851) 126,267
Operating expenses:
Research and development 8,035 10,365 30,483 25,537
Sales and marketing 2,755 9,967 14,641 25,000
General and administrative 2,954 4,355 13,981 10,935
Amortization of purchased intangibles ---- 5,329 5,327 12,427
Amortization of deferred stock
compensation* 1,014 811 2,397 3,007
Restructuring costs 16,000 ---- 20,382 ----
Write-off of purchased intangibles ---- ---- 40,833 ----
Write-off of in-process research and
development ---- ---- ---- 6,300
---------- ---------- ---------- ----------
Total operating expenses 30,758 30,827 128,044 83,206
---------- ---------- ---------- ----------
Income (loss) from operations (29,115) 18,612 (171,895) 43,061
Other income (expense):
Interest and other income 1,001 2,698 3,519 6,927
Interest expense (212) (149) (661) (445)
---------- ---------- ---------- ----------
Income (loss) before income taxes (28,326) 21,161 (169,037) 49,543
Provision for income taxes ---- 9,086 ---- 13,464
---------- ---------- ---------- ----------
Net income (loss) $ (28,326) $ 12,075 $ (169,037) $ 36,079
========== ========== ========== ==========
Basic net income (loss) per share $ (0.53) $ 0.24 $ (3.19) $ 0.72
========== ========== ========== ==========
Diluted net income (loss) per share $ (0.53) $ 0.21 $ (3.19) $ 0.62
========== ========== ========== ==========
Basic common equivalent shares 53,221 51,279 52,926 50,154
========== ========== ========== ==========
Diluted common equivalent shares 53,221 58,440 52,926 58,173
========== ========== ========== ==========
* 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 $ 42 $ 37 $ 89 $ 132
Research and development 110 276 561 1,107
Sales and marketing 164 138 430 488
General and administrative 698 360 1,317 1,280
---------- ---------- ---------- ----------
Total $ 1,014 $ 811 $ 2,397 $ 3,007
========== ========== ========== ==========
See accompanying notes to condensed financial statements.
3
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Common Stock
--------------------- Additional Other Total
Number of Paid in Deferred Accumulated Comprehensive Stockholders'
Shares Amount Capital Compensation Deficit Income 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) -- -- --
Deferred compensation related to
the grant of stock options -- -- 99 (99) -- -- --
Amortization related to deferred
stock compensation -- -- -- 1,308 -- -- 1,308
Cancellation of options to
purchase common stock -- -- (556) 556 -- -- --
Issuance of restricted stock to
employees 3,600 4 7,338 (6,253) -- -- 1,089
Cancellation of restricted stock
issued to employees (50) -- (100) 100 -- -- --
Common stock issued under
Employee Stock Purchase Plan 141 -- 691 -- -- -- 691
Exercise of options to purchase
common stock 783 1 435 -- -- -- 436
Net exercise of warrants to
purchase common stock 354 -- -- -- -- -- --
Unrealized gain on marketable
investment -- -- -- -- -- 340 340
Net loss -- -- -- -- (169,037) -- (169,037)
------ --------- --------- --------- --------- --------- ----------
Balance at September 30, 2001 56,881 $ 57 $ 244,586 $ (6,675) $(178,655) $ 340 $ 59,653
====== ========= ========= ========= ========= ========= ==========
See accompanying notes to condensed financial statements
4
COPPER MOUNTAIN NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
------------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (169,037) $ 36,079
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Write-off of purchased intangibles 40,833 ----
Depreciation and amortization 13,320 17,468
Non-cash restructuring costs 10,900 ----
Non-cash compensation 2,397 3,007
Write-off of in-process research and
development ---- 6,300
Tax benefit from the sale of stock options ---- 1,250
Deferred income taxes ---- (11,268)
Changes in operating assets and
liabilities:
Accounts receivable 16,602 (30,853)
Inventory 13,029 (7,363)
Other current assets and other assets 15,276 (6,950)
Adverse purchase commitment (17,427) ----
Accounts payable and accrued
liabilities (7,349) 40,735
----------- -----------
Net cash provided by (used in) operating
activities (81,456) 48,405
----------- -----------
Cash flows from investing activities:
Maturities of marketable investments, net 57,804 4,083
Purchases of property and equipment (5,204) (13,414)
Cash received in the purchase of OnPREM ---- 844
----------- -----------
Net cash provided by (used in) investing
activities 52,600 (8,487)
----------- -----------
Cash flows from financing activities:
Proceeds from equipment notes payable ---- 316
Payments on capital leases and equipment notes
payable (2,378) (1,339)
Proceeds from issuance of common stock 1,127 7,462
----------- -----------
Net cash provided by (used in) financing
activities (1,251) 6,439
----------- -----------
Net increase (decrease) in cash and cash
equivalents (30,107) 46,357
Cash and cash equivalents at beginning of period 65,838 25,405
----------- -----------
Cash and cash equivalents at end of period $ 35,731 $ 71,762
=========== ===========
Supplemental information:
Unrealized gain on marketable investment $ 340 $ ----
=========== ===========
Interest paid $ 212 $ 419
=========== ===========
Equipment acquired under capital lease
obligations $ ---- $ 2,168
=========== ===========
See accompanying notes to condensed financial statements
5
NOTE 1 - General
In management's opinion, the accompanying unaudited financial statements for
Copper Mountain Networks, Inc. (the "Company") for the three and nine month
periods ended September 30, 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 restructuring charge of $16.0 million for the three months ended September 30,
2001 and except for a charge to write-off certain intangible assets of $40.8
million, a charge related to excess inventory on hand and on order of $51.0
million, a restructuring charge of $20.4 million, a $2.6 million charge related
to the collectibility of certain receivables and a charge related to the
investment in commercial paper of Southern California Edison of $1.0 million for
the nine months ended September 30, 2001) 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 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 September 30, 2001, the Company held investments in investment grade debt and
money market securities with various maturities through February 2002.
Management determines the appropriate classification of its investments in
marketable 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 September 30, 2001 totaled $80.5 million. The Company has
included $35.0 million of these securities in cash and cash equivalents at
September 30, 2001, as they have original maturities of less than 90 days. The
remaining debt securities totaling $45.5 million at September 30, 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 on September 30, 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 during the first three months of 2001
because the security had matured.
During the nine months ended September 30, 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
$2.7 million. Included in other income, net for the nine months ended September
30, 2001 is a loss adjustment of $1.0 million to adjust the carrying value of
the investment to fair market value. Included in other comprehensive income for
the three and nine months ended September 30, 2001 is an unrealized gain
adjustment of $0.3 million. 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 an $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 nine
months ended September 30, 2001, the Company received the lessee's quarterly
lease payments;
6
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 nine
months ended September 30, 2001.
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 September 30, 2001 include revenue recognized from significant customers
totaling $1.3 million or 26%, $0.8 million or 16%, $0.5 million or 10% and one
international customer totaling $0.9 million or 18% of net revenue. The
Company's revenues for the nine months ended September 30, 2001 include revenue
recognized from significant customers totaling $3.7 million or 19%, $2.0 million
or 10% and one international customer totaling $4.0 million or 21% 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 24%, 21%, 18% and 11% of total
accounts receivable at September 30, 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
nine months ended September 30, 2001, the Company recorded charges totaling
$51.0 million related to finished goods and raw materials in excess of
anticipated requirements. The reductions to inventory value and loss on purchase
commitments are included in cost of revenues.
New Accounting Standards
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 nine months ended September 30, 2001 and there was no
cumulative effect adjustment upon adoption.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141").
This statement supersedes Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16") and amends or supersedes a number of interpretations of
APB 16. FAS 141 eliminates the pooling-of-interests method of accounting for
business combinations, except certain transactions initiated prior to July 1,
2001 and changes the criteria to recognize intangible assets apart from
goodwill. FAS 141 is effective for any business combination completed after June
30, 2001. Adoption of FAS 141 is not currently expected to have a material
impact on our results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). This statement supersedes Accounting Principles Board Opinion No.
17, "Intangible Assets." FAS 142 stipulates that goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually, or under
certain circumstances more frequently, for impairment. FAS 142 is effective for
any goodwill and intangible assets
7
acquired after June 30, 2001 and upon adoption for such assets acquired before
July 1, 2001. Companies are required to adopt FAS 142 in the first fiscal year
beginning after December 15, 2001. Adoption of FAS 142 is not currently expected
to have a material impact on our results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"). FAS 143 requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. Companies are required
to adopt FAS 143 in the first fiscal year beginning after June 15, 2002.
Adoption of FAS 143 is not currently expected to have a material impact on our
results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). This statement supersedes Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." FAS 144 provides
a single accounting model for long-lived assets to be disposed of. Companies are
required to adopt FAS 144 in the first fiscal year beginning after December 15,
2001. Adoption of FAS 144 is not currently expected to have a material impact on
our results of operations.
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 the ultimate outcome of litigation. Actual
results could differ from those estimates.
NOTE 3 - Net Income Per Share
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 1.4 million and 3.0 million for the three and nine
month periods ended September 30, 2001, respectively, were excluded from the
calculation of diluted earnings per share because of their anti-dilutive effect.
Common stock equivalents used to calculate diluted earnings per share totaled
7.2 million and 8.0 million for the three and nine month periods ended September
30, 2000, respectively.
8
NOTE 4 - Composition of Certain Balance Sheet Captions (in thousands)
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
Inventory:
Raw materials $ 77,408 $ 22,635
Work in process 513 1,529
Finished goods 14,748 14,569
Allowance for excess and
obsolescence (79,293) (12,328)
------------- ------------
$ 13,376 $ 26,405
============= ============
Accrued liabilities:
Accrued compensation $ 2,345 $ 4,126
Accrued warranty 1,000 3,714
Accrued vacation 1,191 2,203
Deferred revenue 538 2,554
Other 2,339 4,754
------------- ------------
$ 7,413 $ 17,351
============= ============
NOTE 5 - Commitments
In April 1999, the Company entered into an agreement with a contract
manufacturer whereby the contract manufacturer was authorized to procure
inventory on behalf of the Company. Due to the sudden slowdown in the capital
equipment requirements of the telecommunications industry as a whole and more
specifically the Company's historically significant customers, the Company and
its contract manufacturer had procured inventory in excess of current
requirements. As a result in May 2001 the Company and its contract manufacturer
entered into an agreement that outlines payment terms for inventory purchased by
the contract manufacturer on behalf of the Company. Since execution of the
agreement, the Company has paid the contract manufacturer $15.2 million related
to the May 2001 agreement. At September 30, 2001 the remaining balance of $15.2
million, which is subject to an audit by the Company, is included in accounts
payable and is due in two equal quarterly installments in October 2001 and
January 2002. In September 2001, the Company notified the contract manufacturer
that based on the Company's audit, the remaining balance is in dispute and that
no further payments will be made until the dispute is resolved. Accordingly, the
Company did not make the payment scheduled for October 2001. The ultimate
outcome of this dispute is not currently practically determinable.
NOTE 6 - 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. This
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 three months ended March 31 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. As a result of this plan, the Company
had reduced its non-temporary work force by approximately 100 positions.
Substantially all reductions related to this plan occurred prior to March 31,
2001.
On August 2, 2001, the Company announced that it had adopted a business plan to
again re-size its business to reflect current and expected business conditions.
This restructuring plan is expected to largely be completed during 2001. As a
result of the adoption of this plan, the Company recorded charges of $16.0
million during the three months ended September 30, 2001. These charges
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
9
costs incurred for employee severance. Employee reductions occurred in all areas
of the Company. As a result of this plan, the Company reduced its non-temporary
work force by approximately 150 additional positions. Substantially all
reductions occurred prior to September 30, 2001.
As a part of these plans, 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 nine months of 2001, the Company recorded losses from
impairment of assets of $10.9 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 estimates that depreciation
expense will be reduced by $1.3 million, $3.9 million, $3.2 million, $2.2
million and $0.3 million for the years ending December 31, 2001, 2002, 2003,
2004 and 2005, respectively, as a result of this charge.
Also as part of these plans, 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 nine
months of 2001, the Company recorded estimated excess lease costs of $5.9
million 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 reasonably 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 nine months ended
September 30, 2001. Future cash outlays related to these plans are expected to
be completed in 2006.
Details of the restructuring charges are as follows (in 000s):
Reserve Balance Reserve Balance
Cash/ at June 30, at September
Non-cash 2001 Charge Activity 30, 2001
--------- -------- ---------- ---------- ----------
Impairment of assets Non-cash $ -- $ 9,000 $ -- $ 9,000
Excess lease costs Cash 517 5,000 (253) 5,264
Elimination of job
responsibilities Cash -- 2,000 (1,241) 759
---------- ---------- ---------- ----------
$ 517 $ 16,000 $ (1,494) $ 15,023
========== ========== ========== ==========
In connection with these plans, management determined that the estimated future
cash flows from certain intangible assets acquired in the purchase of OnPREM
Networks Corporation would likely not be sufficient to recover the carrying
value of such assets. The Company calculated the present value of expected
future cash flows to determine the fair value of the assets. This evaluation
resulted in a write-off of $40.8 million of goodwill and other intangible assets
in the nine months ended September 30, 2001. The underlying factors contributing
to the decline in expected financial results included changes in the Company's
strategic focus in the marketplace and an overall decline in the
telecommunications equipment market.
NOTE 7 - 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 and similar complaints have been filed against
the Company and its directors, alleging violations of the securities laws
arising out of 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
10
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 8 - Equity
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 would 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 had not terminated
employment prior to such time (the "Cancel and Re-grant Program"). Options to
purchase shares of common stock granted under the Cancel and Re-grant Program
vest ratably over a period of 36 months. All other terms of options granted
under the Cancel and Re-grant Program are 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. In May 2001, the Company
granted options to purchase 3.3 million shares of common stock in conjunction
with the Cancel and Re-grant Program at an exercise price of $3.19 per share.
Stock Option Exchange Program
In May 2001, the Company allowed employees holding options to purchase the
Company's common stock to cancel certain stock option grants in exchange for
options to purchase the same number of common shares which were 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 to purchase shares of common stock
granted under the Exchange Program 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 are substantially the same as the cancelled
options. In May 2001, the Company cancelled and immediately granted replacement
options to purchase 3.1 million shares of common stock in conjunction with the
Exchange Program at an exercise price of $3.19 per share. 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." During the three months
ended September 30, 2001, the Company recognized a credit to compensation
expense of $316,000 related to the Exchange Program. For the nine months ended
September 30, 2001 the Company recognized compensation expense of zero related
to the Exchange Program.
Restricted Common Stock
In August 2001, the Company granted 3,550,000 shares of restricted common stock
to certain employees. The shares, which are restricted as to sale or transfer
until vesting, will vest 50% one year from the date of grant and ratably each
month thereafter for a period of 12 months. The related net compensation expense
of approximately $7.3 million will be amortized in accordance with FASB
Interpretation No. 28 over the vesting period of two years. During the three and
nine months ended September 30, 2001, the Company recognized compensation
expense of $1.1 million related to this grant of restricted common stock.
NOTE 9 - Recent Events
In October 2001, the Company granted 1,550,000 shares of restricted common stock
to certain employees. The shares, which are restricted as to sale or transfer
until vesting, will vest monthly ratably after one year of service for a total
vesting period of 24 months. The related net compensation expense of
approximately $1.8 million will be amortized in accordance with FASB
Interpretation No. 28 over the vesting period of two years.
11
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," "expect," "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, from sales of our DSL CPE and from sales of service
contracts. Additionally, we sell network management software which provides
monitoring and management capabilities for the CE200, revenues from which have
not been material to date. We also sell our CopperEdge 150 DSL concentrators, or
CE 150, to customers in the multiple tenant unit, or MTU, market.
For the three months ended September 30, 2001, revenue recognized from our
largest customers, Mpower Communications, Versatel, Network Telephone and
Verizon accounted for approximately 26%, 18%, 16% and 10%, respectively, 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 significant 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.
12
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 and CE150 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 generally generates
higher gross margin than the initial sale of combined systems. We expect pricing
competition will continue in the future which may result in lower average
selling prices for our current products and as a result our gross margins may
continue to decline.
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 facilities in San
Diego, California. Accordingly, a significant portion of our cost of revenue
could consist of payments to our contract manufacturers.
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.
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. During the second
quarter of 2001, additional deferred compensation was recorded in conjunction
with the Exchange Program (see Note 8 to Condensed Financial Statements). During
the third quarter of 2001, additional deferred compensation was recorded in
conjunction with a grant of restricted stock to employees. The intrinsic value
of the options to purchase common stock granted under the Exchange Program will
be re-measured at the end of each period for the life of the option. We expect
that the total amount of deferred compensation expense that will be recognized
under the Exchange Program will vary from period to period and the ultimate
amount of deferred compensation expense that will be recognized is not currently
determinable. The deferred compensation is being amortized to expense in
accordance with FASB Interpretation No. 28 over the vesting period of the
individual options. We recorded total deferred stock compensation of $17.0
million from inception to December 31, 2000 and $6.8 million in the nine months
ended September 30, 2001 and amortized $14.7 million from inception to December
31, 2000 and $2.4 million for the nine months ended September 30, 2001. In
August 2001, the Company granted 3,550,000 shares of restricted common stock to
certain employees. The shares, which are restricted as to sale or transfer until
vesting, will vest 50% one year from the date of grant and ratably each month
thereafter for a period of 12 months. The related net compensation expense of
approximately $7.3 million will be amortized over the vesting period of two
years. In October 2001, the Company granted 1,550,000 shares of restricted
common stock to certain employees. The shares, which are restricted as to sale
or transfer until vesting, will vest monthly ratably after one year of service
for a total vesting period of 24 months. The related net compensation expense of
approximately $1.8 million will be amortized in accordance with FASB
Interpretation No. 28 over the vesting period of two years.
13
Deferred stock compensation and amortization of deferred stock compensation
could materially increase or decrease 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.
This 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 three months ended March 31 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. As a result of this plan, the Company
had reduced its non-temporary work force by approximately 100 positions.
Substantially all reductions related to this plan occurred prior to March 31,
2001.
On August 2, 2001, the Company announced that it had adopted a business
plan to again re-size its business to reflect current and expected business
conditions. This restructuring plan is expected to largely be completed during
2001. As a result of the adoption of this plan, the Company recorded charges of
$16.0 million during the three months ended September 30, 2001. These charges
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 all areas of the Company. As a result of this plan, the Company reduced its
non-temporary work force by approximately 150 additional positions.
Substantially all reductions occurred prior to September 30, 2001.
As a part of these plans, 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 nine months of 2001, the Company recorded
losses from impairment of assets of $10.9 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 estimates that
depreciation expense will be reduced by $1.3 million, $3.9 million, $3.2
million, $2.2 million and $0.3 million for the years ending December 31, 2001,
2002, 2003, 2004 and 2005, respectively, as a result of this charge.
Also as part of these plans, 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 nine months of 2001, the Company recorded estimated excess lease costs
of $5.9 million 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 reasonably 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 nine months
ended September 30, 2001. Future cash outlays related to these plans are
expected to be completed in 2006.
14
Details of the restructuring charges are as follows (in 000s):
Reserve Balance Reserve Balance
Cash/ at June 30, at September
Non-cash 2001 Charge Activity 30, 2001
--------- ---------- ---------- ---------- ----------
Impairment of assets Non-cash $ -- $ 9,000 $ -- $ 9,000
Excess lease costs Cash 517 5,000 (253) 5,264
Elimination of job
Responsibilities Cash -- 2,000 (1,241) 759
---------- ---------- ---------- ----------
$ 517 $ 16,000 $ (1,494) $ 15,023
========== ========== ========== ==========
In connection with these plans, management determined that the estimated
future cash flows from certain intangible assets acquired in the purchase of
OnPREM Networks Corporation would likely not be sufficient to recover the
carrying value of such assets. The Company calculated the present value of
expected future cash flows to determine the fair value of the assets. This
evaluation resulted in a write-off of $40.8 million of goodwill and other
intangible assets in the nine months ended September 30, 2001. The underlying
factors contributing to the decline in expected financial results included
changes in the Company's strategic focus in the marketplace and an overall
decline in the telecommunications equipment market.
15
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----- ----- ----- -----
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 67.9 47.1 326.9 46.2
----- ----- ----- -----
Gross margin 32.1 52.9 (226.9) 53.8
Operating expenses:
Research and development 157.2 11.0 157.7 10.9
Sales and marketing 53.9 10.7 75.7 10.6
General and administrative 57.8 4.7 72.3 4.6
Amortization of purchased
intangibles -- 5.7 27.6 5.3
Amortization of deferred stock
compensation 19.8 0.9 12.4 1.3
Restructuring costs 313.0 -- 105.5 --
Write-off of purchased
intangibles -- -- 211.3 --
Write-off of in-process
research and development -- -- -- 2.7
----- ----- ----- -----
Total operating expenses 601.7 33.0 662.5 35.4
----- ----- ----- -----
Income (loss) from operations (569.6) 19.9 (889.4) 18.4
Interest and other income, net 15.5 2.7 14.8 2.7
----- ----- ----- -----
Income (loss) before income taxes (554.1) 22.6 (874.6) 21.1
Provision for income taxes -- 9.7 -- 5.7
----- ----- ----- -----
Net income (loss) (554.1) 12.9 (874.6) 15.4
====== ===== ====== =====
Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000
Net Revenue. Net revenue decreased from $93.5 million for the three months
ended September 30, 2000 to $5.1 million for the three months ended September
30, 2001. This decrease was due to significantly fewer sales of our CE200 and
CE150 DSL access concentrators and related line cards. Sales to our four largest
customers for the three months ended September 30, 2000, NorthPoint, Network
Telephone, McLeod and Lucent, decreased from $32.6 million, $12.9 million, $12.7
million, and $11.1 million, respectively, during that period to an aggregate of
$1.0 million for the three months ended September 30, 2001. Sales to our four
largest customers for the three months ended September 30, 2001, Mpower
Communications, Versatel, Network Telephone and Verizon, were $1.3 million, $0.9
million, $0.8 million, and $0.5 million, respectively.
Gross Margin. Our gross margin decreased from $49.4 million for the three
months ended September 30, 2000 to $1.6 million for the three months ended
September 30, 2001. The decrease in gross margin occurred primarily because of a
decrease in net revenue, decreased average selling prices and decreased
production volumes.
Research and Development. Our research and development expenses decreased
from $10.4 million for the quarter ended September 30, 2000 to $8.0 million for
the three months ended September 30, 2001. This decrease was due to a decrease
in personnel expenses related to a decrease in our engineering staff and
decreased spending on prototype materials. Research and development expenses as
a percentage of net revenue increased from 11.0% for the quarter ended September
30, 2000 to 157.2% for the three months ended September 30, 2001. This increase
in research and development expense as a percentage of net revenue was primarily
the result of a decrease in our net revenue for the quarter ended September 30,
2001.
16
Sales and Marketing. Our sales and marketing expenses decreased from $10.0
million for the three months ended September 30, 2000 to $2.8 million for the
three months ended September 30, 2001. This decrease was due to a decrease in
personnel expenses for sales and marketing staff, decreased sales compensation
associated with decreased net revenue, decreased promotional and product
marketing costs and decreased spending on travel costs during the stated
periods. Sales and marketing expenses as a percentage of net revenue increased
from 10.7% of net revenue for the three months ended September 30, 2000 to 53.9%
for the three months ended September 30, 2001. This increase was primarily the
result of a decrease in our net revenue for the three months ended September 30,
2001.
General and Administrative. Our general and administrative expenses
decreased from $4.4 million for the quarter ended September 30, 2000 to $3.0
million for the quarter ended September 30, 2001. This decrease was due to
decreases in personnel expenses and bad debt expense. General and administrative
expenses as a percentage of net revenue increased from 4.7% for the quarter
ended September 30, 2000 to 57.8% for the quarter ended September 30, 2001. This
increase was primarily the result of a decrease in our net revenue for the
quarter ended September 30, 2001.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles decreased from $5.3 million for the quarter ended September 30, 2000
to zero for the quarter ended September 30, 2001. During the second quarter of
2001, the Company calculated the present value of expected future cash flows to
determine the fair value of the assets. This evaluation resulted in a write-off
of $40.8 million of goodwill and other intangible assets. The underlying factors
contributing to the decline in expected financial results included changes in
the Company's strategic focus in the marketplace and an overall decline in the
telecommunications equipment market.
Interest and Other Income. Interest and other income decreased from $2.7
million for the quarter ended September 30, 2000 to $1.0 million for the quarter
ended September 30, 2001. This decrease was primarily due to higher average cash
balances during the quarter ended September 30, 2000.
Interest Expense. Our interest expense increased from $149,000 for the
quarter ended September 30, 2000 to $212,000 for the quarter ended September 30,
2001. This increase was primarily due to an increase in the amounts outstanding
under capital lease and equipment notes payable facilities as a result of
additional financing of computers, equipment for research and development and
for other equipment.
Provision for Income Taxes. Our effective income tax rate for the three
months ended September 30, 2001 was 0% compared to 43% for the same period in
the prior year. The provision for income taxes for the three months ended
September 30, 2001 and 2000 are based on estimates of the effective income tax
rate for the entire year.
Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000
Net Revenue. Net revenue decreased from $234.5 million for the nine months
ended September 30, 2000 to $19.3 million for the nine months ended September
30, 2001. This decrease was due to significantly fewer sales of our CE200 and
CE150 DSL access concentrators and related line cards. Sales to our three
largest customers for the nine months ended September 30, 2000, NorthPoint,
Lucent, and Rhythms Netconnections, decreased from $62.0 million, $52.0 million
and $25.8 million, respectively, during that period to an aggregate of $2.4
million for the nine months ended September 30, 2001. Net revenue for the nine
months ended September 30, 2001 includes $3.1 million of revenue deferred from
prior periods as during this period the criteria for revenue recognition had
been met. Sales to our three largest customers for the nine months ended
September 30, 2001, Versatel, Mpower Communications and Rhythms Netconnections,
were $4.0 million, $3.7 million and $2.0 million, respectively.
Gross Margin. Our gross margin decreased from $126.3 million for the nine
months ended September 30, 2000 to $(43.9) million for the nine months ended
September 30, 2001. The decrease in gross margin occurred primarily because of a
decrease in net revenue and an excess inventory charge of $51.0 million related
to inventory on hand and to future inventory purchase commitments in excess of
anticipated requirements. Before the impact of these charges, gross margin as a
percentage of sales for the
17
nine months ended September 30, 2001 was adversely impacted by decreased average
selling prices, sales mix and decreased production volumes.
Research and Development. Our research and development expenses increased
from $25.5 million for the nine months ended September 30, 2000 to $30.5 million
for the nine months ended September 30, 2001. This increase was due to an
increase in personnel expenses related to an increase in our engineering staff
and quality and technical support costs including outside services. Research and
development expenses as a percentage of net revenue increased from 10.9% for the
nine months ended September 30, 2000 to 157.7% for the nine months ended
September 30, 2001. This increase in research and development expense as a
percentage of net revenue was primarily the result of a decrease in our net
revenue for the nine months ended September 30, 2001.
Sales and Marketing. Our sales and marketing expenses decreased from $25.0
million for the nine months ended September 30, 2000 to $14.6 million for the
nine months ended September 30, 2001. This decrease was due to a decrease in
personnel expenses for sales and marketing staff, decreased sales compensation
associated with decreased net revenue, decreased promotional and product
marketing expenses and decreased spending on travel costs during the stated
periods. Sales and marketing expenses as a percentage of net revenue increased
from 10.6% of net revenue for the nine months ended September 30, 2000 to 75.7%
for the nine months ended September 30, 2001. This increase was primarily the
result of a decrease in our net revenue for the nine months ended September 30,
2001.
General and Administrative. Our general and administrative expenses
increased from $10.9 million for the nine months ended September 30, 2000 to
$14.0 million for the nine months ended September 30, 2001. This increase was
due to increased facilities costs, increased spending on outside services and
increased depreciation expense, partially offset by decreased spending on
employee recruiting and decreased bad debt expense. General and administrative
expenses as a percentage of net revenue increased from 4.6% for the nine months
ended September 30, 2000 to 72.3% for the nine months ended September 30, 2001.
This increase was primarily the result of a decrease in our net revenue for the
nine months ended September 30, 2001.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles decreased from $12.4 million for the nine months ended September 30,
2000 to $5.3 million for the nine months ended September 30, 2001. During the
second quarter of 2001, the Company calculated the present value of expected
future cash flows to determine the fair value of the assets. This evaluation
resulted in a write-off of $40.8 million of goodwill and other intangible
assets. The underlying factors contributing to the decline in expected financial
results included changes in the Company's strategic focus in the marketplace and
an overall decline in the telecommunications equipment market.
Interest and Other Income. Interest and other income decreased from $6.9
million for the nine months ended September 30, 2000 to $3.5 million for the
nine months ended September 30, 2001. This decrease was primarily due to higher
average cash balances during the nine months ended September 30, 2000 and a loss
in the investment in commercial paper of Southern California Edison of $1.0
million.
Interest Expense. Our interest expense increased from $445,000 for the nine
months ended September 30, 2000 to $661,000 for the nine months ended September
30, 2001. This increase was primarily due to an increase in the amounts
outstanding under capital lease and equipment notes payable facilities as a
result of additional financing of computers, equipment for research and
development and for other equipment.
Provision for Income Taxes. The provision for income taxes for the nine
months ended September 30, 2001 and 2000 are based on an estimate of the
effective income tax rate for the entire year offset in 2000 by the elimination
of the valuation allowance related to its deferred tax assets as the realization
of such assets became probable. The reduction of the valuation allowance
decreased the tax provision by approximately $7.8 million.
18
Liquidity and Capital Resources
Currently, the Company is not generating sufficient revenue to fund its
operations. We expect our operating losses, net operating cash outflows and
capital expenditures to continue if we are unable to increase sales. On August
2, 2001, the Company announced that it had adopted a business plan to re-size
its business to reflect current and expected business conditions. We cannot
assure you that we will be able to sufficiently decrease our operating expenses.
If we are unable to realize sufficient savings from re-sizing our business,
and/or sufficiently increase our revenues, our ability to deploy and service our
products, fund our operations or respond to competitive pressures could be
significantly impaired.
At September 30, 2001, we had cash and cash equivalents of $35.7 million
and short-term marketable investments of $45.5 million.
Cash provided by/(used in) operating activities for the nine months ended
September 30, 2001 and 2000 was $(81.5) million and $48.4 million, respectively.
The relative increase in cash used in operating activities for the nine months
ended September 30, 2001 compared to cash provided by operating activities in
the same period in the prior year was primarily the result of a net decline in
net income (loss) of $205.1 million partially offset by an increase in non-cash
charges, and a net change in operating assets and liabilities.
Cash provided by/(used in) investing activities for the nine months ended
September 30, 2001 and 2000 was $52.6 million and $(8.5) million, respectively.
The relative increase in cash provided by investing activities for the nine
months ended September 30, 2001 compared to cash used in investing activities in
the same period in the prior year was the result of an increase in net
maturities of marketable investments partially offset by a decrease in purchases
of property and equipment.
Cash provided by/(used in) financing activities for the nine months ended
September 30, 2001 and 2000 was $(1.3) million and $6.4 million, respectively.
The increase in cash used in financing activities for the nine months ended
September 30, 2001 compared to cash provided by financing activities for the
same period in the prior year was primarily due to an increase in payments on
capital leases and equipment notes payable and a decrease in proceeds from the
issuance of common stock.
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 research and development laboratory and
test equipment to support on-going research and development operations.
We currently believe that our existing cash and cash equivalents balances
and short-term marketable investments will be sufficient to fund our operating
losses, capital expenditures, lease payments and working capital requirements
for at least the next 12 months. However, our capital requirements may vary
based upon the timing and the success of implementation of our business plan and
as a result of regulatory, technological and competitive developments or if:
. demand for our products and services or our cash flow from operations
is less than or more than expected;
. our obligation to purchase certain finished product and raw materials
in excess of anticipated requirements is less than or more than
expected;
. our plans or projections change or prove to be inaccurate;
. we make acquisitions; or
. we accelerate or delay availability of new products or otherwise alter
the schedule or targets of our business plan implementation.
We intend to use these cash resources for working capital and other general
corporate purposes. We may also use a portion of these cash resources to acquire
complementary businesses or other assets. The amounts actually expended for
these purposes will vary significantly depending on a number of factors,
including revenue growth, if any, planned capital expenditures, and the extent
and timing of our entry into
19
target markets. 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. 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 historically two largest customers Northpoint Communications, Inc. and
Rhythms Netconnections, 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 incumbent local
exchange carriers, or 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. 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 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 and
add customers with stronger financial positions.
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 ILECs as potential customers. The future success
of our business may substantially depend on our ability to successfully
penetrate ILEC customers. These customers have traditionally been characterized
by longer sales cycles and 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 this market, and our failure to
successfully do so could materially adversely affect our business, financial
condition and results of operations.
20
Copper Mountain May Not Achieve Quarterly or Annual Profitability
Copper Mountain experienced a significant decline in revenues in the first
three quarters of 2001 and anticipates a decline in its revenues in the full
year 2001 compared to the full year 2000 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 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. Sales to our
largest four customers accounted for approximately 70% of our net revenue for
the three months ended September 30, 2001. 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;
. the success of these customers' services deployed using our products;
and
. the attractiveness of our products compared to our competitors
products.
Our revenue has declined on a sequential basis each quarter from the third
quarter of the year ended December 31, 2000 to the third 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 substantially 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 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.
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 execution of our new business strategy to focus more on the domestic ILEC
market. 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
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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 September 30, 2001 we operated our business from facilities in Palo
Alto, California and San Diego, California. We expect to continue to face
challenges related to effectively and efficiently coordinating our operations
between our facilities. If we are unsuccessful in meeting these challenges, our
business and operating results may be adversely affected.
We cannot assure you that we will be able to sufficiently decrease our
operating expenses. If we are unable to realize sufficient savings from
re-sizing our business, and/or sufficiently increase our revenues, our ability
to deploy and service our products, fund our operations or respond to
competitive pressures could be significantly impaired.
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;
. 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 successfully manage the size of our operational infrastructure.
We discuss these and other risks in more detail below.
22
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 market;
. 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
. 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
23
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.
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, and similar complaints have been filed
against the Company and its directors in Delaware and California state courts,
alleging violations of the securities laws arising out of 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. In May 2001, the complaints filed in federal court were
consolidated into a single complaint. No assurances can be made that we will be
successful in our defense of the claims specified in any of these complaints. 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 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.
24
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 under which we have agreed to manufacture, and sell our products to
certain 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 chooses not
to renew, 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.
Intense Competition in the Market for Telecommunications Equipment Could
Prevent Copper Mountain From Increasing or Sustaining Revenue and Prevent Copper
Mountain From 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 results from
operations 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 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.
25
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
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
broadband services concentrators and associated line cards, 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 broadband services concentrators in
general and Copper Mountain's broadband services concentrator products in
particular, 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.
26
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, including, but not limited to our broadband services
concentrator 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 two
historically largest customers Northpoint Communications, Inc and Rhythms
Netconnections, 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.
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
27
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 our Senior Vice President of
Engineering, we do not have employment contracts with our key personnel. In any
event, employment contracts would not prevent key personnel from terminating
their employment with Copper Mountain. The loss of the services of any key
personnel, particularly senior management and engineers, could materially
adversely affect our business, financial condition and results of operations.
If Copper Mountain is Unable to Retain and Hire Additional Qualified
Personnel As Necessary, It May Not Be Able to Successfully Achieve Its
Objectives
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 two semiconductor chips from vendors for which there are currently no
substitutes. We are evaluating alternative source vendors for 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
28
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. If our current manufacturers are unable or
unwilling to continue manufacturing our components in required volumes, it could
take up to six months for an alternative manufacturer to supply the needed
components in sufficient volumes. It is possible that a source may not be
available to us when needed or be in a position to satisfy our production
requirements at acceptable prices and on a timely basis, if at all. Any
significant interruption in supply would result in the allocation of products to
customers, which in turn could have a material adverse effect on our business,
financial condition and results of operations.
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 Would Adversely Affect Its Results of Operations
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
29
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 adversely affect the Company's
results from operations or cause them to significantly vary from quarter to
quarter.
Changes to Regulations Affecting the Telecommunications Industry Could
Reduce Demand for Copper Mountain's Products or Adversely Affect Its Results of
Operations
Any changes to legal requirements relating to the telecommunications
industry, including the adoption of new regulations by federal or state
regulatory authorities under current laws or any legal challenges to existing
laws or regulations relating to the telecommunications industry could have a
material adverse effect upon the market for Copper Mountain's products.
Moreover, our distributors or telecommunications service provider customers may
require, or we may otherwise deem it necessary or advisable, that we modify our
products to address actual or anticipated changes in the regulatory environment.
Our inability to modify our products or address any regulatory changes could
have a material adverse effect on our business, financial condition or results
of operations.
Copper Mountain's Failure to Comply with Regulations and Evolving Industry
Standards Could Delay Its Introduction of New Products
The market for Copper Mountain's products is characterized by the need to
meet a significant number of communications regulations and standards, some of
which are evolving as new technologies are deployed. In order to meet the
requirements of our customers, our products may be required to comply with
various regulations including those promulgated by the Federal Communications
Commission, or FCC, and standards established by Underwriters Laboratories and
Bell Communications Research. Failure of our products to comply, or delays in
compliance, with the various existing and evolving industry regulations and
standards could delay the introduction of our products. Moreover, enactment by
federal, state or foreign governments of new laws or regulations, changes in the
interpretation of existing laws or regulations or a reversal of the trend toward
deregulation in the telecommunications industry could have a material adverse
effect on our customers, and thereby materially adversely affect our business,
financial condition and results of operations.
Copper Mountain May Not Be Able to Obtain Additional Capital to Fund Its
Operations When Needed
Our capital requirements depend on several factors, including the rate of
market acceptance of our products, the 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.
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If Copper Mountain's Products Contain Defects, Copper Mountain May Be
Subject to Significant Liability Claims from Its Customers and the End-Users of
Its Products and Incur Significant Unexpected Expenses and Lost Sales
Copper Mountain's products have in the past contained, and may in the
future contain, undetected or unresolved errors when first introduced or as new
versions are released. Despite extensive testing, errors, defects or failures
may be found in our current or future products or enhancements after
commencement of commercial shipments. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
development resources, injury to our reputation or increased service and
warranty costs, any of which could have a material adverse effect on our
business, financial condition and results of operations. Moreover, because our
products are designed to provide critical communications services, we may
receive significant liability claims. Our agreements with customers typically
contain provisions intended to limit our exposure to liability claims. These
limitations may not, however, preclude all potential claims resulting from a
defect in one of our products. Although we maintain product liability insurance
covering certain damages arising from implementation and use of our products,
our insurance may not cover any claims sought against us. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful
could seriously damage our reputation and our business.
Copper Mountain May Engage in Future Acquisitions That Dilute Its
Stockholders, Cause It to Incur Debt and Assume Contingent Liabilities
As part of Copper Mountain's business strategy, we expect to review
acquisition prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. We may acquire businesses, products or
technologies in the future. In the event of such future acquisitions, we could:
. issue equity securities which would dilute current stockholders'
percentage ownership;
. incur substantial debt; or
. assume contingent liabilities.
Such actions by us could materially adversely affect our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition could materially
adversely affect our results of operations;
. 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.
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We May Expand Our Operations in International Markets. Our Failure to
Effectively Manage Our International Operations Could Harm Our Business.
Entering new international markets may require significant management
attention and expenditures and could adversely affect our operating margins and
earnings. To date, we have not been able to successfully penetrate these
markets. The Company is shifting from a direct to indirect international sales
and support model. To the extent that we are unable to do so, 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 managing foreign sales channels;
. 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
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companies' stocks have been highly volatile. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such companies. We
have 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 September 30, 2001, we had
approximately 57 million shares of common stock outstanding. We have filed four
registration statements on Form S-8 with the Securities and Exchange Commission
covering the 19.1 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
September 30, 2001, approximately 2.2 million shares are currently subject to
exercisable options. Sales of a large number of shares could have an adverse
effect on the market price for our common stock.
Certain Provisions in Copper Mountain's Corporate Charter and Bylaws May
Discourage Take-Over Attempts and Thus Depress the Market Price of Our Stock
Provisions in Copper Mountain's certificate of incorporation, as amended
and restated, 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.
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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 September 30, 2001.
At September 30, 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 September 30, 2001 of
approximately $2.7 million. The ultimate amount of the decline in fair value and
the net realizable value of this investment is not currently practicably
determinable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the description of the litigation included in our Quarterly
Report on Form 10-Q for the three months ended June 30, 2001 (the "Second
Quarter 10-Q"). The motion to dismiss that is referenced in the Second Quarter
10-Q has been rescheduled to be heard November 29, 2001.
On July 27, 2001 the Company filed a complaint in the San Francisco County
Superior Court against Morgan Stanley Dean Witter & Co. ("Morgan Stanley")
alleging breach of contract, breach of fiduciary duty and negligence in
connection with certain losses on investments. The Company and Morgan Stanley
are currently discussing a settlement. No assurances can be made that we will be
successful in our assertion of such claims or in obtaining a settlement. If we
are not successful in our assertion of such claims or do not obtain a
settlement, we could realize losses on certain investments and such losses could
have a material adverse effect on our business, financial condition and results
of operations. Even if our assertion against such claims is successful, the
litigation could result in substantial costs or a counter claim and divert
management's attention and resources, which could adversely affect our business.
Item 6. Exhibits and Reports on Form 8-K
None.
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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: November 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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