<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 MARCH 31, 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 April 30, 1998 there were 11,680,356 shares of the Registrant's
common stock outstanding.
================================================================================
<PAGE>
NETOPIA, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets
At September 30, 1997 and March 31, 1998..................................... 3
Condensed Consolidated Statements of Operations
For the three and six months ended March 31, 1997 and 1998................... 4
Condensed Consolidated Statements of Cash Flows
For the six months ended March 31, 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.................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................. 22
SIGNATURE.................................................................................... 23
INDEX TO EXHIBITS............................................................................ 24
</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, MARCH 31,
1997 1998
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $14,444 $15,870
Short-term investments....................................................... 27,192 24,450
Trade accounts receivable, net of allowances of $1,127 and $1,169 at
September 30, 1997 and March 31, 1998, respectively....................... 8,332 7,253
Inventories, net............................................................. 4,421 4,755
Deferred tax asset........................................................... 1,463 1,463
Prepaid expenses and other current assets.................................... 790 709
-------- --------
Total current assets................................................... 56,642 54,500
Furniture, fixtures, and equipment, net........................................ 2,321 2,131
Deferred tax assets, long-term................................................. 1,406 1,406
Deposits and other assets...................................................... 632 926
-------- --------
Total assets........................................................... $61,001 $58,963
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..................................... $ 4,497 $ 3,173
Accrued compensation......................................................... 1,237 1,402
Deferred revenue............................................................. 874 915
Other current liabilities.................................................... 55 261
-------- --------
Total current liabilities.............................................. 6,663 5,751
Other long-term liabilities.................................................... 361 244
-------- --------
Total liabilities...................................................... 7,024 5,995
-------- --------
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 11,631,426 shares issued and outstanding at September 30, 1997 and
March 31, 1998, respectively.............................................. 12 12
Additional paid-in capital................................................... 50,568 50,948
Deferred compensation........................................................ (54) (45)
Retained earnings............................................................ 3,451 2,053
-------- --------
Total stockholders' equity............................................. 53,977 52,968
-------- --------
Total liabilities and stockholders' equity............................. $61,001 $58,963
======= =======
</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 SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ---------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Internet/Intranet products........................ $ 4,654 $ 6,252 $ 9,459 $11,715
LAN products...................................... 8,026 5,060 16,684 10,062
------- ------- ------- -------
Total revenues.................................. 12,680 11,312 26,143 21,777
Cost of revenues:
Internet/Intranet products........................ 1,704 1,858 3,258 3,579
LAN products...................................... 5,158 3,527 10,468 6,770
------- ------- ------- -------
Total cost of revenues.......................... 6,862 5,385 13,726 10,349
------- ------- ------- -------
Gross profit.................................... 5,818 5,927 12,417 11,428
Operating expenses:
Research and development.......................... 2,246 2,122 4,413 4,375
Selling and marketing............................. 3,907 4,003 7,708 8,568
General and administrative........................ 832 894 1,669 1,774
------- ------- ------- -------
Total operating expenses........................ 6,985 7,019 13,790 14,717
------- ------- ------- -------
Operating loss.................................. (1,167) (1,092) (1,373) (3,289)
Other income, net.................................... 409 564 797 1,137
------- ------- ------- -------
Loss before income taxes.......................... (758) (528) (576) (2,152)
Income tax (benefit) provision....................... (265) (185) (201) (754)
------- ------- ------- -------
Net loss.......................................... $ (493) $ (343) $ (375) $(1,398)
======= ======= ======= =======
Basic net loss per share............................. $ (0.04) $ (0.03) $ (0.03) $ (0.12)
======= ======= ======= =======
Diluted net loss per share........................... $(0.04) $(0.03) $ (0.03) $ (0.12)
======= ======= ======= =======
Shares used in the calculation of basic
and diluted net loss per share...................... 11,350 11,623 11,239 11,567
======= ======= ======= =======
</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>
SIX MONTHS ENDED MARCH 31,
--------------------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................................. $ (375) $ (1,398)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................................... 933 736
Amortization of deferred compensation.............................................. 9 9
Changes in assets and liabilities:
Trade accounts receivable, net................................................... 3,776 1,079
Inventories, net................................................................. 828 (334)
Prepaid expenses, deposits and other assets...................................... 84 (27)
Accounts payable and accrued liabilities......................................... (1,666) (1,324)
Other liabilities................................................................ (664) 361
Deferred revenue................................................................. 213 (68)
-------- --------
Net cash provided by (used in) operating activities............................ 3,138 (966)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments.................................................. (11,164) (24,262)
Proceeds from the sale of short-term investments.................................... 5,002 27,004
Acquisition of furniture, fixtures and equipment.................................... (554) (489)
Capitalization of software development.............................................. -- (241)
-------- --------
Net cash used in investing activities.......................................... (6,716) 2,012
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net......................................... 669 380
-------- --------
Net cash provided by financing activities...................................... 669 380
-------- --------
Net increase (decrease) in cash and cash equivalents.................................. (2,909) 1,426
Cash and cash equivalents, beginning of period........................................ 19,910 14,444
-------- --------
Cash and cash equivalents, end of period.............................................. $ 17,001 $ 15,870
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.................................................................. $ 2 $ 1
======== ========
Income taxes paid................................................................... $ 150 $ 26
======== ========
</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 as 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 March 31, 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. It includes all changes in equity during a period
except those resulting from investments by or distributions to owners. 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.
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, net):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- --------------
<S> <C> <C>
Raw materials and work in process..................................... $1,966 $1,734
Finished goods........................................................ 2,455 3,021
$4,421 $4,755
====== ======
</TABLE>
6
<PAGE>
4. Furniture, Fixtures and Equipment, net (in thousands):
------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- --------------
<S> <C> <C>
Furniture, fixtures and equipment..................................... $ 13,105 $ 13,594
Accumulated depreciation and amortization............................. (10,784) (11,463)
======== ========
$ 2,321 $ 2,131
======== ========
</TABLE>
5. Net Loss Per Share
------------------
Basic net loss per share is based on the weighted average number of shares
of common stock outstanding during the period. Diluted net 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 three and six months ended
March 31, 1998 are options to acquire 1,706,307 shares of common stock with a
weighted-average price of $2.82 (excludes 1,240,999 options that are out of the
money at March 31, 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 LOSS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, March 31,
------------------------------- ------------------------------
1997 1998 1997 1998
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Computation of basic net loss per share:
Net loss................................................... $ (493) $ (343) $ (375) $(1,398)
======= ======= ======= =======
Weighted average number of common shares outstanding....... 11,350 11,623 11,239 11,567
======= ======= ======= =======
Basic net loss per share................................... $ (0.04) $ (0.03) $ (0.03) $ (0.12)
======= ======= ======= =======
Computation of diluted net loss per share:
Net loss................................................... $ (493) $ (343) $ (375) $(1,398)
======= ======= ======= =======
Weighted average number of common shares outstanding....... 11,350 11,623 11,239 11,567
Number of dilutive common stock equivalents................ -- -- -- --
------- ------- ------- -------
Shares used in per share calculation........................ 11,350 11,623 11,239 11,567
======= ======= ======= =======
Diluted net loss per share................................. $ (0.04) $ (0.03) $ (0.03) $ (0.12)
======= ======= ======= =======
</TABLE>
7
<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 or strategies 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Revenues. The Company's total revenues are derived from the sale of
Internet/Intranet connectivity and software products and Farallon 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 is derived primarily from the sale of
Ethernet, EtherWave, Fast Ethernet and LocalTalk compatible products which
include the PhoneNET system of network connectivity products, of which a
substantial majority have been sold to 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.
The Company's total revenues decreased 10.8% from $12.7 million to $11.3
million for the three months ended March 31, 1997 and 1998, respectively.
Internet/Intranet products revenue increased 34.3% from $4.7 million to $6.3
million for the three months ended March 31, 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 as well as increased
sales of the Netopia family of Internet connectivity products internationally
and the introduction of the Netopia frame relay internet connectivity product
for North America, partially offset by decreased sales of Macintosh versions of
Timbuktu Pro collaboration software and decreased sales of ISDN internet
connectivity products in North America. LAN products revenue decreased 37.0%
from $8.0 million to $5.1 million for the three months ended March 31, 1997 and
1998, respectively. The decrease was primarily due to declining volume and
average selling prices of Ethernet, EtherWave and LocalTalk 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. LAN products revenue accounted for 63.3% and
44.7% of the Company's total revenues for the three months ended March 31, 1997
and 1998, respectively. Internet/Intranet products revenue accounted for 36.7%
and 55.3% of the Company's total revenues for the three months ended March 31,
1997 and 1998, respectively.
As the Company continues to focus on increasing its Internet/Intranet
business and as a result of variable average selling prices of the Company's LAN
products, declining sales of Mac OS computers and competitive factors, the
Company expects that LAN products revenue may decline further. As a result, the
Company's future operating results are dependent upon market acceptance of its
Internet/Intranet products and enhancements thereto. Historically, the Company
has been dependent upon sales of its LAN products, and to the extent that
continuing declines in revenues from LAN products is not offset by increases in
revenue from other sources, such as sales of the Company's Internet/Intranet
products, then the Company's business, operating results and financial condition
will be
8
<PAGE>
materially adversely affected. There can be no assurance that the Company's
increasing focus on its Internet/Intranet products will offset the decline in
revenues from its LAN products. Should the Company's Internet/Intranet products
and enhancements not gain market acceptance, particularly in the Windows market,
the Company's business, operating results and financial condition will be
materially and adversely affected.
Netopia sells its Internet/Intranet and LAN 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. Revenues from distributors
accounted for 61% and 42% of the Company's total revenues for the three months
ended March 31, 1997 and 1998, respectively. The Company's three largest
distributors accounted for 34% and 25% of the Company's total revenues for the
three months ended March 31, 1997 and 1998, respectively. During the three
months ended March 31, 1997 and 1998, revenue from Ingram accounted for 19% and
13% of the Company's total revenues, respectively and revenue from
MicroWarehouse accounted for 10% 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 March 31, 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 ISPs and
VARs as well as pursue additional marketing channels in the future. There can be
no assurance 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, 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.
International revenues accounted for 33% of the Company's total revenues
for each of the three months ended March 31, 1997 and 1998, respectively and are
derived primarily from Europe and the Pacific Rim. Revenues from Europe
accounted for 20% and 23% of total revenues for the three months ended March 31,
1997 and 1998, respectively, while revenues from the Pacific Rim account for 11%
and 6% of total revenues for the three months ended March 31, 1997 and 1998. The
Company's international revenues are currently denominated in United States
dollars, and revenues generated by the Company's distributors currently are 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. In addition, sales of the Company's LAN 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 will be limited, and
the Company's business, operating results and financial condition would be
materially and adversely affected.
Gross Margin. The Company's gross margin for Internet/Intranet and LAN
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 45.9% to 52.4%
for the three months ended March 31, 1997 and 1998, respectively. The Company's
gross margin for Internet/Intranet products increased from 63.4% to 70.3% for
the three months ended March 31, 1997 and 1998, respectively, primarily due to
increased sales of Windows versions of Timbuktu Pro software, particularly
volume licenses, the introduction of frame relay internet connectivity products
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
9
<PAGE>
continued price competition on ISDN internet connectivity products particularly
in North America. The Company's gross margin for LAN products decreased from
35.7% to 30.3% for the three months ended March 31, 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. 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 balance of the Company's 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. Research and development expenses decreased 5.5%
from $2.2 million to $2.1 million for the three months ended March 31, 1997 and
1998, respectively. The decrease was primarily due to reduced expenses related
to the localization of software products for Europe and Japan. Research and
development expenses represented 17.7% and 18.8% of total revenues for the three
months ended March 31, 1997 and 1998, respectively. The Company continues to
devote the majority of research and development resources to Internet/Intranet
products and the Company believes that it will continue to devote substantial
resources to product development and that future research and development
expenses may increase in absolute dollars. Historically, The Company has
believes d 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
March 31, 1998, $211,000 of product development costs incurred subsequent to the
delivery of a working model, under a development agreement with third parties,
have been capitalized. No software development costs were capitalized during the
three months ended March 31, 1997.
Selling and Marketing. Selling and marketing expenses increased 2.5% from
$3.9 million to $4.0 million for the three months ended March 31, 1997 and 1998,
respectively. The increase was primarily due to increased headcount partially
offset by reduced tradeshow related expenses. Such expenses represented 30.8%
and 35.4% of total revenues for the three months ended March 31, 1997 and 1998,
respectively. The Company believes that future selling and marketing expenses
may increase in absolute dollars primarily due to personnel related expenses and
increased advertising and promotional activities.
General and Administrative. General and administrative expenses increased
7.5% from $832,000 to $894,000 for the three months ended March 31, 1997 and
1998, respectively. Such expenses represented 6.6% and 7.9% of total revenues
for the three months ended March 31, 1997 and 1998, respectively. The increase
is primarily related to increased transaction fees related to sales over the
internet and accruing additional sales tax reserves related to state sales tax
audits. The Company believes that future general and administrative expenses
may increase in absolute dollars as the Company adds infrastructure, such as
expenses to maintain and support the Company's web related activities and incurs
additional costs related to being a public company, such as expenses related to
investor relations programs, insurance and increased professional fees.
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 37.9% from $409,000 to $564,000 for the three months ended
March 31, 1997 and 1998, respectively. During the three months ended March 31,
1997, the Company's 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
three months ended March 31, 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 tax credits.
In fiscal 1997, the Company believed that, based upon available objective
evidence, there was sufficient uncertainty regarding the realizability of
certain of its deferred tax assets to warrant a partial valuation allowance,
primarily related to the expected realizability of its research credit
carryforwards. The factors considered included the 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. To the
10
<PAGE>
extent that the Company cannot achieve profitability in the near future or as a
result of acquisition or divestiture activity or as a result of other tax
planning strategies, the Company expects to record a significant or full
valuation allowance against its remaining tax related assets which totalled $3.9
million as of March 31, 1998. In the event the Company records a significant or
full valuation allowance against its deferred tax assets, the Company's
operating results would be materially and adversely affected.
SIX MONTHS ENDED MARCH 31, 1997 AND 1998
The Company's total revenues decreased 16.7% from $26.1 million to $21.8
million for the six months ended March 31, 1997 and 1998, respectively.
Internet/Intranet products revenue increased 23.9% from $9.5 million to $11.7
million for the six months ended March 31, 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 as well as increased
international sales of the Netopia family of Internet connectivity products,
partially offset by decreased sales of Macintosh versions of Timbuktu Pro
collaboration software. LAN products revenue decreased 39.7% from $16.7 million
to $10.1 million for the six months ended March 31, 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. LAN products revenue accounted for
63.8% and 46.2% of the Company's total revenues for the six months ended March
31, 1997 and 1998, respectively. Internet/Intranet products revenue accounted
for 36.2% and 53.8% of the Company's total revenues for the six months ended
March 31, 1997 and 1998, respectively.
Netopia sells its Internet/Intranet and LAN 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. Revenues from distributors
accounted for 57% and 47% of the Company's total revenues for the six months
ended March 31, 1997 and 1998, respectively. The Company's three largest
distributors accounted for 35% and 28% of the Company's total revenues for the
six months ended March 31, 1997 and 1998, respectively. During the six months
ended March 31, 1997 and 1998, revenue from Ingram accounted for 20% 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 six months ended March 31, 1997 and 1998.
International revenues accounted for 31% and 34% of the Company's total
revenues for the six months ended March 31, 1997 and 1998, respectively and are
derived primarily from Europe and the Pacific Rim. Revenues from Europe
accounted for 19% and 24% of total revenues for the six months ended March 31,
1997 and 1998, respectively, while revenues from the Pacific Rim account for 8%
and 6% of total revenues for the six months ended March 31, 1997 and 1998.
Gross Margin. The Company's gross margin for Internet/Intranet and LAN
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 47.5% to 52.5%
for the six months ended March 31, 1997 and 1998, respectively. The Company's
gross margin for Internet/Intranet products increased from 65.6% to 69.4% for
the six months ended March 31, 1997 and 1998, 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 37.3% to 32.7% for the six months ended March 31, 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.
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Research and Development. Research and development expenses remained
relatively unchanged at $4.4 million for each of the six months ended March 31,
1997 and 1998, respectively. Research and development expenses represented 16.9%
and 20.1% of total revenues for the six months ended March 31, 1997 and 1998,
respectively. The Company continues to devote the majority of research and
development resources to Internet/Intranet products, and the Company believes
that it will continue to devote substantial resources to product development and
that future research and development expenses may increase in absolute dollars.
Selling and Marketing. Selling and marketing expenses increased 11.2% from
$7.7 million to $8.6 million for the six months ended March 31, 1997 and 1998,
respectively. The increase was primarily due to increased headcount, increased
advertising expenses related to the introduction of Internet/Intranet products
including Netopia Virtual Office and expenses related to the corporate name
change from Farallon Communications, Inc. to Netopia, Inc. Such expenses
represented 29.5% and 39.3% of total revenues for the six months ended March 31,
1997 and 1998, respectively. The Company believes that future selling and
marketing expenses may increase in absolute dollars primarily due to personnel
related expenses and increased advertising and promotional activities.
General and Administrative. General and administrative expenses increased
6.3% from $1.7 million to $1.8 million for the six months ended March 31, 1997
and 1998, respectively. Such expenses represented 6.4% and 8.1% of total
revenues for the six months ended March 31, 1997 and 1998, respectively. The
increase is primarily related to increased transaction fees related to sales
over the internet and accruing additional sales tax reserves related to state
sales tax audits. The Company believes that future general and administrative
expenses may increase in absolute dollars as the Company adds infrastructure,
such as expenses to maintain and support the Company's web related activities
and incurs additional costs related to being a public company, such as expenses
related to investor relations programs, insurance and increased professional
fees.
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 42.7% from $797,000 to $1.1 million for the six months ended
March 31, 1997 and 1998, respectively. During the six months ended March 31,
1997, the Company's 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
three months ended March 31, 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 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. 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, the level of the Company's international revenues. The
Company's results also depend on factors such as demand for Apple's products,
customer order deferrals in anticipation of new MacOS product offerings, the
elimination of a
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number of Macintosh cloning licenses issued by Apple and potential limitations
on the retail distribution of Apple products. 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 as well as changes in the mix of channels through
which the Company's products are offered. 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 upon shipment to the distributor. Although the Company
maintains reserves for projected returns and price decreases, there can be no
assurance that 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 indications 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. The Company's business is
substantially dependent upon continued growth in the sale of its
Internet/Intranet products. Rapid growth in the use of the Internet and
Intranets is a recent phenomenon. There can be no assurance that communication
or commerce over the Internet will become widespread. In addition, 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
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, that the Company's existing distribution
channels are appropriate for the sale of its Internet/Intranet products or that
sales of such products will reach levels significant enough to offset expected
declines in sales, average selling prices and gross margins of the Company's LAN
products. Although the Company's Internet/Intranet products currently carry a
higher average gross margin than its LAN 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
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financial condition. The markets in which the Company competes currently 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. 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 LAN PRODUCTS; DECLINING LAN BUSINESS. Historically, the
Company has derived a substantial portion of its revenue from LAN products,
which represented 63% and 45% of total revenues for the three months ended March
31, 1997 and 1998, respectively, and represented 64% and 46% for the six months
ended March 31, 1997 and 1998, respectively. These products have experienced
variable average selling prices and gross margins, and declining sales volumes.
The Company anticipates that the average selling prices and gross margins of its
existing LAN products will continue to decline. Accordingly, to the extent the
revenue product mix for any particular period includes a substantial proportion
of LAN products, the Company's total gross margin will be adversely affected. To
date, the Company has been able to partially reduce the decline in total gross
margin by reducing the manufacturing cost of products and by introducing new
products with higher margins. There can be no assurance that the Company will
achieve any such reductions in the future or that new products will gain market
acceptance. Historically, a substantial majority of the Company's LAN products
revenue have been derived from sales of products designed for Apple Mac OS and
compatible computers. Net revenues and operating results from the Company's LAN
products fluctuated on a quarterly basis during fiscal 1997 and into fiscal
1998. The Company expects that net revenues and operating results from LAN
products may decrease in the future as a result of declining sales and average
selling prices, Apple's incorporation of built-in Ethernet connectivity into
certain of its computers, declining sales of Mac OS computers, elimination of a
number of the Mac OS licenses issued by Apple, Apple's loss of market share as
well as competition in the LAN products market.
DEPENDENCE ON APPLE; COMPETITION WITH APPLE PRODUCTS. The Company believes
that over 90% of its LAN 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. In addition, 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. 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 six 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.
The Company relies on an informal working relationship with Apple in
connection with the Company's LAN product development efforts. Although the
Company and Apple have maintained a cooperative working relationship since the
Company's founding, Apple is under no obligation to continue to share product
information or otherwise cooperate with the Company. In addition, there can be
no assurance that Apple will continue to work cooperatively with the Company in
connection with the Company's product development efforts. The absence of such
cooperation in the future, as a result of the continued restructuring in process
at Apple, including but not limited to the search for a new chief executive
officer, or any other factors, could have a material adverse effect on the
Company's business, operating results and financial condition. Apple currently
offers products that compete directly with certain of the Company's products.
The Company anticipates that Apple will continue to incorporate additional
connectivity technologies into more of its products in the future, which will
adversely affect sales of the Company's LAN products. Since Apple has
substantially greater financial, technical, sales, marketing and other resources
than the Company, as well as greater name recognition and a significantly larger
customer base, Apple 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. The Company believes
that it is likely that Apple will continue to sell separately or bundle with its
computers certain network connectivity products, such as 10Mbps
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and 100Mbps adapters, similar to the Company's Ethernet and Fast Ethernet
products. Any such additional bundling or enhancement by Apple could have a
material adverse effect on the Company's business, operating results and
financial condition.
Due to all of the foregoing factors, the Company continues to focus on the
development of its Internet/Intranet business. As a result, the Company's
future operating results are dependent upon continued and increasing market
acceptance and penetration of its Internet/Intranet products and enhancements
thereto, particularly in the Windows market. However, the Company's operating
results will continue to be adversely affected to the extent that declines in
revenues from LAN products are not offset by increases from other sources, such
as revenues from the Company's Internet/Intranet products. There can be no
assurance that the Company's increasing focus on its Internet/Intranet products
will offset the decline in revenues from its LAN products. Should the Company's
Internet/Intranet products and enhancements not gain market acceptance,
particularly in the Windows market, the Company's business, operating results
and financial condition will 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 and remote LAN
access equipment, manufacturers of remote control and screen sharing software
and manufacturers of LAN client access and network systems products. In the
Internet access and remote LAN access equipment market, the Company competes
primarily with Ascend, Cisco, 3Com/U.S. Robotics, Ramp Networks, Intel, Toshiba
and several other companies. In the remote control, screen sharing and
collaboration software markets, the Company competes primarily with Symantec,
Microsoft, Tivoli (IBM), Lotus (IBM), Stac Electronics, Netscape, Microcom
(Compaq), Computer Associates, Network Associates (formerly McAfee), Hot Office
and several other companies. In the LAN client access and network systems
product market, the Company competes primarily with Apple, Asante, Dayna
(Intel), Global Village (currently being acquired by Boca Research, Inc.) 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. In addition, Netscape also offers
software that enables dispersed work groups to collaborate in the work
environment. Accordingly, there can be no assurance that the Company can
continue to market its collaboration 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
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competition as other established and emerging companies enter these markets and
new products and technologies are introduced. Consolidations in the networking
environment 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 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. In addition, the
Company has historically derived a substantial majority of its revenues from the
sale of Ethernet connectivity products. In the event that current Ethernet
network technology is modified or replaced and the Company is unable to modify
its products to support new Ethernet technologies or alternative technologies,
the Company's business, operating results and financial condition could 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
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 May 1, 1998, Netopia's research and development staff consisted of
66 employees. Of these employees 56 were focused primarily on Internet/Intranet
product development and 10 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.
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MANAGEMENT OF CHANGING BUSINESS. The Company has shifted its business
strategy from providing only LAN products to reducing its reliance on LAN
products and focusing development and management efforts on its
Internet/Intranet business. This transition 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 or to manage the transition
effectively, the Company's business, operating results and financial condition
will be materially and adversely affected.
DEPENDENCE ON DISTRIBUTORS. The Company relies primarily on distributors
for the sale of its Internet/Intranet and LAN products. The distribution of LAN
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 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 lifetime 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.
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
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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.
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 ISPs and VAR's 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 ten 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,
18
<PAGE>
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.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed and implemented a plan to resolve the issue. 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 that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a major system failure or miscalculations.
The Company presently believes that with modifications to existing software and
converting to new software, the Year 2000 issue should not pose significant
operational problems for the Company's computer systems as so modified and
converted. 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.
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 products lines. Any
acquisitions or divestiture may result in potentially dilutive issuance of
equity securities, the write-off of software development costs and deferred tax
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 divestiture would involve numerous additional risks including
difficulties in the assimilation or separation of operations, services, products
and 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.
19
<PAGE>
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 on Internet/Intranet software or other products.
The Company's Netopia products are often distributed through partnerships
with ISPs, internet content providers ("ICPs") 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 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 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, 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.
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
20
<PAGE>
results of operations, announcements of technological innovations, 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, 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 . 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.
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 1997, cash flow from operations. 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 March 31, 1998, the Company had
cash, cash equivalents and short-term investments representing 68% of total
assets.
The Company used cash for operating activities of $966,000 for the six
months ended March 31, 1998. The cash used for operations was primarily due to
the net loss of $1.4 million and a decrease of $1.3 million in accounts payable
and accrued expenses, partially offset by the reduction of accounts receivable
of $1.1 million. Netopia Internet connectivity products and Fast Ethernet
products represented 23% and 16% of total gross inventory as of September 30,
1997, respectively, and represented 22% and 16% of total gross inventory as of
March 31, 1998, respectively.
The Company's investing activities have consisted primarily of purchases of
short-term investments and capital equipment. Expenditures for capital
equipment totaled $489,000 for the six months ended March 31, 1998, 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.
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.
21
<PAGE>
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.
22
<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: May 13, 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)
23
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q, 3
MONTHS ENDED 3/31/98 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> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,870
<SECURITIES> 24,450
<RECEIVABLES> 7,253
<ALLOWANCES> 1,169
<INVENTORY> 4,755
<CURRENT-ASSETS> 54,500
<PP&E> 2,131
<DEPRECIATION> 11,463
<TOTAL-ASSETS> 58,463
<CURRENT-LIABILITIES> 5,751
<BONDS> 0
12
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 58,963
<SALES> 11,312
<TOTAL-REVENUES> 11,312
<CGS> 5,385
<TOTAL-COSTS> 7,019
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (564)
<INCOME-PRETAX> (528)
<INCOME-TAX> (185)
<INCOME-CONTINUING> (343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (343)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
