<PAGE>
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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 0-28450
NETOPIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3033136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2470 MARINER SQUARE LOOP
ALAMEDA, CALIFORNIA 94501
(Address of principal executive offices, including Zip Code)
-----------------------------------------
(510) 814-5100
(Registrant's telephone number, including area code)
-----------------------------------------
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Sections 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
--- ---
As of July 31, 1998 there were 11,851,750 shares of the Registrant's common
stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
NETOPIA, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
At September 30, 1997 and June 30, 1998 ............................................................................. 3
Condensed Consolidated Statements of Operations
For the three and nine months ended June 30, 1997 and 1998 .......................................................... 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended June 30, 1997 and 1998 .................................................................... 5
Notes to Condensed Consolidated Financial Statements ................................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .......................................................................................................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................................................................... 25
SIGNATURE ..................................................................................................................... 26
INDEX TO EXHIBITS ............................................................................................................. 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETOPIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
1997 1998
--------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................................... $14,444 $20,373
Short-term investments....................................................... 27,192 19,928
Trade accounts receivable, net of allowances of $1,127 and $1,181 at
September 30, 1997 and June 30, 1998, respectively........................ 8,332 7,457
Inventories, net............................................................. 4,421 4,363
Deferred tax asset........................................................... 1,463 1,463
Prepaid expenses and other current assets.................................... 790 1,077
------- -------
Total current assets...................................................... 56,642 54,661
Furniture, fixtures, and equipment, net........................................ 2,321 2,203
Deferred tax assets, long-term................................................. 1,406 1,406
Deposits and other assets...................................................... 632 2,745
------- -------
Total assets.............................................................. 61,000 $61,015
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 4,497 $ 4,579
Accrued compensation......................................................... 1,237 1,646
Deferred revenue............................................................. 874 875
Other current liabilities.................................................... 55 326
------- -------
Total current liabilities................................................. 6,663 7,426
Other long-term liabilities.................................................... 361 279
------- -------
Total liabilities......................................................... 7,024 7,705
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $0.001 par value, 5,000,000 shares authorized; none
issued or outstanding..................................................... -- --
Common stock: $0.001 par value, 25,000,000 shares authorized;
11,492,732 and 11,742,352 shares issued and outstanding at September
30, 1997 and June 30, 1998, respectively.................................. 12 12
Additional paid-in capital....... .............................................. 50,568 51,282
Deferred compensation........................................................... (54) (41)
Retained earnings............................................................... 3,451 2,057
------- -------
Total stockholders' equity................................................ 53,977 53,310
------- -------
Total liabilities and stockholders' equity............................... $61,001 $61,015
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1997 1998 1997 1998
------ ------ ------ ------
Revenues:
<S> <C> <C> <C> <C>
Internet/Intranet products.............. $ 5,054 $ 6,766 $14,513 $18,481
LAN products............................ 7,102 5,053 23,786 15,115
------- ------- ------- -------
Total revenues........................ 12,156 11,819 38,299 33,596
Cost of revenues:
Internet/Intranet products.............. 1,482 1,984 4,740 5,563
LAN products............................ 4,802 3,310 15,270 10,080
------- ------- ------- -------
Total cost of revenues................ 6,284 5,294 20,010 15,643
------- ------- ------- -------
Gross profit.......................... 5,872 6,525 18,289 17,953
Operating expenses:
Research and development................ 2,212 2,029 6,625 6,404
Selling and marketing................... 3,600 4,104 11,308 12,672
General and administrative.............. 907 912 2,576 2,686
------- ------- ------- -------
Total operating expenses.............. 6,719 7,045 20,509 21,762
------- ------- ------- -------
Operating loss........................ (847) (520) (2,220) (3,809)
Other income, net.......................... 507 526 1,304 1,663
------- ------- ------- -------
Income (loss) before income taxes....... (340) 6 (916) (2,146)
Income tax (benefit) provision............. (119) 2 (320) (752)
------- ------- ------- -------
Net income (loss)....................... $ (221) $ 4 $ (596) $(1,394)
======= ======== ======= =======
Basic net income (loss) per share.......... $ (0.02) $ 0.00 $ (0.05) $ (0.12)
======= ======== ======= =======
Diluted net income (loss) per share........ $ (0.02) $ 0.00 $ (0.05) $ (0.12)
======= ======== ======= =======
Common shares used in the calculations
of basic net income (loss) per share....... 11,378 11,716 11,286 11,617
======= ======== ======= =======
Common and common equivalent shares
used in the calculations of diluted net
income (loss) per share.................... 11,378 13,192 11,286 11,617
======= ======== ======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-------------------------------------
1997 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss.................................................................... $ (596) $(1,394)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 1,391 994
Amortization of deferred compensation.................................... 13 13
Changes in assets and liabilities:
Trade accounts receivable, net......................................... 4,252 875
Inventories, net....................................................... 843 58
Prepaid expenses, deposits and other assets............................ 642 (497)
Accounts payable and accrued liabilities............................... (2,804) 82
Other liabilities...................................................... (127) 667
Deferred revenue....................................................... 372 (68)
-------- -------
Net cash provided by operating activities............................ 3,986 730
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments........................................ (32,817) (35,974)
Proceeds from the sale of short-term investments.......................... 25,943 43,238
Acquisition of furniture, fixtures and equipment.......................... (794) (767)
Acquisition of intangible assets.......................................... -- (1,800)
Capitalization of software development.................................... -- (212)
------- -------
Net cash provided by (used in) investing activities.................. (7,668) 4,485
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............................... 736 714
-------- -------
Net cash provided by financing activities............................ 736 714
-------- -------
Net increase (decrease) in cash and cash equivalents........................ (2,946) 5,929
Cash and cash equivalents, beginning of period.............................. 19,910 14,444
------- -------
Cash and cash equivalents, end of period.................................... $16,964 $20,373
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................................ $ 2 $ 1
======= =======
Income taxes paid.................................................... $ 287 $ 113
======= =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments which
in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements included in the
Company's Annual Report on Form 10-K and other filings with the United States
Securities and Exchange Commission. The consolidated results of operations for
the period ended June 30, 1998 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
September 30, 1998.
2. Recent Accounting Pronouncements
--------------------------------
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997 and may require the Company to modify
certain aspects of its revenue recognition policies. The Company does not
expect the adoption of SOP 97-2 to have a material impact on the Company's
consolidated results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" which are effective for the Company beginning with the fiscal year
ended September 30, 1999.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during the period arising from
transactions, events or circumstances relating to nonowner sources, such as
foreign currency translation adjustments and unrealized gains or losses on
available-for-sale securities. SFAS No. 131 establishes annual and interim
reporting standards relating to the disclosure of an enterprise's business
segments, products, services, geographic areas and major customers. Adoption of
these standards is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for sale security, or a foreign-
currency-denominated forecasted transaction. For a derivative not designated as
a hedging instrument, changes in the fair value of the derivative are recognized
in earnings in the period of change. This statement will be effective for all
annual and interim periods beginning after June 15, 1999. The Company does not
expect the adoption of SFAS No. 133 to have a material effect on the financial
position of the Company.
6
<PAGE>
3. Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Net inventory consisted of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
----------------- ------------------
<S> <C> <C>
Raw materials and work in process..................................... $ 1,966 $ 1,530
Finished goods........................................................ 2,455 2,833
-------- --------
$ 4,421 $ 4,363
======== ========
</TABLE>
4. Furniture, Fixtures and Equipment, net (in thousands):
------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
----------------- ------------------
<S> <C> <C>
Furniture, fixtures and equipment..................................... $ 13,105 $ 13,872
Accumulated depreciation and amortization............................. (10,784) (11,669)
-------- --------
$ 2,321 $ 2,203
======== ========
</TABLE>
5. Net Income (Loss) Per Share
---------------------------
Basic net income (loss) per share is based on the weighted average number
of shares of common stock outstanding during the period. Diluted net income
(loss) per share is based on the weighted average number of shares of common
stock outstanding during the period and dilutive common equivalent shares from
options and warrants outstanding during the period. No common equivalent shares
are included for loss periods as they would be anti-dilutive. Dilutive common
equivalent shares consist of stock options and stock warrants. Excluded from the
computation of diluted earnings per share for the nine months ended June 30,
1998 are options to acquire 3,340,583 shares of common stock with a weighted-
average price of $4.44 (excludes 124,825 options that are out of the money at
June 30, 1998) and warrants to acquire 60,000 shares of common stock with a
weighted-average exercise price of $4.00 because their effects would have been
anti-dilutive.
COMPUTATION OF PER SHARE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
1997 1998 1997 1998
----- ----- ----- -----
Computation of basic net income (loss) per share:
<S> <C> <C> <C> <C>
Net income (loss).......................................... $ (221) $ 4 $ (596) $ (1,394)
======== ======== ========= ========
Weighted average number of common shares outstanding....... 11,378 11,716 11,286 11,617
======== ======== ========= ========
Basic net income (loss) per share......................... $ (0.02) $ 0.00 $ (0.05) $ (0.12)
======== ======== ========= ========
Computation of diluted net income (loss) per share:
Net income (loss).......................................... $ (221) $ 4 $ (596) $ (1,394)
======== ======== ======== ========
Weighted average number of common shares outstanding....... 11,378 11,716 11,286 11,617
Number of dilutive common stock equivalents................ -- 1,476 -- --
------- ------- -------- --------
Shares used in per share calculation........................ 11,378 13,192 11,286 11,617
======= ======= ======== ========
Diluted net income (loss) per share........................ $ (0.02) $ 0.00 $ (0.05) $ (0.12)
======= ======= ======== ========
</TABLE>
7
<PAGE>
6. Subsequent Event
----------------
On August 5, 1998, the Company sold its Farallon LAN Division ("LAN
Division") including the LAN Division's products, accounts receivable,
inventory, property and equipment, intellectual property and other related
assets to Farallon Networking Corporation, a Delaware corporation and an
affiliate of Gores Technology Group ("Gores Technology Group"), for cash, a
warrant, and certain receivables aggregating $4.9 million in consideration.
Gores Technology Group also assumed certain accounts payable and other
liabilities of the LAN Division. The sale transaction will be recorded as a
discontinued operation in the fourth fiscal quarter ending September 30, 1998.
Due to transaction related expenses, the Company expects to record a loss on
the sale not expected to exceed $3.0 million. As a result of the disposal of
this segment, the Company will be reassessing its remaining operations and
presently anticipates that the Company's continuing operations will record a
charge not expected to exceed approximately $1.0 million for certain one-time
reorganization charges and will provide a valuation allowance against its
deferred tax assets not expected to exceed $3.5 million in the fourth fiscal
quarter ending September 30, 1998.
The Company expects to record the results of the LAN Division as a
discontinued operation. The Company's continuing operations would have accounted
for all revenues and operating expenses related to Netopia Internet Connectivity
hardware products, Timbuktu Pro and Netopia Virtual Office software products.
The following summary financial information summarizes the unaudited pro forma
consolidated financial results of the Company's continuing operations for the
fiscal years ended September 30, 1996 and 1997 and the nine months ended June
30, 1997 and 1998.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
---------------------------------- --------------------------------
1996 1997 1997 1998
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 16,718 $ 20,170 $ 14,513 $ 18,481
Cost of goods sold................ 3,811 6,396 4,740 5,563
-------- -------- -------- --------
Gross profit................. 12,907 13,774 9,773 12,918
Total operating 18,779 20,035 14,808 16,634
expenses......................... -------- -------- -------- --------
Operating loss.................... (5,872) (6,261) (5,035) (3,716)
Other income, net................. 1,040 1,869 1,304 1,663
-------- -------- -------- --------
Loss before income taxes..... $ (4,832) $ (4,392) $ (3,731) $ (2,053)
======== ======== ======== ========
</TABLE>
The unaudited pro forma condensed consolidated financial data have been
prepared by Company management and are not necessarily indicative of how the
Company's operating results would have been presented nor are they necessarily
indicative of the presentation of the Company's results for any future period.
Certain operating expenses for the periods presented are based upon allocation
assumptions of certain shared resources. Accordingly, certain expenses
previously allocated to the LAN Division will remain with the Company.
Complete pro forma financial data will be available within 60 days in
compliance with United States Securities and Exchange Commission regulations
pursuant to Form 8-K filings.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, intentions, strategies, proceeds, expenses,
charges, accruals, losses and reserves regarding the future. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Other
Factors That May Affect Future Results" as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in the Company's
other United States Securities and Exchange Commission Filings.
EVENTS OCCURING AFTER JUNE 30, 1998
On August 5, 1998 the Company sold its Farallon LAN Division ("LAN
Division") including the LAN Division's products, accounts receivable,
inventory, property and equipment, intellectual property and other related
assets to Farallon Networking Corporation, a Delaware corporation and an
affiliate of Gores Technology Group ("Gores Technology Group"), for cash,
warrants and certain receivables aggregating $4.9 million in consideration.
Gores Technology Group also assumed certain accounts payable and other
liabilities of the LAN Division. The LAN Division developed and sold Local
Area Networking ("LAN") products primarily for Apple Macintosh computers. The
LAN Division's products consisted of Ethernet, EtherWave, Fast Ethernet and
LocalTalk compatible products which included the PhoneNET system of network
connectivity products. The sale transaction will be recorded as a discontinued
operation in the fourth fiscal quarter ending September 30, 1998. Due to
transaction related expenses, the Company expects to record a loss on the sale
not expected to exceed $3.0 million. As a result of the disposal of this
segment, the Company will be reassessing its remaining operations and
presently anticipates the Company's continuing operations will record a charge
not expected to exceed approximately $1.0 million for certain one-time
reorganization items and will provide a valuation allowance against its
deferred tax assets not expected to exceed $3.5 million in the fourth fiscal
quarter ending September 30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
Revenues. On August 5, 1998, the Company sold its LAN Division to Gores
Technology Group. Revenues from the LAN Division accounted for 58.4% and 42.8%
of the Company's total revenues for the three months ended June 30, 1997 and
1998, respectively. Consequently, the comparisons below should not be relied
upon as indicators of future performance. During the three months ended June 30,
1997 and 1998, the Company's total revenue was derived from the sale of
Internet/Intranet connectivity and software products and LAN connectivity
products. Internet/Intranet product revenues include license revenues for
Timbuktu Pro software and Netopia Virtual Office software as well as sales of
the Netopia family of Internet connectivity products and fees for related
services. LAN products revenue was derived primarily from the sale of Ethernet,
EtherWave, Fast Ethernet and LocalTalk compatible products which included the
PhoneNET system of network connectivity products, of which a substantial
majority had been sold to Apple Macintosh operating system ("Mac OS") customers.
Revenue relating to the sale and licensing of hardware and software products is
recognized upon shipment of the products by the Company and service revenue is
recognized ratably over the term of the contract. Certain of the Company's sales
are made to customers under agreements permitting limited rights of return for
stock balancing or with protection for future price decreases. Revenue is
recorded net of an estimated allowance for returns and credits. Any product
returns or price decreases in the future that exceed the Company's allowances
may materially adversely affect the Company's business, operating results and
financial condition.
9
<PAGE>
The Company's total revenues decreased 2.8% from $12.2 million to $11.8
million for the three months ended June 30, 1997 and 1998, respectively.
Internet/Intranet products revenue increased 33.9% from $5.1 million to $6.8
million for the three months ended June 30, 1997 and 1998, respectively. The
increase in Internet/Intranet revenue was primarily due to increased sales of
volume site licenses and royalty based OEM licenses of Timbuktu Pro and Netopia
Virtual Office software as well as increased sales of the ISDN version of the
Netopia Internet connectivity product internationally, increased sales of the
Frame Relay version of the Netopia Internet connectivity product in North
America and the introduction of the Netopia Dual Analog Internet connectivity
product in North America during the quarter. This increase was partially offset
by decreased sales of Macintosh versions of Timbuktu Pro collaboration software
and the ISDN version of the Netopia Internet connectivity product in North
America. LAN products revenue decreased 28.9% from $7.1 million to $5.1 million
for the three months ended June 30, 1997 and 1998, respectively. The decrease
was primarily due to declining volume and average selling prices of Ethernet
products and declining volumes of EtherWave and LocalTalk products. This
decrease was partially offset by increased sales of Fast Ethernet products. The
Company believes LAN products revenue and revenue from Timbuktu Pro for the
Macintosh continued to be adversely affected by declining sales of Mac OS
computers and Apple's loss of market share as well as by the reduction in the
sales of Macintosh clone computers due to the elimination of a number of
Macintosh cloning licenses issued by Apple. Internet/Intranet products revenue
accounted for 41.6% and 57.2% of the Company's total revenues for the three
months ended June 30, 1997 and 1998, respectively. Total revenue will now
include only Internet/Intranet revenue and therefore the Company expects total
revenue will decline and LAN products revenue will discontinue as a result of
the sale of the LAN Division on August 5, 1998.
As a result of the sale of the LAN Division, which in fiscal 1997 and prior
years was profitable, the Company's future operating results are dependent upon
the market acceptance of its Internet/Intranet products and enhancements
thereto. To the extent that the loss of revenue from the sale of the LAN
Division is not offset by increases in revenue from the sale of the Company's
Internet/Intranet products, the Company's business, operating results and
financial condition will be materially and adversely affected.
Netopia sells its Internet/Intranet products and related maintenance,
support and other services through distributors, while certain products are also
sold directly through select Internet Service Providers ("ISPs") and Value Added
Resellers ("VARs") or directly by the Company to corporate accounts and higher
education institutions. Total revenues from distributors accounted for 60% and
44% of the Company's total revenues for the three months ended June 30, 1997 and
1998, respectively. LAN revenues from distributors accounted for a majority of
total LAN revenues for the three months ended June 30, 1997 and 1998, while
Internet/Intranet revenues from distributors accounted for a significant portion
of total Internet/Intranet revenues for the three months ended June 30, 1997 and
1998. The Company's three largest distributors, in aggregate, accounted for 33%
and 26% of the Company's total revenues for the three months ended June 30, 1997
and 1998, respectively. During the three months ended June 30, 1997 and 1998,
revenue from Ingram Micro ("Ingram") accounted for 16% and 14% of the Company's
total revenues, respectively, and revenue from MicroWarehouse accounted for 11%
and 7% of the Company's total revenues, respectively. No other customers have
accounted for 10% or more of the Company's total revenues during the three
months ended June 30, 1997 and 1998. The Company intends to continue to use its
existing distributors, ISPs and VARs to sell the Company's Internet/Intranet
products and to recruit additional distributors, ISPs and VARs as well as pursue
additional marketing channels in the future. The Company's LAN Division
historically sold significant volumes of product through its distributors. Due
to the sale of the LAN Division there can be no assurance that the Company's
current distributors will continue to market the Company's Internet/Intranet
products, that the Company's channel related expense levels will not increase,
that economic conditions or industry demand will not adversely affect these or
other distributors, or that these distributors will not devote greater resources
to marketing products of other companies. The loss of, or a significant
reduction in revenue from, one of the Company's distributors could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company has recently been advised by MicroWarehouse,
that MicroWarehouse, Ingram and Merisel are jointly developing a "Virtual
Warehouse" program through which MicroWarehouse will purchase its products
directly from Ingram and Merisel to fulfill its customer orders. As a result,
MicroWarehouse would no longer purchase product directly from the Company. If
and when this program is implemented, the Company expects revenue from
MicroWarehouse to be discontinued although the Company expects increased orders
in the future from Ingram and Merisel to offset the loss of revenue from
MicroWarehouse
10
<PAGE>
as Ingram and Merisel will be required to fulfill the MicroWarehouse orders.
There can be no assurance that this "Virtual Warehouse" program will be
implemented or that orders from Ingram and Merisel will order sufficient
quantities to offset the loss of revenue from MicroWarehouse.
International revenues accounted for 29% of the Company's total revenues
for each of the three months ended June 30, 1997 and 1998, and are derived
primarily from Europe and the Pacific Rim. International LAN revenues accounted
for 28% and 27% of total LAN revenues for the three months ended June 30, 1997
and 1998, respectively, while International Internet/Intranet revenues accounted
for 32% and 31% of total Internet/Intranet revenues for the three months ended
June 30, 1997 and 1998, respectively. Revenues from Europe accounted for 18% and
21% of total revenues for the three months ended June 30, 1997 and 1998,
respectively, while revenues from the Pacific Rim accounted for 6% and 5% of
total revenues for the three months ended June 30, 1997 and 1998, respectively.
The Company's international revenues are currently denominated in United States
dollars, and revenues generated by the Company's distributors are currently paid
to the Company in United States dollars. The results of the Company's
international operations may fluctuate from period to period based on global
economic factors including, but not limited to, the current economic situation
in Asia and Japan and movements in currency exchange rates. Historically,
movements in exchange rates have not materially affected the Company's total
revenues. However, there can be no assurance that movements in currency exchange
rates will not have a material adverse effect on the Company's revenues in the
future.
The Company expects that international revenues will continue to represent
a significant portion of its total revenues. Any significant decline in
international demand for the Company's products would have a material adverse
effect on the Company's business, operating results and financial condition. The
Company believes that in order to increase sales opportunities and profitability
it will be required to expand its international operations. The Company has
committed and continues to commit significant management attention and financial
resources to developing international sales and support channels. There can be
no assurance that the Company will be able to maintain or increase international
market demand for its products.
Gross Margin. On August 5, 1998, the Company sold its LAN Division to Gores
Technology Group. Gross margins from the LAN Division were 32.4% and 34.5% for
the three months ended June 30, 1997 and 1998, respectively, and gross profits
from the LAN Division have accounted for 39.2% and 26.7% of total gross profits
for the three months ended June 30, 1997 and 1998, respectively. Consequently,
the comparisons below should not be relied upon as indicators of future
performance. The Company's gross margin for Internet/Intranet products is
affected by many factors, including pricing strategies, royalties paid to third
parties, standard cost changes, new versions of existing products and product
mix. The Company's total gross margin increased from 48.3% to 55.2% for the
three months ended June 30, 1997 and 1998, respectively, primarily due to the
increasing percentage of higher margin Internet/Intranet products being sold by
the Company. The Company's gross margin for Internet/Intranet products was 70.7%
for the three months ended June 30, 1997 and 1998. The Company's gross margin
for LAN products increased from 32.4% to 34.5% for the three months ended June
30, 1997 and 1998, respectively. The increase was primarily due to Fast Ethernet
cost reductions and product mix. The Company expects the total gross margin
percentage will increase during the three months ended September 30, 1998 as a
result of the sale of the LAN Division. The Company's gross margin has varied
significantly in the past and will likely vary significantly in the future
depending primarily on the mix of products sold by the Company and external
market factors including but not limited to price competition. The Company's
Internet/Intranet software products have a higher average gross margin than the
Company's Internet hardware products. Accordingly, to the extent the product mix
for any particular quarter includes a substantial proportion of lower margin
products, there will be a material adverse effect on the Company's business,
operating results and financial condition.
Research and Development. On August 5, 1998, the Company sold its LAN
Division to Gores Technology Group. The LAN Division's research and development
expenses have accounted for 20.9% and 19.7% of total research and development
expenses for the three months ended June 30, 1997 and 1998, respectively.
Consequently, the comparisons below should not be relied upon as indicators of
future performance. Research and development expenses decreased 8.3% from $2.2
million to $2.0 million for the three months ended June 30, 1997 and 1998,
respectively. The decrease was primarily due to the transition of software
development to India and higher spending during the three months ended June 30,
1997 related to the development of the Frame Relay
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Internet connectivity product. Research and development expenses represented
18.2% and 17.2% of total revenues for the three months ended June 30, 1997 and
1998, respectively. The Company believes that it will continue to devote
substantial resources to product development but that future research and
development expenses will decline in absolute dollars as a result of the sale of
the LAN Division and the transfer of its related engineers and their associated
development costs, however, the Company expects research and development
expenses to increase as a percentage of total revenue. Historically, the Company
has believed its process for developing software is essentially completed
concurrently with the establishment of technological feasibility and no internal
software costs have been capitalized to date. During the three months ended June
30, 1998, $11,500 of product development costs incurred subsequent to the
delivery of a working model, under a development agreement with third parties,
were capitalized. No internal software development costs were capitalized during
the three months ended June 30, 1998.
Selling and Marketing. On August 5, 1998, the Company sold its LAN Division
to Gores Technology Group. The LAN Division's selling and marketing expenses
have accounted for a significant portion of total selling and marketing expenses
for the three months ended June 30, 1997 and 1998. Consequently, the comparisons
below should not be relied upon as indicators of future performance. Selling and
marketing expenses increased 14.0% from $3.6 million to $4.1 million for the
three months ended June 30, 1997 and 1998, respectively. The increase was
primarily due to channel development programs and increased promotional spending
to support new product launches. Such expenses represented 29.6% and 34.7% of
total revenues for the three months ended June 30, 1997 and 1998, respectively.
The Company believes that future selling and marketing expenses will decline in
absolute dollars as a result of the sale of the LAN Division and the transfer of
its related employees and the associated selling and marketing expenses and
expects such expenses to increase as a percentage of total revenue.
General and Administrative. On August 5, 1998, the Company sold its LAN
Division to Gores Technology Group. The LAN Division's general and
administrative expenses have accounted for a significant portion of total
general and administrative expenses for the three months ended June 30, 1997 and
1998. Consequently, the comparisons below should not be relied upon as
indicators of future performance. General and administrative expenses increased
from $907,000 to $912,000 for the three months ended June 30, 1997 and 1998,
respectively. Such expenses represented 7.5% and 7.7% of total revenues for the
three months ended June 30, 1997 and 1998, respectively. The Company believes
that future general and administrative expenses will decline in absolute dollars
as a result of the sale of the LAN Division and the transfer of its related
employees and associated expenses.
Other Income, net. Other income, net, primarily represents interest earned
by the Company on its cash, cash equivalents and short-term investments. Other
income increased 3.7% from $507,000 to $526,000 for the three months ended June
30, 1997 and 1998, respectively.
Provision for Income Taxes. The effective tax rate was 35% for the each of
three months ended June 30, 1997 and 1998. This rate differs from the statutory
rate primarily due to state income taxes, investment income from tax advantaged
investments, and the utilization of research and experimentation tax credits.
The Company believes that, following the sale of the LAN Division, there
will be sufficient uncertainty regarding the realizability of its deferred tax
assets to warrant a valuation allowance against its deferred tax assets not
expected to exceed $3.5 million in the three months ending September 30, 1998.
The factors considered included the sale of the LAN Division to Gores
Technology Group, relatively shorter product life cycles in the high
technology industry, the uncertainty of longer-term taxable income estimates
related thereto, and limits on the carryback potential for realizing certain
deferred tax assets.
NINE MONTHS ENDED JUNE 30, 1997 AND 1998
Revenues. On August 5, 1998, the Company sold its LAN Division to Gores
Technology Group. Revenues from the LAN Division accounted for 62.1% and 45.0%
of the Company's total revenues for the nine months ended June 30, 1997 and
1998, respectively. Consequently, the comparisons below should not be relied
upon as indicators
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of future performance. The Company's total revenues decreased 12.3% from $38.3
million to $33.6 million for the nine months ended June 30, 1997 and 1998,
respectively. Internet/Intranet products revenue increased 27.3% from $14.5
million to $18.5 million for the nine months ended June 30, 1997 and 1998,
respectively. The increase in Internet/Intranet revenue was primarily due to
increased sales of the Windows version of Timbuktu Pro collaboration software,
particularly volume licenses, as well as increased international sales of
Netopia Internet connectivity products and increased sales of the Frame Relay
version of the Netopia Internet connectivity product in North America, partially
offset by decreased sales of Macintosh versions of Timbuktu Pro collaboration
software and decreased sales of the ISDN version of the Netopia Internet
connectivity product in North America. The decrease in sales of the ISDN version
of the Netopia Internet connectivity product in North America is primarily due
to increased competition from foreign and domestic manufacturers of similar
product as well as competition from newer technologies such as DSL and cable
Internet connectivity products. LAN products revenue decreased 36.5% from $23.8
million to $15.1 million for the nine months ended June 30, 1997 and 1998,
respectively. The decrease was primarily due to declining volume and average
selling prices of Ethernet, EtherWave and LocalTalk products, partially offset
by increased sales of Fast Ethernet products. The Company believes LAN products
revenue and revenue from Timbuktu Pro for the Macintosh were adversely affected
by declining sales of Mac OS computers and Apple's loss of market share as well
as by the reduction in the sales of Macintosh clone computers due to the
elimination of a number of Macintosh cloning licenses issued by Apple.
Internet/Intranet products revenue accounted for 37.9% and 55.0% of the
Company's total revenues for the nine months ended June 30, 1997 and 1998,
respectively. Total revenue will now include only Internet/Intranet revenue and
therefore the Company expects total revenue will decline and LAN products
revenue will discontinue as a result of the sale of the LAN Division on August
5, 1998.
Netopia sells its Internet/Intranet products and related maintenance,
support and other services through distributors, while certain products are also
sold directly through select ISPs and VARs or directly by the Company to
corporate accounts and higher education institutions. Revenues from distributors
accounted for 61% and 46% of the Company's total revenues for the nine months
ended June 30, 1997 and 1998, respectively. LAN revenues from distributors
accounted for a majority of total LAN revenues for the nine months ended June
30, 1997 and 1998, while Internet/Intranet revenues from distributors accounted
for a significant amount of total Internet/Intranet revenues for the nine months
ended June 30, 1997 and 1998. The Company's three largest distributors, in
aggregate, accounted for 33% and 27% of the Company's total revenues for the
nine months ended June 30, 1997 and 1998, respectively. During the nine months
ended June 30, 1997 and 1998, revenue from Ingram accounted for 19% and 15% of
the Company's total revenues, respectively and revenue from MicroWarehouse
accounted for 10% and 8% of the Company's total revenues, respectively. No other
customers have accounted for 10% or more of the Company's total revenues during
the nine months ended June 30, 1997 and 1998.
International revenues accounted for 30% and 32% of the Company's total
revenues for the nine months ended June 30, 1997 and 1998, respectively, and are
derived primarily from Europe and the Pacific Rim. International LAN revenues
accounted for 31% and 32% of total LAN revenues for the nine months ended June
30, 1997 and 1998, respectively, while International Internet/Intranet revenues
accounted for 29% and 32% of total Internet/Intranet revenues for the nine
months ended June 30, 1997 and 1998, respectively. Revenues from Europe
accounted for 19% and 23% of total revenues for the nine months ended June 30,
1997 and 1998, respectively, while revenues from the Pacific Rim account for 8%
and 6% of total revenues for the nine months ended June 30, 1997 and 1998,
respectively.
Gross Margin. On August 5, 1998, the Company sold its LAN Division to Gores
Technology Group. Gross margins from the LAN Division were 35.8% and 33.3% for
the nine months ended June 30, 1997 and 1998, respectively, and gross profits
from the LAN Division have accounted for 46.6% and 28.0% of total gross profits
during the nine months ended June 30, 1997 and 1998, respectively. Consequently,
the comparisons below should not be relied upon as indicators of future
performance. The Company's gross margin for Internet/Intranet products is
affected by many factors, including pricing strategies, royalties paid to third
parties, standard cost changes, new versions of existing products and product
mix. The Company's total gross margin increased from 47.8% to 53.4% for the nine
months ended June 30, 1997 and 1998, respectively, primarily due to the
increasing percentage of higher margin Internet/Intranet products being sold by
the Company. The Company's gross margin for Internet/Intranet products increased
from 67.3% to 69.9% for the nine months ended June 30, 1997 and 1998,
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respectively, primarily due to increased sales of Windows versions of Timbuktu
Pro software, particularly volume licenses, the introduction of frame relay
routers which have higher gross margins than the Company's other Internet
connectivity products, partially offset by reduced sales of Macintosh versions
of Timbuktu Pro collaboration software and continued price competition on ISDN
Internet connectivity products particularly in North America. The Company's
gross margin for LAN products decreased from 35.8% to 33.3% for the nine months
ended June 30, 1997 and 1998, respectively. The decrease was primarily due to
declining average selling prices as a result of increased price competition as
well as incremental price protection and inventory reserves, partially offset by
cost reductions.
Research and Development. On August 5, 1998, the Company sold its LAN
Division to Gores Technology Group. The LAN Division's research and development
expenses have accounted for 20.6% and 19.2% of total research and development
expenses for the nine months ended June 30, 1997 and 1998, respectively.
Consequently, the comparisons below should not be relied upon as indicators of
future performance. Research and development expenses decreased 3.3% from $6.6
million to $6.4 million for the nine months ended June 30, 1997 and 1998,
respectively, primarily due to reduced software localization and associated
costs, the transition of software development to India and reduced development
expenses related to the Company's LAN products. Research and development
expenses represented 17.3% and 19.1% of total revenues for the nine months ended
June 30, 1997 and 1998, respectively. The Company believes that it will continue
to devote substantial resources to product development but that future research
and development expenses will decline in absolute dollars as a result of the
sale of the LAN Division and the transfer of its related engineers and their
associated development costs, however, the Company expects research and
development expenses to increase as a percentage of total revenue. Historically,
the Company has believed its process for developing software is essentially
completed concurrently with the establishment of technological feasibility and
no internal software costs have been capitalized to date. During the nine months
ended June 30, 1998, $212,000 of product development costs incurred subsequent
to the delivery of a working model, under a development agreement with third
parties, were capitalized. No internal software development costs were
capitalized during the nine months ended June 30, 1998.
Selling and Marketing. On August 5, 1998, the Company sold its LAN Division
to Gores Technology Group. The LAN Division's selling and marketing expenses
have accounted for a significant portion of total selling and marketing expenses
for the nine months ended June 30, 1997 and 1998. Consequently, the comparisons
below should not be relied upon as indicators of future performance. Selling and
marketing expenses increased 12.1% from $11.3 million to $12.7 million for the
nine months ended June 30, 1997 and 1998, respectively. The increase was
primarily due to increased headcount, increased advertising expenses related to
the introduction of new Internet/Intranet products including Netopia Virtual
Office and the Netopia Dual Analog Internet connectivity products and expenses
related to the corporate name change from Farallon Communications, Inc. to
Netopia, Inc. Such expenses represented 29.5% and 37.7% of total revenues for
the nine months ended June 30, 1997 and 1998, respectively. The Company believes
that future selling and marketing expenses will decline in absolute dollars as a
result of the sale of the LAN Division and the transfer of its related employees
and the associated selling and marketing expenses and expects such expenses to
increase as a percentage of total revenue.
General and Administrative. On August 5, 1998, the Company sold its LAN
Division to Gores Technology Group. The LAN Division's general and
administrative expenses have accounted for a significant portion of total
general and administrative expenses for the nine months ended June 30, 1997 and
1998. Consequently, the comparisons below should not be relied upon as
indicators of future performance. General and administrative expenses increased
4.3% from $2.6 million to $2.7 million for the nine months ended June 30, 1997
and 1998, respectively, primarily due to increased employee related expenses,
transaction fees related to sales over the Internet and accruing additional
sales tax reserves related to state sales tax audits. Such expenses represented
6.7% and 8.0% of total revenues for the nine months ended June 30, 1997 and
1998, respectively. The Company believes that future general and administrative
expenses will decline in absolute dollars as a result of the sale of the LAN
Division and the transfer of its related employees and associated expenses.
Other Income, net. Other income, net, primarily represents interest earned
by the Company on its cash, cash equivalents and short-term investments. Other
income increased 27.5% from $1.3 million to $1.7 million for the nine months
ended June 30, 1997 and 1998, respectively. From October 1996 to May of 1997,
the Company's
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short-term investments were held in tax advantaged investments which earned a
lower rate of interest than non-tax advantaged investments in which the Company
is currently invested.
Provision for Income Taxes. The effective tax rate was 35% for the each of
nine months ended June 30, 1997 and 1998. This rate differs from the statutory
rate primarily due to state income taxes, investment income from tax advantaged
investments, and the utilization of research and experimentation tax credits.
OTHER RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, many of which are beyond the Company's control. The following
discussion highlights some of these risks. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and elsewhere in this report, and the risks discussed in the
Company's other United States Securities and Exchange Commission Filings.
FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS UNCERTAIN.
The Company's quarterly operating results have varied significantly in the
past and are likely to vary significantly in the future. For example, the
Company has recently experienced quarterly losses. Historically, the Company
has been dependent upon the sales of its LAN products. As a result of the sale
of the LAN Division, the Company's future operating results are dependent upon
the market acceptance of its Internet/Intranet products and enhancements
thereto. To the extent that the loss of revenue from the sale of the LAN
Division is not offset by increases in revenue from the sale of the Company's
Internet/Intranet products, the Company's business, operating results and
financial condition will be materially and adversely affected. The Company's
operating results depend on factors such as, changes in networking and
communications technologies, price and product competition, usage of the
Internet and developments and changes in the Internet market, the demand for
the Company's products, product enhancements and new product announcements by
the Company and its competitors, market acceptance of new products of the
Company or its competitors, the size and timing of distributor and end user
orders and purchasing cycles, customer order deferrals in anticipation of
enhancements to the Company's or competitors' products, customer order
deferrals for budgetary or other reasons, manufacturing delays, disruptions in
sources of supply, product life cycles, product quality problems, changes in
the level of operating expenses, the timing of research and development
expenditures and the level of the Company's international revenues. The
Company's results also depend on the demand for vendor products related to the
Company's products such as Windows or Apple Macintosh personal computers and
operating systems, among others, and customer order deferrals in anticipation
of new product offerings by these vendors. The Company's gross margins and
operating results depend on factors such as raw material costs, write-offs of
obsolete inventory, changes in pricing policies by the Company or its
competitors, including the grant of price protection terms and discounts by
the Company, changes in the mix of products sold by the Company and the
resulting change in total gross margin, changes in the mix of channels through
which the Company's products are offered as well as the structure of planned
Virtual Office partnerships which may be reported as either higher margin
royalty arrangements or lower margin operations subject to royalty,
amortization or other costs. Additionally, the Company's operating results
depend on general factors such as personnel changes, changes in the Company's
strategy, fluctuations in foreign currency exchange rates, general economic
conditions, both in the United States and abroad and economic conditions
specific to the industries in which the Company competes among others. The
Company's limited Internet/Intranet operating history and the dynamic market
environment in which the Company competes makes the prediction of future
Internet/Intranet operating results difficult, if not impossible. Sales orders
are typically shipped shortly after receipt and, consequently, order backlog
at the beginning of any quarter has in the past represented only a small
portion of that quarter's revenues. Accordingly, the Company's net revenues in
any quarter are substantially dependent on orders booked and shipped during
that quarter. Historically, the Company has often shipped and recognized a
significant portion of its revenues in the last weeks, or even days, of a
quarter. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of a particular quarter. The Company
typically experiences significant volumes of shipments at the end of the
quarter which may be exposed to delays caused by shipping halts or other
factors beyond the Company's control. In addition, the Company recognizes
revenue on products sold through distributors, ISPs and VARs upon shipment to
the distributor, ISP and VAR. Although the Company maintains reserves for
projected returns and price decreases, there can be no assurance that
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such reserves will be adequate. The Company's business also has experienced
seasonality in the past, largely due to customer buying patterns such as
budgeting cycles of educational institutions that purchase the Company's
products and the summer slow down in most European markets. There can be no
assurance that the Company's operating results will not be affected by
seasonality in the future or that such seasonality will occur in a manner
consistent with prior periods.
The Company's expense levels are based in large part on expectations as to
future revenues and as a result are relatively fixed in the short term. If
revenues are below expectations in any given quarter, net income or loss is
likely to be disproportionately affected. Due to all of the foregoing factors,
and other factors discussed herein, revenues and net income or loss for any
future period are not predictable with any significant degree of certainty.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance. There can be no assurance that the
Company's business strategies will be successful or that the Company will be
able to return to or sustain profitability on a quarterly or annual basis in the
future. It is likely that in some future quarter the Company's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.
DEPENDENCE ON INTERNET/INTRANET PRODUCTS. With the sale of the LAN
Division, the Company's business is dependent upon continued and increased
market acceptance and growth in the sale of its Internet/Intranet products. To
the extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed upon it by
such potential growth, or will not otherwise lose its utility due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of activity or due to increased government regulation. Although
the Company has experienced significant percentage growth rates in its
Internet/Intranet revenues, the Company does not believe prior percentage growth
rates are sustainable or indicative of future operating results for these
products and services. The Company's limited Internet/Intranet operating history
and the dynamic market environment in which the Company operates makes the
prediction of future Internet/Intranet operating results difficult, if not
impossible. There can be no assurance that the Company will increase sales of
its Internet/Intranet products or that the Company's existing distribution
channels are appropriate for the sale of its Internet/Intranet products.
Although the Company's Internet/Intranet software products currently carry a
higher average gross margin than its Internet hardware products, the Company
anticipates that competitive pressures in its Internet/Intranet business may
result in declining average selling prices and gross margins. Accordingly, the
failure of the Company's Internet/Intranet products to gain market acceptance or
to achieve significant sales would materially and adversely affect the Company's
business, operating results and financial condition. The markets in which the
Company competes currently are subject to intense price competition and new
technologies and the Company expects additional price and product competition as
other established and emerging companies enter these markets and new products
and technologies are introduced. Additionally, a number of competitors have
substantially greater financial, technical, sales, marketing and other resources
than the Company as well as greater name recognition and a larger customer base.
These companies may therefore be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sales of its products. Increased competition
may result in further price reductions, reduced gross margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results and financial condition.
DEPENDENCE ON DISTRIBUTORS. The Company receives a significant portion of
Internet/Intranet revenue from its two-tier distribution channel. The
distribution of Internet/Intranet products such as those offered by the Company
has been characterized by rapid change, including industry consolidations,
financial difficulties of distributors and the emergence of alternative
distribution channels. There can be no assurance that current distributors will
continue to serve as distributors for the Company since the Company does not
currently have a written agreement regarding price or quantity commitments with
these or other distributors which operate on a purchase order basis. The
Company's LAN Division historically sold significant volumes of product through
its distributors. Due to the sale of the LAN Division there can be no assurance
that the Company's current distributors will continue to market the Company's
Internet/Intranet products, that the Company's channel expense levels will
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not increase, that economic conditions or industry demand will not adversely
affect these or other distributors, or that these distributors will not devote
greater resources to marketing products of other companies. The loss of, or a
significant reduction in revenue from, one of the Company's distributors could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company's distributors generally offer products of
several different companies, including products that are competitive with the
Company's products. There can be no assurance that future sales by the Company's
distributors will continue at current levels, that the Company will be able to
retain its current distributors in the future on terms which are acceptable to
the Company, that the Company's current distributors will choose to or be able
to market the Company's products effectively, that economic conditions or
industry demand will not adversely affect these or other distributors, that
these distributors will not devote greater resources to marketing products of
other companies or that internal staffing changes or other changes at the
Company's distributors will not disrupt historical purchasing or payment
patterns. Accordingly, the loss of, or a significant reduction in revenue from,
one of the Company's distributors, could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
price protection to its distributors. Although the Company provides allowances
for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's allowances will materially and
adversely affect the Company's business, operating results and financial
condition. The Company also provides end users with a ninety (90) day limited
warranty on certain products and permits end users to return any product for its
full purchase price if the product does not perform as warranted. To date, the
Company has not encountered material warranty claims. Nevertheless, if future
warranty claims exceed the Company's reserves, the Company's business, operating
results and financial condition could be materially and adversely affected. In
addition, the Company attempts to further limit its liability to end users
through disclaimers of special, consequential and indirect damages and similar
provisions in its end user warranty. However, no assurance can be given that
such limitations of liability will be legally enforceable.
SALE OF FARALLON LAN DIVISION. On August 5, 1998, the Company sold its LAN
Division to Gores Technology Group. In connection with such sale, the Company
received (i) cash, (ii) the right to a portion of Farallon's revenues for a
period of five years, (iii) a two year promissory note from Farallon Networking
Corporation, guaranteed by Gores Technology Group, and (iv) a warrant to
purchase equity of Farallon Networking Corporation. There can be no assurance
that the business of Farallon Networking Corporation will be sufficiently
successful to allow the Company to realize the value of the warrant and the
receivables described in (ii), (iii) and (iv) above. The failure of the Company
to realize the value of the warrant and such receivables could have a material
adverse effect on the Company's business, operating results and financial
condition. Also in connection with the sale of the LAN Division, the Company
made certain representations and warranties about the assets and liabilities
transferred to Farallon Networking Corporation. While the Company believes such
representations to be accurate, the Company could be liable for up to $2 million
for any damages to Farallon Networking Corporation resulting from any breach or
breaches of any of such representations and warranties. As a result, any
material breach or breaches of the representations warranties made in connection
with the sale of the LAN Division could have a material adverse effect on the
Company's business, operating results and financial condition. See "Fluctuations
in Quarterly Results; Future Operating Results Uncertain," "Dependence on
Distributors," "Dependence on Proprietary Rights and Technology," "Risks
Associated with Potential Acquisitions or Divestitures," "Dependence on Key
Personnel," and "California Headquarters; Leased Facilities."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OR DIVESTITURES. The Company
may acquire or invest in companies, technologies or products that complement the
Company's business or its product offerings. In addition, the Company continues
to evaluate the performance of all its products and product lines and may sell
or discontinue current technologies, products or product lines. Any
acquisitions or divestitures may result in potentially dilutive issuances of
equity securities, the write-off of software development costs or other assets,
the incurring of severance liabilities, the amortization of expenses related to
goodwill and other intangible assets and/or the incurrence of debt, any of which
could have a material adverse effect on the Company's business, financial
condition, cash flows and results of operations. Acquisitions or divestitures
would involve numerous additional risks including difficulties in the
assimilation or separation of operations, services, products and
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personnel, the diversion of management's attention from other business concerns,
the disruption of the Company's business, the entry into markets in which the
Company has little or no direct prior experience, the potential loss of key
employees and the potential loss of key distributor or supplier relationships.
There can be no assurance that the Company would be successful in overcoming
these or any other significant risks encountered.
MANAGEMENT OF CHANGING BUSINESS. Managing the Internet/Intranet business
following the sale of the LAN Division represents a significant challenge for
the Company and its administrative, operational and financial resources and
places increased demands on its systems and controls. The Company's ability to
manage the continuing development of its Internet/Intranet business will require
the Company to continue to change, expand and improve its operational,
management and financial systems and controls and to modify its manufacturing
capabilities. This transition has resulted in a continuing increase in the level
of responsibility for both existing and new management personnel. The Company
anticipates that any growth in its Internet/Intranet business will require it to
recruit and hire a substantial number of new engineering, sales and marketing,
customer service, administrative and managerial personnel. There can be no
assurance that the Company will be successful in hiring or retaining these
personnel, if needed. In addition, certain aspects of the Company's
Internet/Intranet business require volume sales to achieve profitability. If the
Company is unable to achieve such volumes, offset the loss of revenue or to
manage the transition effectively, the Company's business, operating results and
financial condition will be materially and adversely affected.
DEPENDENCE ON APPLE. The Company believes that approximately 25% to 30% of
its Internet/Intranet products revenue are derived from customers purchasing
products for the Apple Mac OS environment. Accordingly, the Company is
substantially dependent on the market for Mac OS computers and the development
and sale of new Apple computers, particularly sales of such computers into
business environments. There can be no assurance that competitive personal
computers will not displace the Mac OS products or reduce sales of Mac OS
products. Sales of the Company's products in the past have been adversely
affected by the announcement by Apple of new products with the potential to
replace existing products, customer order deferrals in anticipation of new Mac
OS product offerings and the elimination of a number of Macintosh cloning
licenses issued by Apple and potential limitations on the retail distribution of
Apple products. The inability of Apple to successfully develop, manufacture,
market or sell new products, and any decrease in the sales or market acceptance
of the Mac OS family of computers, would have a material adverse effect on the
Company's business, operating results and financial condition. For example,
during fiscal 1997 and the first nine months of fiscal 1998, the Company
believes revenues were adversely affected by declining sales of Mac OS computers
and Apple's loss of market share. In addition, sales of the Company's
Internet/Intranet products are dependent upon the international demand for Apple
products. To the extent that the Company is unable to maintain or increase
international demand for its products, or that international demand for Apple
products does not meet the Company's expectations, the Company's international
sales would be limited, and the Company's business, operating results and
financial condition would be materially and adversely affected.
COMPETITION. Netopia believes that the principal competitive factors in its
markets are: (1) product feature, function and reliability, (2) customer service
and support, (3) price and performance, (4) ease of use, (5) brand name
recognition (6) strategic alliances, (7) size and scope of distribution
channels, (8) timeliness of new product introductions, (9) breadth of product
line and (10) size of installed customer base. While the Company believes, in
general, that it currently competes favorably with regard to these factors there
can be no assurance that the Company will be able to compete successfully in the
future, the failure of which would have a material adverse effect on the
Company's business, operating results and financial condition.
The markets for the Company's products and services are intensely
competitive, highly fragmented and characterized by rapidly changing technology,
evolving industry standards, price competition and frequent new product
introductions. A number of companies offer products that compete with one or
more of the Company's products. The Company's current and prospective
competitors include OEM product manufacturers of Internet access equipment,
manufacturers of remote control and screen sharing software and manufacturers of
Internet collaboration and web office software. In the Internet access equipment
market, the Company competes primarily with Ascend, Cisco, 3Com/U.S. Robotics,
Ramp Networks, Intel, Toshiba and several other companies. In the
18
<PAGE>
remote control, screen sharing and Internet collaboration and web office
software markets, the Company competes primarily with Symantec, Microsoft,
Tivoli (IBM), Lotus (IBM), Stac Electronics, Microcom (Compaq), Computer
Associates, Network Associates (formerly McAfee), Hot Office and several other
companies. The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base than
the Company. Accordingly, such competitors or future competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sales
of their products than the Company. In particular, established companies in the
personal computer industry may seek to expand their product offerings by
designing and selling products using competitive technology that could render
the Company's products obsolete or have a material adverse effect on the
Company's sales. For example, Microsoft has available for free, via download on
the Internet, communications and collaboration software compatible with the
Microsoft Internet Explorer and has publicly stated that they are committed to
integrating Internet technology into existing products at no additional cost to
customers. This software product, which enables real-time communication within a
workgroup, as well as similar future product offerings from Microsoft, could
undermine the Company's ability to market its Timbuktu Pro and/or Netopia
Virtual Office collaboration software. Accordingly, there can be no assurance
that the Company can continue to market its collaboration and web office
software, which would have a material and adverse effect on the Company's
business, operating results and financial condition. In addition, several of the
Company's current competitors have introduced free and/or paid guaranteed
service and support programs that appear to be similar to the Company's Up &
Running, Guaranteed! program. As a result, there can be no assurance that the
Company can continue to charge a fee for this support program, which could have
a material and adverse effect upon the Company's business, operating results and
financial condition. The markets in which the Company currently competes are
subject to intense price competition and the Company expects additional price
and product competition as other established and emerging companies enter these
markets and new products and technologies are introduced. Consolidations in the
computer and communication industries continue to create companies with
substantially greater financial, technical, sales, marketing and other resources
than the Company, as well as greater name recognition and a significantly larger
customer base. These companies may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sales of its products. Increased
competition may result in the loss of market share, further price reductions and
reduced gross margins, any of which could materially and adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, or that competitive factors faced by the Company will
not have a material adverse effect on the Company's business, operating results
and financial condition.
NEW PRODUCT DEVELOPMENT AND RAPID TECHNOLOGICAL CHANGE. The personal
computer industry and Internet marketplace is characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions,
short product life cycles and rapidly changing customer requirements. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's Netopia Internet connectivity hardware products currently operate only
over ISDN, Fractional T1/T1, Fractional E1/E1, Frame Relay, 56K analog modem and
DSL telecommunication services. As other communications technologies, such as
ATM and communication over cable or wireless networks, are developed or gain
market acceptance, the Company will be required to enhance its Internet
connectivity products to support such technologies, which will be costly and
time consuming. If the Company is unable to modify its products to support new
Internet access technologies, or if technologies supported by current products
do not achieve widespread customer acceptance as a result of the adoption of
alternative technologies or as a result of de-emphasis of these technologies by
communications service providers, the Company's business, operating results and
financial condition would be materially adversely affected. The Company has in
the past and may in the future experience delays in new product development.
There can be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change, evolving industry standards and changing customer requirements, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or product
enhancements, or that its new products and product enhancements will adequately
meet the requirements
19
<PAGE>
of the marketplace and achieve any significant degree of market acceptance.
Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements in a timely and cost-effective
manner would have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the future introduction or even
announcement of products by the Company or one or more of its competitors
embodying new technologies or changes in industry standards or customer
requirements could render the Company's then existing products obsolete or
unmarketable. There can be no assurance that the introduction or announcement of
new product offerings by the Company or one or more of its competitors will not
cause customers to defer purchase of existing Company products. Such deferral of
purchases could have a material adverse effect on the Company's business,
operating results and financial condition.
Complex products such as those offered by the Company may contain
undetected or unresolved defects when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company,
defects will not be found in new products or new versions of products following
commercial release, resulting in loss of market share, delay in or loss of
market acceptance or product recall. Any such occurrence could have a material
adverse effect upon the Company's business, operating results and financial
condition.
As of June 30, 1998, Netopia's research and development staff consisted of
62 employees. Of these employees 53 were focused primarily on Internet/Intranet
product development and 9 were focused primarily on LAN product development. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly-skilled engineering personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel, the failure of
which could have a material adverse effect on the Company's business, operating
results and financial condition.
INTERNATIONAL OPERATIONS. The Company's international business is subject
to inherent risks, including but not limited to the impact of possible and
existing recessionary environments in economies outside the United States, costs
of localizing products for foreign countries, longer receivable collection
periods and greater difficulty in accounts receivable collection, unexpected
changes in regulatory requirements, difficulties and costs of staffing and
managing foreign operations, potentially adverse tax consequences and political
and economic instability. In addition, the laws of certain foreign countries in
which the Company's products are or may be manufactured or sold, including
various countries in Asia including the People's Republic of China, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. There can be no
assurance that the Company will be able to sustain or increase international
revenues, or that the foregoing factors will not have a material adverse effect
on the Company's future international revenues and its business, operating
results and financial condition. The Company has a substantial portion of its
products and components manufactured by foreign suppliers. The Company's
operating results are subject to the risks inherent in international purchases,
including, but not limited to, various regulatory requirements, political and
economic changes and disruptions, transportation delays, export/import controls,
tariff regulations, higher freight rates and potentially adverse tax
consequences. Duty, tariff and freight costs can materially increase the cost of
crucial components for the Company's products.
DEPENDENCE ON STRATEGIC ALLIANCES; DEPENDENCE ON CONTRACT MANUFACTURERS AND
LIMITED SOURCE SUPPLIERS. The Company relies on a number of strategic
relationships to help achieve market acceptance of the Company's products and to
leverage the Company's development, sales and marketing resources. Although the
Company views these relationships as important factors in the development and
marketing of the Company's products and services, a majority of the Company's
agreements with its strategic partners or customers do not require future
minimum commitments to purchase the Company's products, are not exclusive and
generally may be terminated at the convenience of either party. There can be no
assurance that the Company's strategic partners regard their relationship with
the Company as strategic to their own respective businesses and operations, that
they will not reassess their commitment to the Company or its products at any
time in the future, or that they will not develop and/or market their own
competitive technology.
20
<PAGE>
The Company does not manufacture any of the components used in its products
and performs only limited assembly on some products. The Company relies on
independent contractors to manufacture to specification the Company's
components, subassemblies, systems and products. The Company also relies upon
limited source suppliers for a number of components used in the Company's
products, including certain key microprocessors and integrated circuits. There
can be no assurance that these independent contractors and suppliers will be
able to timely meet the Company's future requirements for manufactured products,
components and subassemblies. The Company generally purchases limited source
components pursuant to purchase orders and has no guaranteed supply arrangements
with these suppliers. In addition, the availability of many of these components
to the Company is dependent in part on the Company's ability to provide its
suppliers with accurate forecasts of its future requirements. However, any
extended interruption in the supply of any of the key components currently
obtained from a limited source would disrupt its operations and have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the Company anticipates that it will be necessary to
establish additional strategic relationships in the future, in particular with
additional distributors, ISPs and VARs however there can be no assurance that
the Company will be able to establish such alliances or that such alliances will
result in increased revenues.
DEPENDENCE ON PROPRIETARY RIGHTS AND TECHNOLOGY. The Company's ability to
compete is dependent in part on its proprietary rights and technology. The
Company relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company generally enters into
confidentiality or license agreements with its employees, resellers,
distributors, customers and potential customers and limits access to the
distribution of its software, hardware designs, documentation and other
proprietary information, however in some instances the Company may find it
necessary to release its source code to certain parties, for example the Company
entered into a product development agreement pursuant to which it released
certain source code to a third party in the People's Republic of China. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to prevent misappropriation of its technology. The Company currently
has three issued United States patents. There can be no assurance that the
Company's patents will not be invalidated, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications, whether or not
being currently challenged by applicable governmental patent examiners, will be
issued with the scope of the claims sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology or design around the
patents owned by the Company. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy is expected to be a persistent
problem. In selling its software products, the Company relies primarily on
''shrink wrap'' licenses that are not signed by licensees and, therefore, it is
possible that such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries where the
Company's products are or may be manufactured or sold, particularly developing
countries including various countries in Asia, such as the People's Republic of
China, do not protect the Company's proprietary rights as fully as do the laws
of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competing companies will not independently develop similar
technology.
The Company relies upon certain software, firmware and hardware designs
that it licenses from third parties, including firmware that is integrated with
the Company's internally developed firmware and used in the Company's products
to perform key functions. There can be no assurance that these third-party
licenses will continue to be available to the Company on commercially reasonable
terms. The loss of, or inability to maintain, such licenses could result in
shipment delays or reductions until equivalent firmware could be developed,
identified, licensed and integrated which would materially and adversely affect
the Company's business, operating results and financial condition.
In connection with the sale of the LAN Division to Gores Technology Group,
the Company sold a significant portion of its patented technology. Because some
of such technology is incorporated into the Company's
21
<PAGE>
products, the Company has obtained a non-exclusive, irrevocable, royalty-free
license to such technology. To the extent that additional technology sold in
connection with the sale of the LAN Division is incorporated into the Company's
products, or is necessary to the production of future products, the Company may
be required to obtain additional licenses to such technology. There can be no
assurance that licenses to such technology will be available on commercially
reasonable terms, if at all. To the extent the Company is unable to obtain such
licenses, the Company's business, operating results and financial condition
could be materially adversely affected.
YEAR 2000. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the application year. Any of
the Company's programs or products that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. In
October 1996, the Company began a "Millennium Project" to determine if any
actions needed to be taken regarding date-related effects to the Company's
software or hardware products. Through testing, the Company has determined that
its Netopia Internet Connectivity products, Timbuktu Pro for Macintosh and
Windows (versions later than 1.5) and Timbuktu Enterprise are Year 2000
Compliant and has received certification as such. The Company is currently
evaluating the Year 2000 compliance of its Netopia Virtual Office software and
expects the product to receive certification to such within the 1998 calendar
year. The Company has also conducted a comprehensive review of its core internal
computer systems, whether provided by third parties or internally developed, to
determine if any actions need to be taken regarding Year 2000 date-related
effects. These underlying systems are based on the Progress programming language
which identifies dates based on four (4) digit numbers rather than two (2) digit
numbers and therefore the Company has determined that the Year 2000 issue will
not pose significant operational problems for the Company's computer systems.
The Company does not expect to incur material expenses related to the Year 2000
issue. However, if such modifications and conversion are not sufficient, the
Year 2000 issue may have a material impact on the operations of the Company.
LITIGATION. From time to time, the Company has received claims of
infringement of other parties' proprietary rights. Although the Company believes
that all such claims received to date are without merit or are immaterial, there
can be no assurance that third parties will not assert infringement or other
claims in the future with respect to the Company's current or future products or
activities. The Company expects that it will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segments grow and the functionality of products in different industry
segments overlap. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially and adversely affected.
From time to time, the Company may be involved in litigation or
administrative claims arising out of its operations in the normal course of
business. In the event of a successful claim against the Company, the Company's
business, operating results and financial condition would be materially and
adversely affected.
LENGTHY SALES CYCLE AND LENGTHY PARTNERSHIP DEVELOPMENT. The Company's
Internet/Intranet software products are often licensed to customers on a volume
license basis for use on private wide area network (''WAN'') Intranets involving
thousands of nodes. These licenses often involve significant license and
maintenance fees. As a result, the license of the Company's Internet/Intranet
software products often involves a significant commitment of management
attention and resources by prospective customers. Accordingly, the Company's
sales process for these products is often subject to delays associated with long
approval processes that typically accompany significant capital expenditures.
For these and other reasons, the sales cycle associated with the license of the
Internet/Intranet software products is often lengthy and subject to a number of
significant delays over which the Company has little or no control. There can be
no assurance that the Company will not experience these and additional delays in
the future related to its Internet/Intranet software or other products.
22
<PAGE>
The Company's Netopia products are often distributed through partnerships
with ISPs, Internet content providers ("ICPs"), Internet portals and on-line
communities. These partnerships often involve lengthy testing and certification
studies as well as detailed agreements. As a result, partnerships with ISPs,
ICPs, Internet portals and on-line communities to distribute Netopia products
involve a significant commitment of management attention and resources by
prospective partners. Accordingly, the Company's business development process
for these distribution channels is often subject to delays associated with long
approval processes that typically accompany significant partnership agreements,
development agreements and capital expenditures. For these and other reasons,
the business development process associated with the partnerships are often
lengthy and subject to a number of significant delays over which the Company has
little or no control. There can be no assurance that the Company will not
experience these and additional delays in the future on partnership development.
Additionally, the Company's software products distributed through ISPs, ICPs,
Internet portals and on-line communities currently offer a free evaluation
period which may delay or reduce potential revenue from the introduction of new
products or product modifications.
TARIFF AND REGULATORY MATTERS. The Company is not currently subject to
direct regulation by any government agency, other than regulations applicable to
businesses generally. However, rates for telecommunications services are
governed by tariffs of licensed carriers that are subject to regulatory
approval. Future changes in these tariffs could have a material adverse effect
on the Company's business, operating results and financial condition. For
example, if tariffs for public switched digital services increase in the future
relative to tariffs for private leased services, then the cost-effectiveness of
the Company's products would be reduced and its business, operating results and
financial condition would be materially and adversely affected. In addition, the
Company's telecommunications products must meet standards and receive
certification for connection to public telecommunications networks prior to
their sale. In the United States, such products must comply with Part 15(a)
(industrial equipment), Part 15(b) (residential equipment) and Part 68 (analog
and ISDN lines) of the Federal Communications Commission regulations. The
Company's telecommunications products also must be certified by certain domestic
telecommunications carriers. In foreign countries, such products are subject to
a wide variety of governmental review and certification requirements. While
certain foreign countries and the European Economic Community regulate the
importation and certification of the Company's products, most foreign customers
typically require that the Company's products receive certification from their
country's primary telecommunication carriers. Any future inability to obtain on
a timely basis or retain domestic regulatory approvals and certification or
foreign regulatory approvals, including safety and telecommunications, could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's business and prospects depend to
a significant degree upon the continuing contributions of its key management,
sales, marketing, product development and administrative personnel. The Company
does not have employment contracts with its key personnel and does not maintain
any key person life insurance policies. The loss of key management or technical
personnel could materially adversely affect the Company's business, operating
results and financial condition. The Company believes that its prospects depend
in large part upon its ability to attract and retain highly-skilled engineering,
managerial, sales and marketing, manufacturing, and administrative personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's business, operating results and financial condition.
In connection with the sale of the LAN Division to Gores Technology Group,
several key employees became employees of the Buyer, including personnel who
were previously engaged in (i) managing relationships with the Company's
distributors and other organizations within the Company's sales channel, (ii)
managing relationships with the Company's vendors and manufacturing partners,
(iii) managing the Company's material requirements planning functions, (iv)
overseeing the Company's internal accounting systems, policies and procedures,
and (v) marketing the Company's products to users of Apple computers. As a
result, the Company will be required to hire personnel to replace such
individuals or to train existing employees to perform such functions. To the
extent the Company is unable to compensate for the loss of such personnel, the
Company's business, operating results and financial condition could be
materially and adversely affected.
23
<PAGE>
VOLATILITY OF STOCK PRICE. The market price of the shares of the Company's
Common Stock is highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's results of
operations, announcements of technological innovations, announcements of product
distribution agreements, introduction of new products by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the networking and other technology industries,
changes in or failure by the Company to meet securities analysts' expectations,
large volume sales of the Company's Common Stock, activities related to
acquisitions or divestitures, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stocks of technology companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
CALIFORNIA HEADQUARTERS; LEASED FACILITIES . The Company's corporate
headquarters and a large portion of its research and development facilities as
well as other critical business operations are located in California, near major
earthquake faults. The Company's business, financial condition and operating
results could be materially adversely affected in the event of a major
earthquake.
In connection with the sale of the LAN Division to Gores Technology Group,
the Company assigned the lease to the Company's distribution center to Gores
Technology Group and entered into a sublease to use a portion of the space
covered by such lease for the Company's manufacturing, shipping and receiving
operations. If Gores Technology Group were to default on the lease, the Company
would be required to find alternative facilities for such operations. There can
be no assurance that the Company would be able to secure such alternate
facilities on a timely basis or on similar commercially reasonable terms, if at
all. If the Company were to lose the use of its sublet facilities or if it were
unable to obtain alternative space, the Company's business, operating results
and financial condition could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through the private
sale of equity securities, the Initial Public Offering ("IPO") of the Company's
Common Stock and through fiscal 1998, cash flow from operating activities.
Since inception, the Company has raised $19.4 million from the private sale of
equity securities and approximately $24.8 million, net of offering expenses,
from the Company's IPO completed in June 1996. As of June 30, 1998, the Company
had cash, cash equivalents and short-term investments representing 66% of total
assets.
Cash provided by operating activities during the nine months ended June 30,
1998 was primarily due to the reduction of accounts receivable of $875,000,
depreciation and amortization of $994,000 and other liabilities primarily
representing accrued benefits and deferred rent of $667,000 offset by
the net loss of $1.4 million.
The company's investing activities have consisted primarily of purchases of
short-term investments and capital equipment. The cash provided by investing
activities during the nine months ended June 30, 1998 were primarily from
proceeds from the sale of short-term investments partially offset by purchases
of such investments, acquisition of a trademark license related to the Netscape
Internet portal for Netopia Virtual Office, which the Company expects to
amortize over a period not to exceed 2 years and expenditures for capital
equipment, representing acquisitions of computer equipment used predominantly in
product development. The Company expects that its capital expenditures will
increase in future periods to support new product development and production.
The Company's principal commitments consist primarily of leases on its
headquarters facilities and certain operating equipment.
24
<PAGE>
On August 5, 1998, the Company sold its Farallon LAN Division ("LAN
Division") including the LAN Division's products, accounts receivable,
inventory, property and equipment, intellectual property and other related
assets to Farallon Networking Corporation, a Delaware corporation and an
affiliate of Gores Technology Group, for cash, a warrant, and certain
receivables aggregating $4.9 million in consideration. Gores Technology Group
also assumed certain accounts payable and other liabilities of the LAN Division.
the sale transaction will be recorded as a discontinued operation in the fourth
fiscal quarter ending September 30, 1998. Due to transaction related expenses,
the company expects to record a loss on the sale not expected to exceed $3.0
million. As a result of the disposal of this segment, the Company will be
reassessing its remaining operations and presently anticipates that the
Company's continuing operations will record a charge not expected to exceed
approximately $1.0 million for certain one-time reorganization charges and will
provide a valuation allowance against its deferred tax assets not expected to
exceed $3.5 million in the fourth fiscal quarter ending September 30, 1998.
The Company believes that its existing cash, cash equivalents and short-
term investments will be adequate to meet its cash needs for working capital and
capital expenditures for at least the next 12 months. Thereafter, if cash
generated from operations is insufficient to satisfy the Company's liquidity
requirements, the Company may seek to sell additional equity or convertible debt
securities or obtain additional credit facilities. The sale of additional equity
or convertible debt securities could result in additional dilution to the
Company's stockholders. A portion of the Company's cash may be used to acquire
or invest in complementary businesses or products, to obtain the right to use
complementary technologies or to obtain additional presence on the internet.
from time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies. The Company
has no agreements or commitments, and is not currently engaged in any
negotiations with respect to any such transaction.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
25
<PAGE>
SIGNATURE
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.
Date: August 14, 1998 NETOPIA, INC.
(Registrant)
By: /s/ James A. Clark
-------------------------------------------
James A. Clark
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
26
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27.1 Financial Data Schedule
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR QUARTERLY PERIOD JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,373
<SECURITIES> 19,928
<RECEIVABLES> 7,457
<ALLOWANCES> 1,181
<INVENTORY> 4,363
<CURRENT-ASSETS> 54,661
<PP&E> 2,203
<DEPRECIATION> 11,669
<TOTAL-ASSETS> 61,015
<CURRENT-LIABILITIES> 7,426
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 53,298
<TOTAL-LIABILITY-AND-EQUITY> 61,015
<SALES> 11,819
<TOTAL-REVENUES> 11,819
<CGS> 5,294
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</TABLE>
