UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-28450
Netopia, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3033136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2470 Mariner Square Loop
Alameda, California 94501
(Address of principal executive offices, including Zip Code)
(510) 814-5100
(Registrant's telephone number, including area code)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ----------
Indicate by X if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in this Form 10-K or any amendment to this
Form 10-K.
Yes No X
--------- ----------
As of December 1, 1998 there were 12,036,566 shares of the Registrant's
Common Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the registrant, based on the closing price of the Common Stock
as reported on The Nasdaq Stock Market on December 1, 1998 was approximately
$61,726,681.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for its Annual Stockholders
Meeting to be held on February 18, 1999 is incorporated by reference in Part III
of this Form 10-K.
<PAGE>
NETOPIA, INC.
FORM 10-K
INDEX
PART I. PAGE
ITEM 1. Description of Business........................................... 2
ITEM 2. Properties........................................................18
ITEM 3. Legal Proceedings.................................................18
ITEM 4. Submission ofMatters toa Vote of Security Holders.................18
PART II.
ITEM 5. Market for Netopia's Common Stock and Related Stockholder Matters.19
ITEM 6. Selected FinancialData............................................20
ITEM 7. Management's Discussionand Analysisof Financial Condition and
Results of Operations.............................................21
ITEM 7(a). Quantitativeand Qualitative Disclosures About Market Risk.........36
ITEM 8. Financial Statements and Supplementary Data.......................37
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................37
PART III.
ITEM 10. Directors andExecutive Officers of the Registrant.................37
ITEM 11. Executive Compensation............................................37
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....37
ITEM 13. Certain Relationships and Related Transactions....................37
PART IV.
ITEM 14. Exhibits,Financial Schedules and Reports on Form 8-K..............38
INDEX TO EXHIBITS.............................................................38
SIGNATURES....................................................................40
<PAGE>
PART I.
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, intentions, strategies, proceeds, expenses,
charges, accruals, losses and reserves regarding the future. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Other
Factors That May Affect Future Results" as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in the Company's
other United States Securities and Exchange Commission filings.
Item 1. DESCRIPTION OF BUSINESS
Company Background
Netopia, Inc. (the "Company," "Netopia" or "Registrant") develops,
markets and supports products and services which enable growing organizations to
establish their presence on the Internet. The Company's products include Netopia
Virtual Office ("NVO") software which is a "no assembly required" web site
solution that allows Internet users to create their own customized, interactive
web site, Netopia Internet Routers, which offer a range of high-speed,
multi-user digital and analog Internet connectivity solutions, and Timbuktu Pro
real-time communication and remote control software for workgroups, remote
workers and help desk administrators.
In 1993, the Company focused its business strategy to concentrate on
the Internet and Intranet markets through the utilization of its Transmission
Control Protocol/Internet Protocol ("TCP/IP") and routing expertise. In fiscal
1994, the Company released its Timbuktu Pro Internet/Intranet collaboration
software product (TCP/IP enabled). In fiscal 1996, the Company introduced its
Netopia Internet router products and services, and, in fiscal 1997, the Company
introduced its NVO software platform. During fiscal 1998, the Company expanded
its Internet product offerings by releasing the hosted version of NVO and by
offering additional Internet routers supporting Digital Subscriber Line ("DSL")
and 56K Dual Analog technologies. The Company also expanded its strategic
Internet relationships in fiscal 1998 by partnering with Netscape, France
Telecom, Copper Mountain and Northpoint Communications.
In the fourth quarter of fiscal 1998, the Company sold its Farallon
Local Area Networking ("LAN") Division (the "LAN Division") through which it had
developed and sold LAN products primarily for Apple Macintosh computers. The LAN
Division's operations, products and the market in which it competed were no
longer considered core to the Company's business strategy. As a result, the
Company sold the LAN Division's products, accounts receivable, inventory,
property and equipment, intellectual property and other related assets, to
Farallon Communications, Inc. ("Farallon"), formerly known as Farallon
Networking Corporation, a Delaware corporation and an affiliate of Gores
Technology Group ("Gores"). Farallon also assumed certain accounts payable and
other liabilities of the LAN Division. In connection with such sale, the Company
received consideration aggregating $4.9 million, including (i) $2.0 million of
cash, (ii) royalties on Farallon's revenues for a period of five years to the
extent that Farallon achieves revenues from the sale of its LAN Products of at
least $15.0 million per year, (iii) a two year $1.0 million promissory note from
Farallon, guaranteed by Gores, and (iv) a warrant to purchase up to 5% of the
equity of Farallon. There can be no assurance that the business of Farallon will
be sufficiently successful to allow the Company to realize the value of the
receivables, note and warrant described in (ii), (iii) and (iv) above. See
"Other Risks Associated with the Sale of the LAN Division."
The Company is incorporated in Delaware, and its principal executive
offices are located at 2470 Mariner Square Loop, Alameda, California, USA 94501.
<PAGE>
Events Occurring After September 30, 1998
On December 17, 1998, the Company signed a definitive agreement and
closed a transaction to purchase Serus LLC ("Serus"), a Utah limited liability
company. Serus is a developer of java-based web site editing software products.
Upon completion of the development of such products, Netopia intends to market
the products both independently and along with its Netopia Virtual Office
software platform to allow users more flexibility in customizing their web
sites. As per the SERUS ASSET PURCHASE AGREEMENT by and among Netopia, Inc. and
Serus LLC (the "Purchase Agreement"), Netopia will acquire substantially all of
the assets and assume certain liabilities of Serus and existing operations which
include in-process research and development. The maximum aggregate purchase
price of the Serus transaction is approximately $7.0 million including (i) $3.0
million of cash due and payable on the closing date of the transaction, (ii)
409,556 shares of the Company's Common Stock issued on the closing date, and
(iii) a $1.0 million earnout opportunity based upon certain criteria as set
forth in the Purchase Agreement.
The Company is in the process of completing the valuation of the assets
acquired and liabilities assumed in connection with its acquisition of Serus
including the evaluation of in-process research and development costs. The
Company expects to record a charge to operations during the 3 months ended
December 31, 1998 for in-process research and development relating to this
recently completed acquisition. The amount of such charge is not presently
determinable, but could be material. The Company is aware that the United States
Securities and Exchange Commission ("SEC") is reviewing the assumptions and
methodologies heretofore commonly used by companies in calculating such charges.
The Company intends to follow recent guidance disseminated by the SEC in its
valuation of the assets acquired and liabilities assumed and, in particular, in
the valuation of in-process research and development.
In the course of integrating Serus into the operations of the Company,
it is possible that facts or circumstances may be discovered that were not known
nor apparent prior to the time that the Company executed the Serus Purchase
Agreement or during its financial and technical due diligence reviews of Serus.
There can be no assurance that difficulties will not be encountered in
integrating the operations of Serus, or that the specific benefits expected from
the integration of Serus will be achieved. The acquisition of Serus also
involves a number of other risks, including technical risks related to the
completion of on-going development efforts; assimilation of new operations and
personnel; the diversion of resources from Netopia's existing business;
integration of their respective equipment, product and service offerings,
networks and technologies, financial and information systems and brand names;
coordination of geographically separated facilities and work forces; management
challenges associated with the integration of the companies; coordination of
their respective engineering, selling, marketing and service efforts,
assimilation of new management personnel; and maintenance of standards,
controls, procedures and policies. The process of integrating the Serus
operations, including its personnel, could cause interruption of, or loss in
momentum in the activities of Netopia's business and operations, including those
of the business acquired. Further, employees of Serus who may be key to the
integration effort or Netopia's ongoing operations may choose not to continue to
work for Netopia following the closing of the acquisition.
Industry Background
The emergence and continued expansion of the Internet as a viable
medium for communications, collaboration and commerce has substantially enhanced
the value and potential of the Internet market. The Internet is a global, open
network of thousands of interconnected computer networks and millions of
computer connections that allow businesses, individuals and other organizations
to communicate worldwide. Large enterprises are increasingly adopting private
"Intranets" that employ Internet data formats and communications protocols, such
as TCP/IP, to connect geographically dispersed networks and facilities.
Intranets enable network users to communicate and access information within an
organization, communicate with external users, such as suppliers, customers and
consultants, and use the World Wide Web (the "web") to access information
available on the Internet. The emergence of the Internet and Intranets as well
as the increased affordability and availability of advanced hardware, software,
communications and commerce services has made Internet and Intranet
communications available to a broader range of users.
<PAGE>
The increasing utility of the Internet and Intranets and the
availability of high-performance infrastructures that enable advanced
capabilities, such as real-time communication, collaboration and commerce, are
compelling small businesses, geographically dispersed facilities of large
enterprises, home offices, mobile users, schools and other small organizations
to establish a web presence and adopt complex network communications and
computing systems. However, these organizations typically do not have access to
sophisticated technical support and therefore may not be well-served by complex
web site development and networking systems requiring extensive technical
knowledge or expertise. Today, the tasks of installing, configuring and
developing web sites and networking systems, obtaining high-speed digital
services, such as DSL, Integrated Service Digital Network ("ISDN"), frame relay
or fractional T1/T1, and arranging for an Internet connection from an Internet
Service Provider ("ISP") can be costly and burdensome for such users. In
addition, traditional vendors, resellers and systems integrators of Internet
networking products historically have not offered products or services
specifically designed for users who may not have access to sophisticated
technical support. Accordingly, the absence of complete, easy-to-use,
plug-and-play solutions for affordable Internet/Intranet connectivity and
Internet presence software which enables real-time communication, collaboration
and commerce has constrained the ability of these users to fully achieve the
benefits of the Internet.
The Netopia Solution
As the use, functionality and importance of the Internet increases, the
Company believes the benefits provided by enabling businesses to connect to the
Internet and establish an online Internet presence to help increase market
exposure, generate long-term cost savings and facilitate communications, are now
beginning to be realized by companies of all sizes. Although many small, growing
businesses recognize the importance of the Internet, they often lack the
expertise and internal resources to connect to and develop a successful Internet
presence for their company. The Company believes that over the next few years a
large number of organizations will be looking for a cost-effective,
user-friendly solution for connecting to the Internet and establishing a
professional web site.
Netopia believes it is well positioned to serve the needs of these
small businesses and other organizations and individuals by providing them with
complete web site services, communication software and easy-to-use Internet
connectivity solutions. Netopia strives to develop products that can be used by
anyone regardless of their technical background or access to technical support.
With Netopia's innovative Internet/Intranet solutions, users at organizations of
any size can utilize online communication and collaboration to increase
productivity and add value to customer relationships.
Netopia believes that the Internet will become a central system for
conducting commerce. To that end, web sites can no longer exist as static
transmissions, but must evolve to combine value added functions such as
interactive communication with e-commerce capabilities; Internet connections can
no longer be laborious, but must be instantaneous and serve multiple users; and
online collaboration must evolve from one-to-one into many-to-many. Netopia's
solutions seek to address these needs while providing simple setup and minimal
on-going maintenance. By designing innovative tools that go beyond the rigid use
of the web, Netopia believes it is poised to lead companies worldwide to a
simpler, more affordable method of using technology to improve business.
The Netopia Strategy
Netopia's objective is to become a leading provider of web site
services and high-speed, multi-user Internet connectivity solutions which enable
small growing organizations to establish their presence on the Internet.
Empower "Mere Mortals" to Establish an Internet Presence. The Company
focuses on providing interactive web sites with built-in functionality such as
communication tools including chat, intercom, screen sharing and web-based
e-mail. These web sites allow the web site owner to add pictures, links, text
and files, creating a customized web site, without any programming knowledge or
use of expensive consultants. Through partnerships with companies such as
Netscape, Big Planet, McAfee and Intuit, Netopia is striving to create a diverse
distribution channel to provide "no assembly required" web sites worldwide. The
Company targets vertical target markets with web site "templates" designed by
the Company providing partial customization intended to add value to the web
site owners in a particular profession, market or common interest group. The
Company intends to add additional features to its web site platform by adding
e-commerce, custom domain names and java-based web site editing.
<PAGE>
Provide Complete, Plug-and-Play Internet Connectivity Solutions. The
Company focuses on providing a range of high-speed digital and analog Internet
connectivity solutions, including DSL, Fractional T1/T1, Frame Relay, ISDN and
Dual 56K, emphasizing ease of use and plug-and-play functionality consistent
with Netopia's tradition of providing products that are simple to install, use
and support. The Netopia Internet connectivity products are bundled with
Internet software and are supported with the Company's "Up & Running,
Guaranteed!" program, providing users a single source for complete Internet
connectivity. The Company intends to develop future generations of its Netopia
Internet connectivity hardware products that incorporate alternative
technologies for high bandwidth connectivity and increased throughput, while
retaining ease of use and plug-and-play features.
Expand Strategic Alliances. The Company has formed a number of
strategic relationships that assist the Company in developing, distributing and
marketing its products. For example, to assist its customers in gaining Internet
access and to increase sales of its Internet products, Netopia has formed
strategic relationships with PSINet, Bell Atlantic, France Telecom, Telecom
Italia, Netscape, GeoCities, McAfee, Intuit and approximately 200 ISPs. The
Company intends to sell its Netopia Internet Connectivity products and the NVO
software platform through these ISPs. The Company also intends to expand its
current strategic relationships and to form additional strategic relationships
to augment its current product development, distribution and marketing
strategies.
Leverage Collaboration Software Expertise. Utilizing expertise
developed in pioneering collaboration software for the workgroup, remote user
and help desk administrator, the Company intends to continue to offer products
that increase user productivity and efficiency by enabling real-time,
peer-to-peer collaboration over the Internet, and Intranets. The Company's
Timbuktu Pro software expands the functionality of the Internet beyond e-mail
and Web browsing by enabling users in any location to remotely access an
enterprise network and to engage in real-time collaboration over Intranets or
the Internet -- viewing other users' screens, revising information, transferring
files, controlling other computers and remotely accessing network resources. The
Company intends to enhance and expand the number of real-time collaboration
tools it offers. For example, the Company recently announced its release of
Timbuktu Web Seminar which extends Timbuktu Pro's capabilities from one-to-one
collaboration to one-to-many collaboration.
Target Rapidly Growing Markets for Internet Access and Presence
Solutions. The Company targets those segments of the Internet access and
presence market which it believes are among the most rapidly growing, such as
small businesses, branch offices of multi-national corporations, home offices,
mobile users, schools and other small organizations. These users generally do
not have access to sophisticated technical support and are not well-served by
traditional vendors of Internet access products, which have not historically
offered products which the Company believes are well designed for these markets.
The Company intends to leverage its expertise in developing easy-to-use,
plug-and-play products to more rapidly penetrate these markets.
Leverage Distribution Channels and Customer Support Infrastructure. The
Company believes that its relationships with approximately 57 distributors in 29
countries, and with its ISPs, are a valuable asset and that these channels will
significantly enhance the marketing and sale of its products. In addition, the
Company believes that it is recognized in the industry as providing outstanding
customer service and support. The Company intends to leverage its positive name
recognition, its distribution relationships and its customer support
organization to promote its products.
Products
Netopia offers easy-to-use web site services and collaboration software
and plug-and-play, high-speed, multi-user Internet connectivity solutions. The
Company's products are designed for users that may not have access to
sophisticated technical support, so called "mere mortals," whether they work in
small businesses, branch offices of multi-national coporations, home offices,
schools or other small organizations. The Company's products include its NVO
software platform, its Netopia Internet Routers and its Timbuktu Pro real-time
communication and remote control software.
<PAGE>
Netopia Virtual Office. The NVO software platform is a "no assembly
required" web site solution that enables Internet users, whether as independent
professionals or small businesses, to create their own customized, interactive
web site. The NVO software platform provides flexibility and expandability in
the creation and management of customizable web sites with value-added
functionality such as integrated communications technology. The Company has also
announced plans to incorporate e-commerce functionality to the NVO software
platform in fiscal 1999.
For web site owners, the platform provides a feature rich Internet
presence without requiring any knowledge of Hypertext Markup Language ("HTML"),
programming skills or a technical staff to maintain the site. For ISPs, Internet
Portals ("IPs"), Internet product vendors and professional associations, the
platform is an opportunity to offer their customers web sites with
customization, value-add features and ease of use advantages.
The NVO software platform consists of four main components:
(i) Netopia Site Server. The Netopia Site Server ("NSS") is the platform's
back end server that delivers the web sites' web pages, administers the web
sites and enables the delivery of the communication features within the web
site.
Through its integration with the Netscape Enterprise Server ("NES") as a
server plug-in, as well as its cohesion with any standard database, the NSS
automatically creates web sites, serves the web site pages, provides
administrative functions and enables the conferencing features of NVO. The NSS's
object-based site architecture provides flexibility (i.e., web site owners can
add additional pages to their web site at any time), while its centralized
administration and compatibility with registration databases automate
operations.
(ii) Web Site Templates. Web Site Templates are no assembly required web
sites targeted to a common interest group or industry and pre-populated with
information useful to that group. Netopia, or its partners, can pre-populate
each template with links, frequently asked questions ("FAQs"), formats, files or
other information, and the web site can be further personalized by the web
site's owner. The template design is independent of the information the NSS
maintains about each web site owner. This centralized location allows the owner
data to be separate from the template itself. Therefore, a Netopia partner can
add new features to existing web sites and update all customer sites at one
time. Web site owners can also select a new template and immediately change the
design of their existing web site without altering or losing any of their
information.
(iii) Third Party Technology Integration. Functionality can be extended
through the integration of third party technologies (e.g., web-based e-mail).
Users can leverage the Company's existing technology partnerships or replace and
augment the NVO software platform features with their own proprietary
technology.
(iv) Integrated Conferencing and File Management Tools. Netopia Owner and
Visitor software allows web site owners and visitors to interact directly in
real-time through chat sessions, screen sharing, intercom and other
communication features. It allows for both drag-and-drop functions,
point-to-point communication capabilities and multiple file upload.
When customers license the NSS from the Company, they have the option
of either hosting and administering their web sites themselves or contracting
with Netopia to provide the hosting and administrative services. When customers
choose to have Netopia host and administer their web sites, Netopia handles the
hosting and administrative services related to the web sites, including the
development, marketing, administrative and support services necessary for
creating and hosting web sites. This service includes "service pages," a
co-branded site where customers can sign up for their web site, view and select
a web site template, download the appropriate software and utilize owner
services and support. Netopia can also assist with the creation and delivery of
mass e-mails, coordinate co-marketing efforts, offer web site move-in assistance
and provide site maintenance.
<PAGE>
The performance of the Company's servers, networking hardware and
software infrastructure used for the hosting services offered by the Company for
NVO is critical to the Company's business and reputation and its ability to
attract customers, web users, new subscribers and partners. Any system failure
that causes an interruption in service or a decrease in responsiveness of the
Company's hosting service could result in less traffic to the Company's hosted
web sites and, if sustained or repeated, could impair the Company's reputation
and the attractiveness of its brand name. The Company maintains redundant
systems for all critical operational areas. The Company also offers up to 10Mb
of disk space to each NVO web site hosted on the Company's servers. Disk storage
is configured to survive drive failures without risk of data loss using RAID
striping and mirroring.
The Company entered into an eight-month Web-hosting agreement with
Exodus Communications, Inc. ("Exodus") effective June 1998. This agreement is
automatically renewed for subsequent one-year terms unless either party provides
notice at least 60 days prior to the expiration of any term. Pursuant to the
agreement, Exodus provides and manages power and environmentals for the
Company's networking and server equipment. Exodus also provides site
connectivity to the Internet via multiple DS-3 and OC-3 links on a 24
hour-a-day, seven-days-per week basis. Under the terms of the agreement, Exodus
does not, however, guarantee that the Company's Internet access will be
uninterrupted, error-free or completely secure. Any disruption in the Internet
access provided by Exodus or any failure of the Company's server and networking
systems to handle current or higher volumes of traffic could have a material
adverse effect on the Company's business, operating results and financial
condition. An increase in the use of the Company's hosted NVO web sites could
strain the capacity of its systems, which could lead to slower response time or
system failures. Slowdowns or system failures adversely affect the speed and
responsiveness of the Company's hosted web sites and would diminish the
experience for the Company's subscribers and visitors. The ability of the
Company to provide effective Internet connections or of its systems to manage
substantially larger numbers of customers at higher transmission speeds is as
yet unknown, and, as a result, the Company faces risks related to its ability to
scale up to its expected customer levels while maintaining superior performance.
If usage of bandwidth increases, Netopia will need to purchase additional
servers and networking equipment and rely more heavily on its equipment and on
Exodus and its services to maintain adequate data transmission speeds, the
availability of which may be limited or the cost of which may be significant.
The successful delivery of the Company's services is also dependent
in substantial part upon the ability of Exodus and the Company to protect
Netopia's servers and network infrastructure against damage from human error,
fire, flood, power loss, telecommunications failure, sabotage, intentional acts
of vandalism and similar events. In addition, substantially all of the Company's
servers and network infrastructure are located in Northern California, an area
particularly susceptible to earthquakes, which also could cause system outages
or failures if one should occur. Despite precautions taken by, and planned to be
taken by, the Company and Exodus, the occurrence of other natural disasters or
other unanticipated problems at their respective facilities could result in
interruption in the services provided by the Company or significant damage to
Netopia's equipment. Despite the implementation of network security measures by
the Company, its servers are vulnerable to computer viruses, break-ins, and
similar disruptions from unauthorized tampering. The occurrence of any of these
events could result in interruptions, delays or cessations in service, which
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company's reputation and the
Netopia brand name could be materially and adversely affected.
Netopia Internet Connectivity Solutions. The Company's Netopia Internet
Connectivity Solutions offer a range of high speed digital and analog Internet
Routers which enable cost-effective, plug-and-play Internet connectivity for
individual users and workgroups who may not have access to sophisticated
technical support, and service programs to assist users for connecting to the
Internet. The Company's Internet Router products incorporate the following
technologies:
(i) Symmetric Digital Subscriber Line ("SDSL"). The Netopia Internet Router
with SDSL is a seven-speed router that achieves connection speeds to the
Internet from 160Kbps to 1.6Mbps, and provides a business with a shared,
simultaneous and permanent connection to the Internet. The seven-speed feature
of the SDSL Router enables a business to select the level of bandwidth given
budget and usage, and the ability to increase DSL speeds as business needs
change. The Netopia SDSL Router comes equipped with a built-in 8 port 10base-T
Ethernet hub and an uplink port to connect to another Ethernet hub so that users
can easily create or expand a network. The Netopia SDSL Router is a "No User
Configuration Required" solution. After connecting the router to the SDSL line
<PAGE>
and powering on, the SmartDSL feature connects to the ISP and configures the
router automatically. For users on a LAN, the SmartIP feature (a combination of
Network Address Translation ("NAT") and Dynamic Host Configuration Protocol
("DHCP") server) enables LAN managers to configure workstations for Internet
access without having to enter an IP address. Other features include built-in IP
firewall, IP and Internetwork Packet Exchange ("IPX") (Routing Information
Protocol ("RIP") and Service Advertising Protocol ("SAP")) packet filtering,
back-to-back connections and a modular architecture which lets users add or
switch to different connection types by changing wide area network ("WAN")
module cards.
(ii) DSL and Cable. The Netopia 9100 Ethernet to Ethernet Router allows
small and medium sized businesses to connect all users on a LAN to the Internet
via the Ethernet port on DSL or Cable modems. The Ethernet Router comes equipped
with a built-in 8 port 10base-T Ethernet hub and an uplink port to connect to
another Ethernet hub so that users can create or expand a network. The Ethernet
Router is also equipped with features that simplify router setup and management
with such features as NAT, dynamic IP addressing and an integrated DHCP server.
These features enable workstations to be configured for Internet access without
having to enter an IP address, allow a LAN to access the Internet through a
single dynamically assigned IP address and increase security. Other features
include a built-in IP firewall, a modular architecture, IP and IPX (RIP and SAP)
packet filtering, among others.
(iii) Fractional T1/T1, Digital Data Service ("DDS") and Frame Relay. The
Netopia leased line routers provide Internet connections at 56K DDS, Fractional
T1 and T1 speeds to provide branch offices, small to medium sized businesses or
schools a full-time presence on the Internet. Each model supports Frame Relay,
Point-to-Point Protocol ("PPP") and Cisco High-level Data Link Control ("HDLC")
protocols and offers a serial interface supporting synchronous speeds of up to
1.5Mbps, asynchronous speeds up to 230Kbps and a modular architecture. The
Synch/Async Serial ("SA") models support speeds up to Fractional T1/T1 (in North
America) and E1 (outside of North America) through an external Channel Service
Unit/Data Service Unit ("CSU/DSU"). The 56K DDS and Fractional T1/T1 models are
available in North America only.
(iv) ISDN. Netopia Internet Routers for ISDN are LAN attached devices
supplying high-speed, dial-up connectivity for all users on a network. The ISDN
Routers include a basic rate interface ("BRI") port with built-in NT-1
interface, PPP, Multilink PPP and 4:1 compression. In addition, the ISDN Routers
include patented EtherWave technology that enables connectivity to a 10base-T
Ethernet network in a "daisy-chain" fashion with or without the use of an
Ethernet hub. The ISDN Routers are optimized for small office and home use. The
ISDN Routers include SmartIP, a cost-saving, ease-of-use and security feature
that integrates NAT technology with a DHCP server to map multiple IP addresses
on the small office LAN to a single static or dynamically assigned Internet IP
address from the ISP; two Plain Old Telephone Service ("POTS") interface ports;
an integrated two-port 10Base-T Ethernet hub and two integrated PC Card
slotswhich allow remote troubleshooting, diagnostics, configuration and firmware
upgrades in the event of ISDN line failure.
(v) Dual 56K Analog. The Netopia Internet Router with Dual Analog will
connect an entire LAN to the Internet with speeds up to 168Kbps over standard
analog telephone lines. By integrating two internal 56K analog modems (and
supporting one additional external analog modem) and using analog Multilink PPP,
the Dual Analog Router provides multiple users on a LAN with high-speed,
dial-on-demand Internet access without the expense or complexity of digital
lines. The Dual Analog Router supports ITU v.90 or K56flex standards, IP and IPX
network protocols and has a built-in 8 port 10baseT Hub and remote management
capabilities.
<PAGE>
The Company offers the users of Netopia Internet Routers the "Customer
Care, Guaranteed!" service programs including "Up & Running, Guaranteed!." These
service programs assist users in ordering and provisioning the telecommunication
carrier line, and obtaining and establishing their ISP service, provide remote
configuration of the Netopia Internet Routers, assist in the installation and
configuration of the client server software, and provide technical support for
the Netopia product line. Toll-free technical support is included with this
service program for one year.
Timbuktu Pro Collaboration Software. Timbuktu Pro is a multi-platform
remote control and file transfer software for work groups and remote workers as
well as help desk, server and web site administrators. Timbuktu Pro's patented
screen sharing technology allows remote control and file transfer between
Windows 3.x, Windows 95, Windows NT, Windows 98 and MacOS machines. Timbuktu Pro
software enables users to collaborate with other Timbuktu Pro users in real-time
over the Internet, Intranets and LANs -- viewing other users' screens, revising
information, transferring files, controlling other computers and remotely
accessing network resources. Timbuktu Pro products are also used by help desk
and information systems personnel to remotely solve technical problems, update
software and train users on new applications and operating systems. The Company
believes that the peer-to-peer collaboration features in its Timbuktu Pro
products bring additional functionality to the Internet, Intranets and LANs. The
Timbuktu Pro Enterprise edition provides a comprehensive set of tools geared
towards Information Technology ("IT") professionals responsible for deploying
and administering remote control technology in the enterprise environment. The
Timbuktu Pro Enterprise edition includes the Timbuktu Pro Universal License
which the Company believes allows customers to leverage Timbuktu Pro's
multi-platform compatibility to reduce the cost of migrating between platforms
and operating systems within the enterprise environment. Additionally, Netopia
has pursued integration opportunities with application developers focused on
systems management and help desk solutions for the large corporate customer. As
a result, Timbuktu Pro can be integrated with Remedy's ARS, Microsoft SMS,
PLATINUM's Apriori, Tivoli's TME, Allen Systems Group's ASG-IMPACT and Computer
Associates' Unicenter ING technology software to enhance the help desk
functionality. This integration is included with Timbuktu Pro Enterprise and
allows the IT organization to deploy Timbuktu Pro's remote control functionality
directly with these leading enterprise applications which the Company believes
provide seamless execution of remote control sessions from within the
applications themselves. On December 7, 1998, the Company announced the
introduction of Timbuktu Web Seminar ("TWS"). TWS is a web-based conferencing
solution for the enterprise, Internet and education markets. TWS is web-based
ScreenCasting technology that enables professionals to broadcast from their
desktop to multiple meeting participants live via the Internet, or Intranet. The
TWS server allows the presenter's screen to be broadcast to the participating
audience and includes comprehensive security, administration and web polling
capabilities. The TWS server installs on Microsoft Windows NT4.0 with IIS 3 or 4
servers and offers organizations savings in travel and meeting expenses while
increasing productivity.
The Company's business is dependent upon continued growth in the sale
of its products. The rapid growth in the use of the Internet and Intranets for
communication and commerce is a recent phenomenon, and there can be no assurance
that such 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 infrastructure of the Internet will continue to be able to support the
demands placed upon it by such potential growth, or that it 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 revenue growth rates, the Company does not believe prior percentage
growth rates should be relied upon as being indicative of future operating
results. The Company's limited operating history as an Internet company and the
dynamic market environment in which the Company operates makes the prediction of
future operating results difficult, if not impossible. There can be no assurance
that the Company will increase sales of its products, or that the Company's
existing distribution channels are appropriate for the sale of its products.
Accordingly, the failure of the Company's products to gain market acceptance or
to achieve significant sales would materially and adversely affect the Company's
business, operating results and financial condition. The markets in which the
Company competes currently are subject to intense price competition, and 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 their products. Increased competition may
result in further price reductions, reduced gross margins, increased operating
expenses and loss of market share, any of which could materially adversely
affect the Company's business, operating results and financial condition.
<PAGE>
Strategic Alliances
The Company has entered into strategic alliances to facilitate the
development, distribution, marketing and support of its products. These
alliances enhance the Company's ability to adapt effectively to technological
change and leverage shared distribution resources, thereby providing increased
utility to end users.
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 the Company's operations and have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company anticipates that it will be
necessary to establish additional strategic relationships in the future, in
particular with additional distributors, ISPs and Value Added Resellers
("VARs"). However, there can be no assurance that the Company will be able to
establish such alliances or that such alliances will result in increased
revenues.
Selling and Marketing
The Company's sales force assists end users by providing solutions for
their Internet presence, connectivity and collaboration needs. In addition, the
sales force provides pre-sales and order management support to distributors,
resellers, ISPs and VARs, identifies new opportunities for product development
and provides general market information to management. The Company's marketing
strategy is to achieve broad market penetration by utilizing multiple
distribution channels, including the use of two-tier distributors, direct sales
and telemarketing, Affinity partners, ISPs and VARs, mail order, K-12 and
electronic marketing and distribution.
Two-Tier Distributors. Netopia's major distributors in North America
are Ingram Micro ("Ingram") and Tech Data which distribute Netopia's products to
resellers, VARs, dealers and dealer chains. Internationally, Netopia distributes
its products through approximately 57 distributors in 29 countries. In Europe,
distributors sell primarily in the United Kingdom, France, Germany and Sweden,
and, in the Pacific Rim, distributors sell primarily in Japan. Netopia provides
periodic training in the development of Internet solutions to VARs who purchase
the Company's products primarily from distributors. The Company's agreements
with its distributors can generally be terminated without cause and do not
provide for minimum purchase commitments. Additionally, the agreements provide
price protection and grant the distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases.
<PAGE>
Direct Sales / Telemarketing. Netopia's direct sales and telemarketing
sales force are primarily focused on the execution of high volume or site
license agreements with corporate accounts in North America. The Company
currently plans on leveraging its telemarketing expertise developed domestically
to begin an international direct telemarketing sales force located in Europe.
Timbuktu Pro software is the primary product sold through this channel. The
Company intends to sell NVO through its telesales force in fiscal 1999.
ISPs and VARs. Netopia has formed strategic relationships with ISPs
(including telecommunication carriers) and VARs that assist the Company in
developing, distributing and marketing its products. For example, to assist
customers in establishing their Internet presence and access and to increase
sales of the Company's products, Netopia has formed strategic relationships with
PSINet, France Telecom, Telecom Italia, Bell Atlantic and approximately 200
other ISPs. The Company also has recruited over 400 Internet VARs for the sale
of the Company's products.
Affinity Partners. Netopia plans to utilize Affinity Partners (a common
interest group or professional association) as a distribution channel for its
NVO software platform. The Company's Affinity Partners are provided either a
button or banner on the Affinity Partners' web site that, when clicked on by the
visitor, will direct visitors to the NVO service. Once visitors are directed to
the NVO service, they will have the opportunity to sign up for their own NVO web
site.
Mail Order. Netopia markets its products in mail order catalogs, such
as those offered by MicroWarehouse, to reach users who are generally more
technically sophisticated. Through lower overhead and service costs, mail order
catalogs are generally able to offer lower prices than dealers and retailers.
Electronic Marketing and Distribution. The Company has developed an
online web store for the sale of its products and also offers its products
through other online stores such as Cyberian Outpost, Download Warehouse and
software.net. In addition to the Company's web store, the Company's web site
also offers online technical support, bulletin board and File Transfer Protocol
("ftp") service as well as product and Corporate information. This site allows
the Company to e-mail focused monthly electronic bulletins for customers and
partners, providing information on the Company's most recent upgrades and
promotions. The Company currently supports secure online commerce transactions
through its web store using Netscape's Secure (SSL) Commerce Server and
CyberCash's Secure Internet Payment Service.
Other Marketing. The Company utilizes several other marketing programs,
such as trade advertising, participation in trade shows and press briefings on
strategy and new products to support the sale and distribution of its products.
Through these marketing programs, Netopia seeks to build brand name recognition,
stimulate demand and inform channels about the capabilities and benefits of the
Company's products.
The Company relies primarily on its two-tier distributors for the sale
of its products. Revenues from distributors accounted for 45%, 43% and 37% of
total revenues for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively. A substantial amount of the Company's revenues are generated from
a limited number of these distributors. The Company's three largest
distributors, in aggregate, accounted for 21%, 24% and 23% of the Company's
total revenues for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively. During the fiscal years ended September 30, 1998, 1997 and 1996,
revenue from Ingram accounted for 12%, 14% and 12% of the Company's total
revenues, respectively. No other customers have accounted for 10% or more of the
Company's total revenues during the fiscal years ended September 30, 1998, 1997
and 1996.
The distribution of 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 LAN Division
<PAGE>
historically sold significant volumes of product through the Company's
distributors. Due to the sale of the LAN Division there can be no assurance that
the Company's current distributors will continue to market the Company's
products or that the Company's channel expense levels will not increase. The
loss of, or a significant reduction in revenue from, one of the Company's
distributors could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's distributors generally
offer products of several different companies, including products that are
competitive with the Company's products. There can be no assurance that future
sales by the Company's distributors will continue at current levels, that the
Company will be able to retain its current distributors in the future on terms
which are acceptable to the Company, that the Company's current distributors
will choose to or be able to market the Company's products effectively, that
economic conditions or industry demand will not adversely affect these or other
distributors, that these distributors will not devote greater resources to
marketing products of other companies or that internal staffing changes or other
changes at the Company's distributors will not disrupt historical purchasing or
payment patterns. Accordingly, the loss of, or a significant reduction in
revenue from, one of the Company's distributors, could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
price protection to its distributors. Although the Company provides allowances
for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's allowances will materially and
adversely affect the Company's business, operating results and financial
condition. The Company also provides end users with a ninety (90) day and one
(1) year limited warranty on its Timbuktu Pro and Internet connectivity
products, respectively, and permits end users to return the product for
replacement or its full purchase price if the product does not perform as
warranted. The NVO service is provided on an "as is" basis, therefore the
Company does not generally offer a warranty on its NVO service. End users are
offered a free thirty (30) day evaluation period to use and evaluate the service
prior to purchase and thereafter can discontinue their subscription at any time.
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 would be legally enforceable.
The Company's Timbuktu Pro software products are often licensed to
customers on a volume license basis for use on private WAN Intranets involving
thousands of nodes. These licenses often involve significant license and
maintenance fees. As a result, the license of the Company's 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 Company's 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 the
sales of its software or other products.
The Company's Netopia Internet Router products and NVO software
platform are often distributed through partnerships with ISPs, VARs and
telecommunications carriers. These partnerships often involve lengthy testing
and certification studies, detailed agreements and financial commitments from
the prospective partner. As a result, partnerships with ISPs, VARs and/or
telecommunications carriers to distribute the Company's 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 development and
capital expenditures. For these and other reasons, the business development
process associated with the partnerships is often lengthy and historically has
been subject to a number of significant delays over which the Company has little
or no control. Additionally, credit risks related to the financial viability of
newly organized IPSs or VARs are often more significant than for other partners.
There can be no assurance that the Company will not experience these and
additional delays or financial risks in the future related to partnership
development.
The Company's business model for NVO is dependent upon the Company's
ability to leverage this software platform to generate revenue streams from
monthly subscription based accounts and the licensing of the technology to
future customers and partners. The potential profitability of the business model
is unproven, and, to be successful, the Company must, among other things,
develop and market solutions that achieve broad market acceptance by its
<PAGE>
subscribers, partners and Internet users. This model has existed for only a
limited period of time, and, as a result, is relatively unproven. There can be
no assurance that the Company will be able to retain its subscribers or that it
will be able to attract new subscribers or licensors. Accordingly, no assurance
can be given that the Company's business model for NVO will be successful or
that it can generate revenue growth or significant profits.
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.
Customer Service and Support
The Company believes that it is recognized in the Internet industry as
having an outstanding customer support organization. Netopia believes that
effective customer support is a key criterion used in selecting the Company's
products. Network managers and administrators, ISPs, VARs, distributors,
resellers, consultants and other experienced technical experts utilize the
Company's toll-free telephone support lines, fax and online support services to
access Netopia's internal technical databases and support personnel.
Additionally, support personnel are trained to satisfy the needs of end users
who are not technical experts and do not have access to sophisticated technical
support. The Company believes that its support programs have been successful in
creating brand loyalty through its focused support of the specialized needs of
these end users, and through the easy-to-use, plug-and-play design of its
products.
With "Customer Care, Guaranteed!" service programs including "Up and
Running, Guaranteed!," Netopia remotely configures the Netopia Internet Routers
and assists users in setting up service with the user's telephone company and
ISP. Once unique in the industry, this concept has been adopted by a number of
the Company's competitors. However, the Company believes that its program
remains the most comprehensive in the market. The Company's expertise in solving
technical problems enables it to commit its resources to analyze any problem an
end user may have, even if it involves a product from another company, thereby
building customer loyalty to Netopia as the single source for Internet
connectivity solutions.
Technology and Product Development
The Netopia Internet Routers include several core communications
technologies, including a third-generation multi-protocol routing engine. The
product's operating software has been optimized for the special requirements of
Internet access over high-speed analog and digital WAN links, and provides both
packet header and data-link compression. The routing engine operates in
conjunction with companion modules that provide connection/bandwidth management,
authentication/security and configuration/network management functions. The
routing engine is standards-based and supports several routing protocols
including Routing Information Protocol ("RIP") and RIPv2. The
connection/bandwidth management module supports dial-on-demand routing, tracks
incoming and outgoing data calls and is optimized for the different types of
supported WAN interfaces. Calls can be initiated based on time of day, type of
data traffic, and packet data thresholds. Additionally, switched circuit models
support a "dynamic bandwidth allocation" capability that transparently initiate
connections based on packet data thresholds. These technologies significantly
reduce telecommunications costs, particularly with analog and ISDN which is
typically tariffed on the basis of usage. Additionally, cost control
functionality, optimized for switched interfaces, allows users to determine the
amount of traffic used and terminate routing functionality based upon selectable
parameters. The authentication/security module provides PPP authentication
services, including Password Authentication Protocol ("PAP"), Challenge
Handshake Authentication Protocol ("CHAP"), PAP-token and CHAP token, between
interconnected routers, dial-back security, and packet filters that allow a LAN
to maintain a degree of network security while connecting to the Internet.
Netopia Internet Routers incorporate NAT, under the brand name, SmartIP. SmartIP
allows for the development of affordable LAN Internet accounts. The Netopia
Internet Routers support a wide variety of local and remote
configuration/network management capabilities. These capabilities include a
utility for assigning a LAN IP address to the router called SmartStart, which
includes a server for assigning IP addresses to desktop machines based on the
DHCP, a utility for automatically configuring router Frame Relay parameters
<PAGE>
called SmartMatch, a menu-based console and virtual terminal ("TELNET")
interface, Trivial File Transfer Protocol ("TFTP") client for firmware upgrades,
and the Simple Network Management Protocol ("SNMP"). The Netopia Internet
Routers also support additional utilities and diagnostics such as Packet
Internet Groper ("PING"), trace route and syslog, which allow users to
troubleshoot network problems. During fiscal 1998, the Company introduced the
new R-series Internet router product line which is a new class of modular
router. Designed and engineered to reduce the cost of investment in the customer
premises equipment ("CPE") market for Internet, Intranet and WAN connectivity to
the small to medium business enterprise customer segment. The R-series product
line incorporates the processing unit, memory, power supply, system input-output
and operating system software in the base unit. The base unit also supports an
optional, standards-based, hardware encryption and/or compression module.
Depending on the system requirements, customers then select from a wide range of
WAN interface modules to be plugged into the two configurable slots, including
dual v.90 modems, U and S/T ISDN, U and S/T ISDN with two analog telephone
interfaces, ISDN DSL ("IDSL"), SDSL and Ethernet.
The Company's Timbuktu Pro software products include patented cross
platform collaboration technology that provides remote control capabilities
across disparate operating systems. This collaboration system supports text and
graphical image display between homogeneous and heterogeneous computers
connected on a network, the Internet or via other transport media. The system
captures drawing events during a recording process and then translates these
events into procedure calls during the imaging process on the destination
platform. For example, this technology allows a Windows NT workstation to view
the screen of a MacOS computer regardless of the differences in screen size,
resolution or color depth. This technology enables the Company to better address
the heterogeneous requirements of companies' intranets and the Internet. The
Company has also developed proprietary compression and caching technologies
which are used to minimize resources required for image transmissions over the
Internet and slow speed networks.
The Company's Timbuktu Pro software products also include multi-level
security technology that protects enterprise network computing resources and
individual users from unauthorized intrusion. In addition to supporting the
native operating system security model, such as NT usernames and passwords, each
product can maintain its own database, which is used to verify the identity and
define the privileges of any user attempting to gain access to a machine. The
Company has also developed unique administration technology for
security-conscious network administrators that allows them to customize the
functionality available to their organizations. In addition, the TCP/IP ports
assigned to Netopia by the Internet Engineering Task Force ("IETF") allow
network managers to safeguard their Intranets from unauthorized access with
widely available firewall technology. The Company believes that the
object-oriented modular architecture of its products allows Netopia to exploit
market opportunities quickly and address OEM customer requirements. For
instance, by leveraging the Timbuktu Pro for Windows product's built-in
Component Object Model ("COM") architecture, the Company was one of the first to
market real-time collaboration Netscape plug-ins and Internet applets. This
architecture allows new features, transports, and services to be quickly
incorporated to meet future market demands as well as provide easy integration
of this technology into other third-party applications.
The Company's NVO product provides a platform for creating, managing,
and serving pre-built customizable web sites with integrated communications and
collaboration technology. The NSS, which is the core of the platform, consists
of a web server that serves the web pages, provides message and file handling
capabilities, and enables the conferencing features of the product; and an admin
server for managing the web sites. The web server and the admin server both run
as NES plug-ins on Sun Solaris systems. The admin server provides the management
functionality for the web sites including creation, deletion, rename, setting
values, and changing templates through callable functions. The NSS also provides
application programming interfaces ("APIs") for password handling and for
hashing the web site files for distribution across the file system being used.
These APIs allow host providers to replace default functionality with
site-specific functions for accessing backend registration databases, etc. The
web site pages served by the NSS server are built on a defined directory
structure in the native file system for efficient performance. The NVO platform
includes a proprietary server-side scripting language, nHTML, which is used to
build the customizable web site pages. To serve pages the NSS server parses and
executes nHTML directives that dynamically generate standard HTML pages for the
client, so that the browsers display standard pages. The web sites can
<PAGE>
incorporate the patented Timbuktu cross-platform collaboration technology,
including remote control. The NSS server enables visitors to the web sites to
make connections to the web site owners' machines for screen sharing,
point-to-point chat, and intercom features. The server also provides file upload
and download capabilities through the NVO Files feature. Collaboration features,
such as screen sharing, use the multi-level security technology implemented in
the Company's Timbuktu Pro product. The product provides secure access to site
customization and configuration pages and to files in the web site via browser
authentication.
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 future success will depend on its ability to enhance its existing
products and to introduce new products to meet changing customer requirements
and emerging technologies. For example, the Company's Netopia Internet Router
currently operates over ISDN, Fractional T1/T1 (domestically), Fractional E1/E1
(international), Frame Relay, SDSL, Ethernet and 56K analog telecommunication
services. As other communications technologies such as Asynchronous Transfer
Mode ("ATM"), Asymmetric Digital Subscriber Line ("ADSL"), various other
versions of DSL and communication over cable or wireless networks are developed
or gain market acceptance, the Company will be required to enhance its Internet
Router products to support such technologies, which will be costly, time
consuming and have uncertain market acceptance. If the Company is unable to
modify its products to support new Internet access technologies, or if ISDN,
Fractional T1/T1, Fractional E1/E1, Frame Relay, SDSL, Ethernet or 56K
technologies do not achieve widespread customer acceptance as a result of the
adoption of alternative technologies or as a result of de-emphasis of ISDN,
Fractional T1/T1, Fractional E1/E1, Frame Relay, SDSL, Ethernet or 56K
technologies by telecommunications service providers, the Company's business,
operating results and financial condition would be materially and 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
purchases of existing Company products. Any such deferral of purchases could
have a material adverse effect on the Company's business, operating results or
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 or financial
condition.
The Company believes that its future business and operating results
depend in part on its ability to continue to enhance existing products, develop
new products and improve the price and performance of its products in a timely
manner. The Company continuously evaluates the emerging needs, developing
standards and emerging technologies of its target markets to identify new market
or product opportunities. Netopia is focusing its development efforts on its
Internet Routers through high-speed digital services, including ISDN, T-1, Frame
Relay, DSL, 56K analog technologies and software enhancements to its NVO
<PAGE>
software platform and Timbuktu Pro products, further international localization
of its products and cost-reducing design improvements. In addition, the Company
has relied and will continue to rely on external development resources, such as
OEM suppliers, for the development of certain of its products and related
components. The Company may in the future acquire products or technologies to
complement current research and development efforts. Research and development
expenses were $7.2 million for each of the fiscal years ended September 30, 1998
and 1997 and $7.6 million for the fiscal year ended September 30, 1996.
As of December 1, 1998, Netopia's research and development staff
consisted of 56 employees. 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.
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 and loyalty of 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, services and subscribers are
intensely competitive, highly fragmented and characterized by rapidly changing
technology, evolving industry standards, price competition and frequent new
product introductions. A number of companies offer products that compete with
one or more of the Company's products. The Company's current and prospective
competitors include OEM product manufacturers of Internet access equipment,
manufacturers of Internet presence and web site software and developers of
remote control and collaboration software. In the Internet access equipment
market, the Company competes primarily with Ascend, Cisco, 3Com/U.S. Robotics,
Ramp Networks, Intel, Flowpoint and several other companies. In the Internet
presence and web site software market, the Company competes with IBM, Inc.
Online, The Globe, AOL, GeoCities, Homestead, Lycos, Zyworld and several other
companies. In the remote control and collaboration software markets, the Company
competes primarily with Symantec, Microsoft, Tivoli (IBM), Lotus (IBM), Stac
Electronics, Microcom (Compaq), Computer Associates 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. Other companies in the personal computer or
Internet 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 NVO software. Accordingly,
there can be no assurance that the Company can continue to market its
collaboration and web office software, which would have a material and adverse
effect on the Company's business, operating results and financial condition. In
addition, several of the Company's current competitors have introduced free
and/or paid guaranteed service and support programs that appear to be similar to
the Company's "Up & Running, Guaranteed!" program. As a result, there can be no
assurance that the Company can continue to charge a fee for this support
program. The markets in which the Company currently competes are subject to
intense price competition and the Company expects additional price and product
<PAGE>
competition as other established and emerging companies enter these markets and
new products and technologies are introduced. Consolidations in the computer and
communication industries continue to create companies with substantially greater
financial, technical, sales, marketing and other resources than the Company, as
well as greater name recognition and a significantly larger customer base. These
companies may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sales of its products. Increased competition may
result in the loss of market share, further price reductions and reduced gross
margins, any of which could materially and adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, or that competitive factors faced by the Company will not have a
material adverse effect on the Company's business, operating results and
financial condition.
Proprietary Rights and Technology
The Company's ability to compete is dependent in part on its
proprietary rights and technology. The Company relies primarily on a combination
of patent, copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. The
Company generally enters into confidentiality or license agreements with its
employees, resellers, distributors, customers and potential customers and limits
access to the distribution of its software, hardware designs, documentation and
other proprietary information, however in some instances the Company may find it
necessary to release its source code to certain parties, for example the Company
entered into a product development agreement pursuant to which it released
certain source code to a third party in the People's Republic of China. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to prevent misappropriation of its technology. The Company currently
has three issued United States patents. There can be no assurance that the
Company's patents will not be invalidated, circumvented or challenged, that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications, whether or not
being currently challenged by applicable governmental patent examiners, will be
issued with the scope of the claims sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to the Company's technology or design around the
patents owned by the Company. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy is expected to be a persistent
problem. In selling its software products, the Company relies primarily on
"shrink wrap" licenses that are not signed by licensees and, therefore, it is
possible that such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries where the
Company's products are or may be manufactured or sold, particularly developing
countries including various countries in Asia, such as the People's Republic of
China, do not protect the Company's proprietary rights as fully as do the laws
of the United States. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competing companies will not independently develop similar
technology.
The Company relies upon certain software, firmware and hardware designs
that it licenses from third parties, including firmware that is integrated with
the Company's internally developed firmware and used in the Company's products
to perform key functions. There can be no assurance that these third-party
licenses will continue to be available to the Company on commercially reasonable
terms. The loss of, or inability to maintain, such licenses could result in
shipment delays or reductions until equivalent firmware could be developed,
identified, licensed and integrated which would materially and adversely affect
the Company's business, operating results and financial condition.
Employees
As of December 1, 1998, the Company employed 188 persons, including 58
in sales and marketing, 56 in research and development, 30 in customer service
and support, 14 in manufacturing operations, and 30 in general and
administrative functions. The Company also contracts with consultants who
provide short and long-term services to the Company in various areas. Netopia
believes that its relations with its employees are good. None of Netopia's
employees is represented by a labor union, and the Company has not experienced a
work stoppage. The Company believes its business is dependent upon the
contributions of its senior management and other key personnel and on Netopia's
ability to attract and retain highly qualified personnel. Competition to hire
such personnel in Netopia's industry and location is intense.
<PAGE>
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.
Item 2. PROPERTIES
The Company leases approximately 49,000 square feet of office space for
its headquarters in Alameda, California. The site is used for research and
development, administration, customer service and sales and marketing
activities. The facility is currently leased for a five year term, expiring on
December 31, 2002. The Company has a five-year renewal option on the Alameda
headquarters facility which, if exercised, would commence on January 1, 2003. As
a result of the sale of the LAN Division, the Company has provided a partial
reserve against the remaining term of the lease of the Alameda headquarters
related to the space which was occupied by the LAN Division. The Company also
leases approximately 29,000 square feet of warehouse space in San Leandro,
California to accommodate the Company's distribution center, which maintains
inventory and provides shipping and handling. The facility is currently leased
for a five year term, expiring on December 31, 2002. The Company has a five-year
renewal option on the San Leandro warehouse facility which, if exercised, would
commence on January 1, 2003. As a result of the sale of the LAN Division and per
the Separation Agreement made by and between Netopia, Inc. and Farallon, Netopia
is to assign the lease of the warehouse facility to Farallon. The assignment of
such lease is expected to occur in fiscal 1999. After the lease is assigned to
Farallon, the Company will continue to utilize a portion of the warehouse space
under a sublease with Farallon. The term of the sublease will begin on the
effective date of the lease assignment and terminate on December 31, 2002. The
Company's California facilities are located near major earthquake fault lines.
In the event of an earthquake, the Company's business, financial condition and
operating results could be materially adversely affected.
In addition, the Company leases approximately 7,000 square feet of
research and development office space in Lawrence, Kansas and 1,450 square feet
in San Jose, California. These leases expire on July 30, 1999 and September 30,
2002, respectively. The Company leases approximately 4,500 square feet of sales
office space in Dallas, Texas for its software telesales group. The facility is
currently leased for a five year term, expiring on July 31, 2003. The Company
leases approximately 1,900 square feet of sales office space in Springfield,
Virginia. The facility is currently leased for a five year term, expiring on
July 16, 2003. The Company also leases approximately 1,200 square feet of sales
office space in France. The facility is currently leased for a nine year term,
expiring on February 28, 2005. The Company believes that its existing facilities
are adequate for its current needs and that additional space sufficient to meet
the Company's needs for the foreseeable future is available on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
As of December 22, 1998 the Company was not involved in any pending
legal proceedings which the Company believes could have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter ended September 30, 1998.
<PAGE>
ITEM 5. MARKET FOR NETOPIA'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "NTPA." The table below sets forth the quarterly high and low sales
prices per share as reported on The Nasdaq Stock Market for the two most recent
fiscal years ended September 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
High Low High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fourth fiscal quarter ended September 30..................... $11.500 $ 4.375 $ 7.125 $ 4.375
Third fiscal quarter ended June 30........................... 10.875 5.625 5.375 3.938
Second fiscal quarter ended March 31......................... 6.375 4.125 6.313 4.250
First fiscal quarter ended December 31....................... 9.000 5.000 14.500 6.375
</TABLE>
The market price of the shares of the Company's Common Stock is highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's results of operations, announcements
of technological innovations, announcements of product distribution agreements,
introduction of new products by the Company or its competitors, developments
with respect to patents, copyrights or proprietary rights, conditions and trends
in the Internet 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 and activities related to acquisitions or divestitures,
semi-professional and amateur day traders, postings on Internet message and chat
boards, 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 Internet 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. As of December 1, 1998 the Company had
approximately 160 registered stockholders of record. The Company has not paid
cash dividends on its Common Stock. The Company currently anticipates that it
will retain all future earnings, if any, for use in its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The closing price per share of the Company's Common Stock as reported on
the Nasdaq Stock Market on December 22, 1998 was $7.188.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Fiscal years ended September 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- --------- ---------- -----------
(in thousands; except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 24,836 $20,170 $16,718 $ 6,569 $ 5,310
Cost of revenues................................. 7,955 6,396 3,811 674 447
----------- ----------- --------- ---------- -----------
Gross profit................................. 16,881 13,774 12,907 5,895 4,863
Operating expenses:
Research and development..................... 7,201 7,177 7,603 5,905 2,787
Selling and marketing ....................... 14,404 11,288 9,410 4,463 2,841
General and administrative................... 3,380 2,945 2,835 2,364 2,736
----------- ----------- --------- ---------- -----------
Total operating expenses..................... 24,985 21,410 19,848 12,732 8,364
----------- ----------- --------- ---------- -----------
Operating loss............................ (8,104) (7,636) (6,941) (6,837) (3,501)
Other income, net................................ 2,222 1,869 1,040 815 291
----------- ----------- --------- ---------- -----------
Loss from continuing operations
before income taxes....................... (5,882) (5,767) (5,901) (6,022) (3,210)
Income tax provision (benefit) (a)............... 2,155 (2,217) (4,619) (2,732) (1,856)
----------- ----------- --------- ---------- -----------
Loss from continuing operations........... (8,037) (3,550) (1,282) (3,290) (1,354)
Discontinued operations, net of taxes (b)........ (2,496) 3,021 4,983 5,796 3,541
----------- ----------- --------- ---------- -----------
Net income (loss)........................ $(10,533) $ (529) $ 3,701 $ 2,506 $ 2,187
=========== =========== ========= ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal years ended September 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- --------- ---------- -----------
(in thousands; except for per share amounts)
<S> <C> <C> <C> <C> <C>
Per share data, continuing operations:
Basic and diluted loss per share............. $ (0.69) $ (0.31) $ (0.13) $ (0.36) $ --
Shares used in the per share calculations.... 11,687 11,335 9,890 9,148 --
Per share data, discontinued operations:
Basic income (loss) per share................ $ (0.21) $ 0.27 $ 0.50 $ 0.63 $ --
Diluted income (loss) per share.............. $ (0.21) $ 0.24 $ 0.46 $ 0.61 $ --
Common shares used in the calculations of
basic income (loss) per share.............. 11,687 11,335 9,890 9,148 --
Common and common equivalent shares
used in the calculations of diluted net
income (loss) per share.................... 11,687 12,350 10,887 9,522 --
Per share data, net income (loss):
Basic net income (loss) per share............ $ (0.90) $ (0.05) $ 0.37 $ 0.27 $ --
Diluted net income (loss) per share.......... $ (0.90) $ (0.05) $ 0.34 $ 0.26 $ --
Common shares used in the calculations of
basic net income (loss) per share.......... 11,687 11,335 9,890 9,148 --
Common and common equivalent shares
used in the calculations of diluted net
income (loss) per share.................... 11,687 11,335 10,887 9,522 --
========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated balance sheet data:
Working capital................................... $ 38,152 $ 49,979 $49,469 $21,755 $19,569
Total assets...................................... 56,292 61,001 61,618 33,872 29,289
Long-term liabilities............................. 260 361 46 218 689
Total stockholders' equity........................ 44,801 53,977 53,143 24,279 21,644
=========== =========== ========== =========== ===========
</TABLE>
- ------------------------------------
(a)______See Note 5 of Notes to Consolidated Financial Statements.
(b) On August 5, 1998, the Company sold its LAN Division. The sale transaction
and operating results of the LAN Division for the periods presented are
reported as a discontinued operation. See Note 2 of Notes to Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Report that
are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, intentions, strategies, proceeds, expenses,
charges, accruals, losses and reserves regarding the future. All forward-looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Other
Factors That May Affect Future Results" as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in the Company's
other United States Securities and Exchange Commission filings.
<PAGE>
Overview
Netopia develops, markets and supports products and services which
enable growing organizations to establish their presence on the Internet. The
Company's products include NVO software which is a "no assembly required" web
site solution that allows Internet users to create their own customized,
interactive web site, Netopia Internet Routers, which offer a range of
high-speed, multi-user digital and analog Internet connectivity solutions, and
Timbuktu Pro real-time communication and remote control software for workgroups,
remote workers and help desk administrators.
In 1993, the Company focused its business strategy to concentrate on
the Internet and Intranet markets through the utilization of its TCP/IP and
routing expertise. In fiscal 1994, the Company released its Timbuktu Pro
Internet/Intranet collaboration software product (TCP/IP enabled). In fiscal
1996, the Company introduced its Netopia Internet router products and services,
and, in fiscal 1997, the Company introduced its NVO software platform. During
fiscal 1998, the Company expanded its Internet product offerings by releasing
the hosted version of NVO and by offering additional Internet routers supporting
DSL and 56K Dual Analog technologies. The Company also expanded its strategic
Internet relationships in fiscal 1998 by partnering with Netscape, France
Telecom, Copper Mountain and Northpoint Communications. Additionally, in the
fourth quarter of fiscal 1998, the Company sold its LAN Division which developed
and sold LAN products primarily for Apple Macintosh computers.
The Company's total revenues from continuing operations are derived
from the sale of hardware and software products and include license revenues for
its Timbuktu Pro and NVO software, sales of its Netopia Internet router products
and fees for related services, as well as revenue from licensing the Company's
patent covering cross-platform screen-sharing technology. Revenue relating to
the sale and licensing of hardware and software products is recognized upon
shipment of the products by the Company, patent revenue is recognized upon the
licensing of the rights to the patent and service revenues are 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. 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. Although the
Company has experienced revenue growth over the last five years, there can be no
assurance that the Company will be able to sustain or increase revenue growth
rates. There can be no assurance that the Company will be profitable on a
quarterly or annual basis. As a result of the sale of the LAN Division, the
Company's consolidated statements of operations have been restated to reflect
the discontinuation of the operations associated with the Company's LAN
Division. The Company's limited operating history without its LAN Division and
the dynamic market environment in which the Company competes make the prediction
of future operating results difficult, if not impossible.
The Company sells its products and related maintenance, support and
other services through distributors, ISPs, VARs and directly by the Company to
corporate accounts, higher education institutions and over the Internet. The
Company's revenues from distributors accounted for 45%, 43% and 37% of the
Company's total revenues for the fiscal years ended September 30, 1998, 1997 and
1996, respectively. The Company's three largest distributors, in aggregate,
accounted for 21%, 24% and 23% of the Company's total revenues for the fiscal
years ended September 30, 1998, 1997 and 1996, respectively. During the fiscal
years ended September 30, 1998, 1997 and 1996, revenue from Ingram accounted for
12%, 14% and 12% of the Company's total revenues, respectively. No other
customers have accounted for 10% or more of the Company's total revenues during
the fiscal years ended September 30, 1998, 1997 and 1996.
The distribution of 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
<PAGE>
distributors which operate on a purchase order basis. The LAN Division
historically sold significant volumes of product through the Company's
distributors. Due to the sale of the LAN Division there can be no assurance that
the Company's current distributors will continue to market the Company's
products or that the Company's channel expense levels will not increase. The
loss of, or a significant reduction in revenue from any one of the Company's
distributors could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's distributors generally
offer products of several different companies, including products that are
competitive with the Company's products. There can be no assurance that future
sales by the Company's distributors will continue at current levels, that the
Company will be able to retain its current distributors in the future on terms
which are acceptable to the Company, that the Company's current distributors
will choose to or be able to market the Company's products effectively, that
economic conditions or industry demand will not adversely affect these or other
distributors, that these distributors will not devote greater resources to
marketing products of other companies or that internal staffing changes or other
changes at the Company's distributors will not disrupt historical purchasing or
payment patterns. Accordingly, the loss of, or a significant reduction in
revenue from, one of the Company's distributors, could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company grants to its distributors limited rights to return unsold
inventories of the Company's products in exchange for new purchases and provides
price protection to its distributors. Although the Company provides allowances
for projected returns and price decreases, any product returns or price
decreases in the future that exceed the Company's allowances will materially and
adversely affect the Company's business, operating results and financial
condition. The Company also provides end users with a ninety (90) day and one
(1) year limited warranty on its Timbuktu Pro and Internet connectivity
products, respectively, and permits end users to return the product for
replacement or its full purchase price if the product does not perform as
warranted. The NVO service is provided on an "as is" basis, therefore the
Company does not generally offer a warranty on its NVO service. End users are
offered a free thirty (30) day evaluation period to use and evaluate the service
prior to purchase and thereafter can discontinue their subscription at any time.
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 revenues accounted for 33%, 27% and 20% of the Company's
total revenues for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively. The following table provides a breakdown of revenue by region
expressed as a percentage of total revenues for the periods presented:
<TABLE>
<CAPTION>
Fiscal years ended September 30,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Europe.......................................................... 25% 19% 11%
Pacific Rim..................................................... 5 5 7
Other........................................................... 3 3 2
--------------- -------------- --------------
Subtotal international revenues............................... 33 27 20
United States................................................... 67 73 80
--------------- -------------- --------------
Total revenues.............................................. 100% 100% 100%
=============== ============== ==============
</TABLE>
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
<PAGE>
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. To the extent that the Company is unable to
maintain or increase international demand for its products, the Company's
international sales will be limited, and the Company's business, operating
results and financial condition would be materially and adversely affected.
The Company's international operations are subject to inherent risks,
including, but not limited to, the impact of current and potential future
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 such as 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 may make the possibility of piracy of the
Company's technology and products more likely. There can be no assurance that
the Company will be able to sustain or increase international revenues, or that
the foregoing factors will not have a material adverse effect on the Company's
future international revenues and its business, operating results and financial
condition.
In the fourth quarter of fiscal 1998, the Company sold its LAN Division
through which it had developed and sold LAN products primarily for Apple
Macintosh computers. The LAN Division's operations, products and the market in
which it competed were no longer considered core to the Company's business
strategy. As a result, the Company sold the LAN Division's products, accounts
receivable, inventory, property and equipment, intellectual property and other
related assets, to Farallon Communications, Inc. ("Farallon"), formerly known as
Farallon Networking Corporation, a Delaware corporation and an affiliate of
Gores Technology Group ("Gores"). Farallon also assumed certain accounts payable
and other liabilities of the LAN Division. The LAN Division's products consisted
of Ethernet, EtherWave, Fast Ethernet and LocalTalk compatible products which
included the PhoneNET system of network connectivity products (the "LAN
Products"). In connection with such sale, the Company received consideration
aggregating $4.9 million, including (i) $2.0 million of cash, (ii) royalties on
Farallon's revenues for a period of five years to the extent that Farallon
achieves revenues from the sale of its LAN Products of at least $15.0 million
per year, (iii) a two year $1.0 million promissory note from Farallon,
guaranteed by Gores, and (iv) a warrant to purchase up to 5% of the equity of
Farallon. There can be no assurance that the business of Farallon will be
sufficiently successful to allow the Company to realize the value of the
receivables, note and warrant described in (ii), (iii) and (iv) above. The
failure of the Company to realize the value of the receivables, note and warrant
could have a material adverse effect on the Company's business, operating
results and financial condition. Also in connection with the sale of the LAN
Division, the Company made certain representations and warranties about the
assets and liabilities transferred to Farallon. While the Company believes such
representations have been accurate, the Company could be liable for up to $2
million for any damages to Farallon resulting from any breach or breaches of any
of such representations and warranties. As a result, any material breach or
breaches of the representations and warranties made in connection with the sale
of the LAN Division could have a material adverse effect on the Company's
business, operating results and financial condition. See "Other Risks Associated
with the Sale of the LAN Division."
Events Occurring After September 30, 1998
On December 17, 1998, the Company signed a definitive agreement and
closed a transaction to purchase Serus LLC ("Serus"), a Utah limited liability
company. Serus is a developer of java-based web site editing software products.
Upon completion of the development of such products, Netopia intends to market
the products both independently and along with its Netopia Virtual Office
software platform to allow users more flexibility in customizing their web
sites. As per the SERUS ASSET PURCHASE AGREEMENT by and among Netopia, Inc. and
Serus LLC (the "Purchase Agreement"), Netopia will acquire substantially all of
the assets and assume certain liabilities of Serus and existing operations which
include in-process research and development. The maximum aggregate purchase
price of the Serus transaction is approximately $7.0 million including (i) $3.0
million of cash due and payable on the closing date of the transaction, (ii)
<PAGE>
409,556 shares of the Company's Common Stock issued on the closing date, and
(iii) a $1.0 million earnout opportunity based upon certain criteria as set
forth in the Purchase Agreement.
The Company is in the process of completing the valuation of the assets
acquired and liabilities assumed in connection with its acquisition of Serus
including the evaluation of in-process research and development costs. The
Company expects to record a charge to operations during the 3 months ended
December 31, 1998 for in-process research and development relating to this
recently completed acquisition. The amount of such charge is not presently
determinable, but could be material. The Company is aware that the SEC is
reviewing the assumptions and methodologies heretofore commonly used by
companies in calculating such charges. The Company intends to follow recent
guidance disseminated by the SEC in its valuation of the assets acquired and
liabilities assumed and, in particular, in the valuation of in-process research
and development.
In the course of integrating Serus into the operations of the Company,
it is possible that facts or circumstances may be discovered that were not known
nor apparent prior to the time that the Company executed the Serus Purchase
Agreement or during its financial and technical due diligence reviews of Serus.
There can be no assurance that difficulties will not be encountered in
integrating the operations of Serus, or that the specific benefits expected from
the integration of Serus will be achieved. The acquisition of Serus also
involves a number of other risks, including technical risks related to the
completion of on-going development efforts; assimilation of new operations and
personnel; the diversion of resources from Netopia's existing business;
integration of their respective equipment, product and service offerings,
networks and technologies, financial and information systems and brand names;
coordination of geographically separated facilities and work forces; management
challenges associated with the integration of the companies; coordination of
their respective engineering, selling, marketing and service efforts,
assimilation of new management personnel; and maintenance of standards,
controls, procedures and policies. The process of integrating the Serus
operations, including its personnel, could cause interruption of, or loss in
momentum in the activities of Netopia's business and operations, including those
of the business acquired. Further, employees of Serus who may be key to the
integration effort or Netopia's ongoing operations may choose not to continue to
work for Netopia following the closing of the acquisition.
<PAGE>
Results of Operations
The following table sets forth certain consolidated statement of
operations data of the Company expressed as a percentage of total revenues for
the periods presented:
<TABLE>
<CAPTION>
Fiscal years ended September 30,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................................ 100.0% 100.0% 100.0%
Cost of revenues................................................ 32.0 31.7 22.8
--------------- -------------- --------------
Gross profit................................................ 68.0 68.3 77.2
Operating expenses:
Research and development.................................... 29.0 35.6 45.5
Selling and marketing ...................................... 58.0 56.0 56.3
General and administrative.................................. 13.6 14.6 16.9
--------------- -------------- --------------
Total operating expenses.................................... 100.6 106.2 118.7
--------------- -------------- --------------
Operating loss........................................... (32.6) (37.9) (41.5)
Other income, net............................................... 8.9 9.3 6.2
--------------- -------------- --------------
Loss from continuing operations
before income taxes...................................... (23.7) (28.6) (35.3)
Income tax provision (benefit).................................. 8.7 (11.0) (27.6)
--------------- -------------- --------------
Loss from continuing operations.......................... (32.4) (17.6) (7.7)
Discontinued operations:
Income from discontinued operations, net of taxes........... 2.4 15.0 29.8
Loss on sale of discontinued operations, net of taxes....... (12.4) -- --
--------------- -------------- --------------
Net income (loss)....................................... (42.4)% (2.6)% 22.1%
=============== ============== ==============
</TABLE>
Fiscal Years Ended September 30, 1998, 1997 and 1996
Revenues. Total revenue increased 23.1% to $24.8 million in fiscal 1998
from $20.2 million in fiscal 1997, which increased 20.6% from $16.7 million in
fiscal 1996. The increase in fiscal 1998 was primarily due to increased sales of
the Windows version of Timbuktu Pro collaboration software, particularly volume
site licenses, increased sales of the Netopia ISDN Internet router
internationally primarily as a result of the Company's relationship with the
France Telecom WANadoo service ("WANadoo") and increased sales of the Netopia
Frame Relay Internet router in North America which was not available during the
entire 1997 fiscal year. These increases were partially offset by decreased
sales of the MacOS version of Timbuktu Pro collaboration software and price
competition related to the Netopia ISDN Internet router in North America. The
increase in fiscal 1997 was primarily due to increased sales of the Netopia ISDN
Internet router internationally, which was introduced in the fourth quarter of
fiscal 1996, the fiscal 1997 first quarter introduction of the POTS enabled ISDN
Internet router in North America, a greater number of regional ISPs selling
Netopia Internet routers and increased sales of the Windows version of Timbuktu
Pro. These increases were partially offset by decreased sales of the MacOS
version of Timbuktu Pro, decreased revenue from patent licenses and price
competition related to Netopia ISDN Internet routers in North America. During
fiscal years 1998 and 1997, revenues from the MacOS version of Timbuktu Pro have
been adversely affected by declining sales of MacOS computers, Apple Computer's
loss of market share and the reduction in sales of Macintosh clone computers due
to the elimination of a number of cloning licenses issued by Apple Computer.
Also during fiscal years 1998 and 1997, the Company's Internet router products,
particularly its Netopia ISDN Internet router, have experienced increasing price
competition from both domestic and foreign manufacturers of similar products as
well as competition from newer technologies such as DSL and cable Internet
router products. In fiscal 1999, the Company expects revenue from the MacOS
version of Timbuktu Pro to continue to decline in absolute dollars and as a
percent of revenue and expects continued price competition related to its
Internet router products.
<PAGE>
International revenues increased 47.6% to $8.2 million in fiscal 1998
from $5.5 million in fiscal 1997, which increased 64.4% from $3.3 million in
fiscal 1996. The increase in fiscal 1998 is primarily due to increased sales of
the Company's Netopia Internet routers, particularly the Netopia ISDN Internet
router as a result of the WANadoo service. The increase in fiscal 1997 was
primarily due to increased sales of the Netopia ISDN Internet router, which was
introduced internationally in the fourth quarter of fiscal 1996.
Gross Margin. The Company's total gross margin decreased to 68.0% in
fiscal 1998 from 68.3% in fiscal 1997, which decreased from 77.2% in fiscal
1996. The decrease in fiscal 1998 was primarily due to the write-down of the
Company's single user ISDN modem inventory which totaled approximately $200,000.
The write-down of the Company's single user ISDN modem inventory reflects a
shift in the Company's strategic focus to providing multi-user Internet
connectivity products rather than single user Internet connectivity products.
The decrease in fiscal 1997 was primarily due to increased sales of the
Company's Netopia Internet router products which have a lower gross margin than
the Company's software products and decreased revenue from patent licenses. 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, pricing strategies, royalties paid to third parties, standard cost
changes, new versions of existing products and external market factors including
but not limited to price competition. The Company's Timbuktu Pro and NVO
collaboration 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 were $7.2
million for fiscal 1998 and $7.2 million for fiscal 1997, which decreased 5.6%
from $7.6 million in fiscal 1996. Although research and development expenses
remained unchanged between fiscal 1998 and fiscal 1997, third party contractor
expenses increased but were offset by reduced product localization expenses. The
decrease in fiscal 1997 was primarily due to decreased product design,
prototyping and regulatory compliance related expenses as well as reduced
incentives, recruiting, travel and contractor expenses partially offset by
increased product localization expenses. Research and development expenses
represented 29.0%, 35.6% and 45.5% of total revenues for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively. The Company believes that it
will continue to devote substantial resources to product and technological
development and that research and development costs may increase in absolute
dollars in fiscal 1999. Historically, the Company has believed its process for
developing software is essentially completed concurrently with the establishment
of technological feasibility and no internal software costs have been
capitalized to date. During the fiscal year ended September 30, 1998, $237,000
of product development costs incurred subsequent to the delivery of a working
model, under a development agreement with third parties, were capitalized.
Selling and Marketing. Selling and marketing expenses increased 27.6%
to $14.4 million in fiscal 1998 from $11.3 million in fiscal 1997, which
increased 20.0% from $9.4 million in fiscal 1996. The increase in fiscal 1998
was primarily due to increased headcount and increased advertising, promotional
and channel development expenses related to the introduction of new products
including the hosted version of NVO and the Netopia Dual Analog and SDSL
routers. The increase in fiscal 1997 was primarily due to increased headcount
and related expenses. Selling and marketing expenses represented 58.0%, 56.0%
and 56.3% of total revenues for the fiscal years ended September 30, 1998, 1997
and 1996, respectively. The Company believes that selling and marketing expenses
may increase in absolute dollars in fiscal 1999 as a result of increased
advertising and promotion campaigns as well as expansion of its telesales staff.
General and Administrative. General and administrative expenses
increased 14.8% to $3.4 million in fiscal 1998 from $2.9 million in fiscal 1997,
which increased 0.4% from $2.8 million in fiscal 1996. The increase in fiscal
1998 was primarily due to the accrual of additional bad-debt expense reserves
and increased facility related costs, partially offset by decreased use of
information systems contractors. The increase in fiscal 1997 was primarily due
to increased legal, accounting and insurance fees related to being a public
company partially offset by reduced consulting and employee related expenses.
General and administrative expenses represented 13.6%, 14.6% and 16.9% of total
revenues for the fiscal years ended September 30, 1998, 1997 and 1996,
respectively.
<PAGE>
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 18.9% to $2.2 million in fiscal 1998 from $1.9 million in
fiscal 1997, which increased 79.7% from $1.0 million in fiscal 1996. The
increase in fiscal 1998 was primarily due to the Company moving its short-term
investments to non-tax advantaged investments from tax advantaged investments.
The increase in fiscal 1997 was primarily due to the interest earned on cash
raised from the Company's June 1996 Initial Public Offering ("IPO") which was
invested during the entire fiscal year of 1997.
Provision for Income Taxes. Income tax expense related to continuing
operations was $2.2 million in fiscal 1998 compared to income tax benefits of
$2.2 million and $4.6 million in fiscal years 1997 and 1996, respectively. Tax
expense in fiscal 1998 was primarily related to the establishment of a valuation
allowance against $2.9 million of deferred tax assets as of the beginning of the
year and an additional valuation allowance of $2.6 million primarily against net
operating losses generated in the current year. The tax benefit recorded in
fiscal 1997 was primarily related to the Company's net operating loss in such
year and the tax benefit in fiscal 1996 was primarily related to the Company's
net operating loss in such year and the reversal of a previously recognized
valuation allowance. Excluding the impact of changes in the valuation allowance
against deferred tax assets, the Company's effective tax rate differs from the
statutory rate primarily due to research tax credits and tax exempt interest
income. See Note 5 of Notes to Consolidated Financial Statements.
At September 30, 1998, the Company believed that based upon available
objective evidence, there was sufficient uncertainty regarding the realizability
of its tax assets to warrant a full valuation allowance. The factors considered
included the relative shorter life cycles in the high technology industry and
the uncertainty of longer-term taxable income estimates related thereto and as a
result of the sale of the historically profitable LAN Division. At September 30,
1997, the Company believed that based upon the then available objective
evidence, there was sufficient uncertainty regarding the realizability of
certain of its tax assets to warrant a partial valuation allowance, primarily
related to the expected realizability of its research credit carryforwards. The
factors considered included the relative shorter product life cycles in the high
technology industry and the uncertainty of longer-term taxable income estimates
related thereto and limits on the carryback potential for realizing deferred tax
assets. In fiscal 1996, the Company reversed a full valuation allowance that it
had previously provided against its deferred tax assets, resulting in an income
tax benefit of approximately $2.3 million. During fiscal 1996, the Company
believed that due to the demonstrated market acceptance of its new
Internet/Intranet products, the uncertainty regarding the realizability of its
deferred tax assets had diminished to the point where it was more likely than
not that the deferred tax assets would be realized.
Discontinued Operations. On August 5, 1998, the Company sold its LAN
Division for consideration aggregating $4.9 million, including (i) $2.0 million
of cash, (ii) royalties on Farallon's revenues for a period of five years to the
extent that Farallon achieves revenues from the sale of its LAN Products of at
least $15.0 million per year, (iii) a two year $1.0 million promissory note from
Farallon, guaranteed by Gores, and (iv) a warrant to purchase up to 5% of the
equity of Farallon. The sale of the LAN Division has been accounted for as a
discontinued operation and prior period consolidated financial statements have
been restated to reflect the discontinuation of the LAN Division. Income from
discontinued operations of $602,000, $3.0 million and $5.0 million in fiscal
years ended September 30, 1998, 1997 and 1996, respectively, represents the
operating income, net of taxes of the discontinued operations. The net book
value of the LAN Division approximated the fair value of the consideration
received, accordingly, the loss on sale of discontinued operations of $3.1
million in the fiscal year ended September 30, 1998, primarily represents costs
and transaction expenses incurred and accrued as a result of the sale of the LAN
Division. Such expenses are directly attributable to the sale transaction and
are primarily related to projected costs of abandoned facilities, investment
advisory, legal and accounting fees and certain expenses related to employees of
the LAN Division.
Other 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
<PAGE>
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. Historically, the Company
had been dependent upon the sales of its LAN Products. As a result of the sale
of the LAN Division, the Company's future operating results are dependent upon
the market acceptance of its Internet/Intranet products and enhancements
thereto. To the extent that the loss of revenue from the sale of the LAN
Division and its products is not offset by increases in revenue from the sale of
the Company's Internet/Intranet products, the Company's business, operating
results and financial condition will be materially and adversely affected.
Historically, the Company's continuing operations have not achieved
profitability and there can be no assurance that the Company will achieve
profitability in the future. 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, retention and growth of the
Company's NVO subscriber base, 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 customer
orders and purchasing cycles, customer order deferrals in anticipation of
enhancements to the Company's or competitors' products, customer order deferrals
for budgetary or other reasons, manufacturing delays, disruptions in sources of
supply, product life cycles, product quality problems, changes in the level of
operating expenses, the timing of research and development expenditures and the
level of the Company's international revenues. The Company's results also depend
on the demand for vendor products related to the Company's products such as
Windows or Apple Macintosh personal computers and operating systems, among
others, and customer order deferrals in anticipation of new product offerings by
these vendors. The Company's gross margins and operating results depend on
factors such as raw material costs, write-offs of obsolete inventory, changes in
pricing policies by the Company or its competitors, including the grant of price
protection terms and discounts by the Company, changes in the mix of products
sold by the Company and the resulting change in total gross margin, changes in
the mix of channels through which the Company's products are offered as well as
the structure of planned NVO partnerships which may be reported as either higher
margin royalty arrangements or lower margin operations subject to royalty,
amortization or other costs. Additionally, the Company's operating results
depend on general factors such as personnel changes, changes in the Company's
strategy, fluctuations in foreign currency exchange rates, general economic
conditions, both in the United States and abroad, and economic conditions
specific to the industries in which the Company competes, among others. The
Company's limited Internet/Intranet operating history and the dynamic market
environment in which the Company competes make the prediction of future
operating results difficult, if not impossible. Sales orders are typically
shipped shortly after receipt and, consequently, order backlog at the beginning
of any quarter has in the past represented only a small portion of that
quarter's revenues. Accordingly, the Company's net revenues in any quarter are
substantially dependent on orders booked and shipped during that quarter.
Historically, the Company has often shipped and recognized a significant portion
of its revenues in the last weeks, or even days, of a quarter. As a result, the
magnitude of quarterly fluctuations may not become evident until late in, or
after the close of a particular quarter. The Company typically experiences
significant volumes of shipments at the end of the quarter which may be exposed
to delays caused by shipping halts or other factors beyond the Company's
control. In addition, the Company recognizes revenue on products sold through
distributors, ISPs and VARs upon shipment to the distributor, ISP and VAR.
Although the Company maintains reserves for projected returns and price
decreases, there can be no assurance that 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 slowdown 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.
<PAGE>
Accordingly, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance. There can be no assurance that the
Company's business strategies will be successful or that the Company will be
able to return to or sustain profitability on a quarterly or annual basis in the
future. It is likely that in some future quarter the Company's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.
Risks Associated with Potential Acquisitions or Divestitures. The
Company may acquire or invest in companies, technologies or products that
complement the Company's business or its product offerings. In addition, the
Company continues to evaluate the performance of all its products and product
lines and may sell or discontinue current technologies, products or product
lines. Any acquisitions or divestitures may result in the use of cash,
potentially dilutive issuances of equity securities, the write-off of software
development costs or other assets, incurrance of severance liabilities, the
amortization of expenses related to goodwill and other intangible assets and/or
the incurrance of debt, any of which could have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
Acquisitions or divestitures would involve numerous additional risks including
difficulties in the assimilation or separation of operations, services, products
and 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. In addition, potential acquisition candidates targeted by the
Company may not have audited financial statements, detailed financial
information or any degree of internal controls. There can be no assurance that
an audit subsequent to any successful completion of an acquisition will not
reveal matters of significance, including with respect to revenues, expenses,
liabilities, contingent or otherwise, and intellectual property. There can be no
assurance that the Company would be successful in overcoming these or any other
significant risks encountered and the failure to do so could have a material
adverse effect upon the Company's business, operating results and financial
condition.
Management of Changing Business. Managing the Company's business
following the sale of the LAN Division represents a significant challenge for
the Company and its administrative, operational and financial resources and
places increased demands on its systems and controls. The Company's ability to
manage the continuing development of its Internet/Intranet business will require
the Company to continue to change, expand and improve its operational,
management and financial systems and controls and to modify its manufacturing
capabilities. This transition has resulted in a continuing increase in the level
of responsibility for both existing and new management personnel. The Company
anticipates that any growth in its Internet/Intranet business will require it to
recruit and hire a substantial number of new engineering, sales and marketing,
customer service, administrative and managerial personnel. There can be no
assurance that the Company will be successful in hiring or retaining these
personnel, if needed. In addition, certain aspects of the Company's
Internet/Intranet business require volume sales to achieve profitability. If the
Company is unable to achieve such volumes, offset the loss of revenue or to
manage the transition effectively, the Company's business, operating results and
financial condition will be materially and adversely affected.
Other Risks Associated with the Sale of the LAN Division. In connection
with the sale of the LAN Division, the Company received consideration
aggregating $4.9 million, including (i) $2.0 million of cash, (ii) royalties on
Farallon's revenues for a period of five years to the extent that Farallon
achieves revenues from the sale of its LAN Products of at least $15.0 million
per year, (iii) a two year $1.0 million promissory note from Farallon,
guaranteed by Gores, and (iv) a warrant to purchase up to 5% of the equity of
Farallon.
Pursuant to the Agreement of Purchase and Sale of Assets, dated August
5, 1998 (the "Purchase Agreement"), by and between the Registrant and Farallon
Communications, Inc., formerly known as Farallon Networking Corporation, the
purchase price of the LAN Division is subject to a purchase price adjustment.
Such adjustment is based upon the difference between the unaudited balance sheet
of the LAN Division as of the effective date of sale (the "Draft Balance Sheet")
and the estimated book value of the LAN Division at March 31, 1998. On the
effective date of sale, the Company estimated that this difference was
approximately $165,000 and accordingly recorded that amount as a liability on
the Company's Balance Sheet as of September 30, 1998. Any adjustment to the
purchase price of the LAN in excess of the amount accrued for could have a
material adverse effect on the Company's business, operating results and
financial condition.
<PAGE>
The Company's successful realization of assets related to the sale of the
LAN Division, such as the royalty and note receivable, is dependent upon the
successful operation of Farallon by its management team and by Gores. For
example, if Farallon is unable to achieve revenues from LAN Products of at least
$15.0 million per year, the Company will lose its right to a portion of
Farallon's revenue which could have a material adverse affect upon the Company's
business, operating results and financial condition. Farallon's use of its bank
credit facility or incurrance of other debt related financing may require
Netopia to take a subordinate position to such debt. Such subordinate position,
if required, could potentially decrease the likelihood of Netopia receiving
payments on its future receivables from Farallon which would allow Farallon's
other debt holders to be repaid on their loans before Farallon would make any
payments to Netopia on Netopia's Farallon related receivables. Failure to
receive such payments would have a material adverse effect on the Company's
business, operating results and financial condition. Additionally, the Company
made customary representations and warranties about the assets and liabilities
transferred to Farallon in the Purchase Agreement which the Company believes
were materially accurate but which could become the topic of future negotiation
or dispute. While the Company believes such representations have been accurate,
the Company could be liable for up to $2 million for any damages to Farallon
resulting from any breach or breaches of any such representation and warranties.
These or other aspects of the transaction would have a material adverse affect
upon the Company's business, operating results and financial condition.
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 many foreign countries, such products are
subject to a wide variety of governmental review and certification requirements.
While the European Economic Community and certain other foreign countries
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 retain, or obtain on a timely basis, domestic or foreign
regulatory approvals and certifications, including safety and
telecommunications, could have a material adverse effect on the Company's
business, operating results and financial condition.
Due to the increasing popularity and use of the Internet, a number of
legislative and regulatory proposals are under consideration by federal, state,
local and foreign governmental organizations, and it is possible that a number
of laws or regulations may be adopted with respect to the Internet relating to
such issues as user privacy, user screening to prevent inappropriate uses of the
Internet by, for example, minors or convicted criminals, taxation, infringement,
pricing, content regulation, quality of products and services and intellectual
property ownership and infringement. The adoption of any such laws or
regulations may decrease the growth in the use of the Internet, which could in
turn decrease the demand for the Company's products, increase the Company's cost
of doing business, or otherwise have a material adverse effect on the Company's
business, results of operations and financial condition. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, copyright, trademark, trade secret, obscenity, libel and personal
privacy is uncertain and developing. Any new legislation or regulation, or
application or interpretation of existing laws, could have a material adverse
effect on the Company's business, operating results and financial condition. For
example, although it was held unconstitutional, the Telecommunications Act of
1996 prohibited the transmission over the Internet of certain types of
information and content. Other nations, including Germany and China, have taken
actions to restrict the free flow of material on the web deemed to be
objectionable. In addition, although substantial portions of the Communications
Decency Act (the "CDA") were held to be unconstitutional, there can be no
assurance that similar legislation will not be enacted in the future, and it is
possible that such legislation could expose the Company to substantial
liability. Legislation like the CDA could also dampen the growth in use of the
<PAGE>
web generally and decrease the acceptance of the web as a communications and
commercial medium, and could, thereby, have a material adverse effect on the
Company's business, operating results and financial condition. It is also
possible that the use of "cookies" to track demographic information and users
may become subject to laws limiting or prohibiting their use. A "cookie" is a
bit of information keyed to a specific server, file pathway or directory
location that is stored on a user's hard drive, possibly without the user's
knowledge. A user is generally able to remove cookies. Germany, for example, has
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged the passage of laws limiting or abolishing the use of cookies. Limitations
on the Company's potential use of cookies could limit the effectiveness of the
Company's tracking user data, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, a
number of legislative proposals have been made at the federal, state and local
level that would impose additional taxes on the sale of goods and services over
the Internet and certain states have taken measures to tax Internet-related
activities. Moreover, it is likely that, once such moratorium is lifted, some
type of federal and/or state taxes will be imposed upon Internet commerce, and
there can be no assurance that such legislation or other attempts at regulating
commerce over the Internet will not substantially impair the growth of commerce
on the Internet and, as a result, adversely affect the Company's opportunity to
derive financial benefit from such activities. In addition to the foregoing
areas of recent legislative activities, several telecommunications carriers are
currently seeking to have telecommunications over the web regulated by the
Federal Communications Commission (the "FCC") in the same manner as other
telecommunications services. For example, America's Carriers Telecommunications
Association has filed a petition with the FCC for this purpose. In addition,
because the growing popularity and use of the web have burdened the existing
telecommunications infrastructure and many areas with high web use have begun to
experience interruptions in phone service, local telephone carriers have
petitioned the FCC to regulate ISPs in a manner similar to long-distance
telephone carriers and to impose access fees on the ISPs. If either of these
petitions is granted, or the relief sought therein is otherwise granted, the
costs of communicating on the web could increase substantially, potentially
slowing growth in use of the web, which could in turn decrease demand for the
Company's services or increase the Company's cost of doing business.
Due to the global nature of the web, it is possible that, although
transmissions by the Company over the Internet originate primarily in the State
of California, the governments of other states and foreign countries might
attempt to regulate the Company's transmissions or prosecute the Company for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that the
Company might not unintentionally violate such laws or that such laws will not
be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on the Company's business,
operating results and financial condition.
In addition, as the Company's services are available over the Internet
in multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state or foreign country. The failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties and could result in the inability of
the Company to enforce contracts in such jurisdictions. Any such new legislation
or regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, operating results and
financial condition.
Liability for Information Retrieved From the Web. Because materials may
be downloaded by subscribers and other users of the Company's NVO web sites and
subsequently distributed to others, there is a potential that claims will be
made against the Company for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature, content,
publication and distribution of such materials. Such claims have been brought,
and sometimes successfully pressed, in the past. In addition, the increased
attention focused upon liability issues as a result of these lawsuits and
legislative proposals could impact the overall growth of Internet use. The
Company could also be exposed to liability with respect to the offering of
third-party content that may be accessible through content and materials that
<PAGE>
may be posted by subscribers on their personal web sites or chat sessions. Such
claims might include, among others, that by directly or indirectly hosting the
personal web sites of third parties, the Company is liable for copyright or
trademark infringement or other wrongful actions by such third parties through
such web sites. The Company also offers e-mail services, which expose the
Company to potential risk, such as liabilities or claims resulting from
unsolicited e-mail (spamming), lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service. Even to
the extent that such claims do not result in liability to the Company, the
Company could incur significant costs in investigating and defending against
such claims. The imposition on the Company of potential liability for
information carried on or disseminated through its systems could require the
Company to implement measures to reduce its exposure to such liability, which
may require the expenditure of substantial resources and limit the
attractiveness of the Company's services to its subscribers which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Year 2000 Readiness Disclosure. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
application year. Any of the Company's programs or products that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. In addition, the year 2000 is a leap year, which may also
lead to incorrect calculations, functions or systems failure. As a result,
within approximately one year, computer systems and software used by many
companies may need to be upgraded to comply with such Year 2000 requirements. In
October 1996, the Company began a "Millennium Project" to determine if any
actions needed to be taken regarding date-related effects to: (i) the Company's
software or hardware products; (ii) the Company's internal operating and desktop
computer systems and non-information technology systems; and (iii) the readiness
of the Company's third party vendors and business partners.
Through testing, the Company has determined that its Netopia Internet
router products, Netopia Virtual Office software and the versions later than 1.5
of the Company's Windows, MacOS and Enterprise versions of Timbuktu Pro, are
Year 2000 Compliant. Although the Company's products are Year 2000 compliant,
the Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
products such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, even if the Company's products are Year 2000 compliant,
other systems or software used by the Company's customers may not be Year 2000
compliant. The failure of such non-compliant third-party software or systems
could affect the perceived performance of the Company's products, which could
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company's internal systems include information technology systems
such as financial, order entry, inventory, shipping and customer database
computer systems, desktop computer systems and non-information technology
systems such as telephones and facilities. The Company has conducted a
comprehensive review of its internal information technology systems such as
financial, order entry, inventory, shipping and customer database computer
systems to determine if any actions need to be taken regarding Year 2000
date-related effects. These underlying systems are based on a relational
database language which identifies dates based on four (4) digit numbers rather
than two (2) digit numbers and therefore the Company has determined that the
Year 2000 issue will not pose significant operational problems for these
computer systems. The Company is in the process of initiating a comprehensive
inventory and evaluation of all desktop systems and expects to complete this
process and upgrade such non-compliant desktop systems to Year 2000 compliant
systems by June 1999. The additional costs of remediation are not expected to be
material to the Company's financial condition or results of operations. However,
if implementation of replacement systems is delayed or if significant new
non-compliance issues are identified, the Company's business, financial
condition and results of operations could be materially adversely affected.
The Company is in the process of identifying and prioritizing critical
third party vendors, strategic partners and suppliers of non-information related
products and services concerning their plans and progress in addressing the Year
2000 problem. The Company is also working with key suppliers of products and
services to determine that their operations and products are Year 2000 compliant
or to monitor their progress toward Year 2000 compliance, as appropriate.
<PAGE>
To date, the Company has not incurred material expenses related to its
Year 2000 compliance effort other than the investment of employee time and
resources. The Company has currently identified certain facilities related items
that the Company estimates will cost approximately $45,000 to upgrade to Year
2000 compliance. While the Company has dedicated and will continue to dedicate a
substantial amount of time and internal resources towards attaining Year 2000
compliance, there can be no assurance that the Company's Year 2000 compliance
program will be completed on a timely basis. In addition, there can be no
assurance that there will not be an interruption of operations or other
limitations of system functionality or that the Company will not incur
substantial costs to avoid such limitations. Any failure to effectively monitor,
implement or improve the Company's operational, financial, management and
technical support systems could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, the
Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
software products such as those offered by the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, even if the Company's products are Year 2000
compliant, other systems or software used by the Company's customers may not be
Year 2000 compliant. The failure of such non-compliant third-party software or
systems could affect the perceived performance of the Company's products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The most likely worst case scenarios would
include hardware failure and the failure of infrastructure services provided by
government agencies and other third parties (e.g., electricity, telephone
service, water transport, internet services, etc.). In such worst case scenario
the Company would lose customers and revenue which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is in the process of completing its contingency planning for high
risk areas at this time and is scheduled to commence contingency planning for
medium to low risk areas by June 1999. The Company expects its contingency plans
to include, among other things, manual "work-arounds" for software and hardware
failures, as well as substitution of systems, if necessary.
Dependence on Apple. The Company believes that approximately 25% to 30%
of its revenues are derived from customers purchasing products for the Apple
MacOS environment. Accordingly, the Company is dependent on the market for MacOS
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 MacOS products or
reduce sales of MacOS products. Sales of the Company's products in the past have
been adversely affected by the announcement by Apple of new products with the
potential to replace existing products, customer order deferrals in anticipation
of new MacOS product offerings and the elimination of a number of Macintosh
cloning licenses issued by Apple and potential limitations on the retail
distribution of Apple products. The inability of Apple to successfully develop,
manufacture, market or sell new products, and any decrease in the sales or
market acceptance of the MacOS 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 1998, the Company believes
revenues were adversely affected by declining sales of MacOS computers and
Apple's loss of market share. In addition, sales of the Company's products are
dependent upon the international demand for Apple products. To the extent that
the Company is unable to maintain or increase international demand for its
products, or that international demand for Apple products does not meet the
Company's expectations, the Company's international sales would be limited, and
the Company's business, operating results and financial condition would be
materially and adversely affected.
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 additional royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
<PAGE>
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.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through the
private sale of equity securities, the IPO of the Company's Common Stock and, in
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 September 30, 1998, the Company had cash, cash equivalents and
short-term investments representing 75% of total assets. Included in the
Company's cash balances at September 30, 1998 was $736,000 of accounts
receivable collections related to the LAN Division's operations which had not
yet been remitted to Farallon.
The Company's operating activities used $926,000 of cash in fiscal
1998, generated $4.9 million of cash in fiscal 1997 and used $3.3 million of
cash in fiscal 1996. The cash used in operations in fiscal 1998 was primarily
due to expenses related to the sale of the LAN Division and increased
advertising and promotional expenses related to the introduction of new
products. The cash generated by operations in fiscal 1997 was primarily due to
collection of accounts receivable and decreased inventory, partially offset by
reductions of accounts payable and other accrued liabilities. The cash used in
operations in fiscal 1996 was primarily due to increases in accounts receivable
related to volume license sales of the Company's software products, that
occurred in the last weeks of the fourth quarter ended September 30, 1996,
increases in operating expenses related to the introduction of Netopia Internet
router products, reduction in accounts payable and increases in inventory
related to the Company's Netopia Internet router products and the LAN Division's
Fast Ethernet products.
The Company's investing activities have consisted primarily of
purchases of short-term investments and capital equipment. The cash provided by
investing activities during fiscal 1998 was primarily from proceeds from the
sale of short-term investments partially offset by purchases of such
investments, proceeds from the sale of the LAN Division, less the acquisition of
a trademark license related to the Netscape Internet portal for NVO, which the
Company expects to amortize over a period not to exceed 2 years, and
expenditures for capital equipment, representing acquisitions of computer
equipment used predominantly in product development. The Company expects that
its capital expenditures will increase in future periods to support new product
development and production. The cash used in investing activities in fiscal
years 1997 and 1996 was primarily related to the purchase of short-term
investments and capital equipment. The Company's financing activities in fiscal
1998, 1997 and 1996 represent the exercise of stock options, activities related
to the Company's Employee Stock Purchase Plan and the IPO. The Company's
principal commitments consist primarily of leases on its headquarters facilities
and certain operating equipment. See Note 7 of Notes to Consolidated Financial
Statements.
Although the Company believes that its existing cash balance will
decrease moderately during fiscal 1999 as a result of increased operating
expenses and acquisition related activities, 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.
From time to time, in the ordinary course of business, the Company evaluates
potential acquisitions of businesses, products and technologies. Accordingly, 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,
to obtain additional presence on the Internet or to support additional
advertising and promotional campaigns.
<PAGE>
Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition
("SOP 97-2"). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products, upgrades,
enhancements, postcontract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence which is specific to the
vendor. The revenue allocated to software products, including specified upgrades
or enhancements generally is recognized upon delivery of the products. The
revenue allocated to post contract customer support generally is recognized
ratably over the term of the support, and revenue allocated to service elements
generally is recognized as the services are performed. If evidence of the fair
value for all elements of the arrangement does not exist, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. SOP 97-2 will be adopted by the Company effective October 1, 1998.
The Company does not expect the adoption of SOP 97-2 will have a material impact
on the Company's consolidated results of operations.
In June 1997, the Financial Accounting Standards Board issued 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 non-owner sources, such as foreign currency
translation adjustments and unrealized gains or losses on available-for-sale
securities. SFAS No. 131 establishes annual and interim reporting standards
relating to the disclosure of an enterprise's business segments, products,
services, geographic areas and major customers. Adoption of these standards is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. This statement will be
effective for all annual and interim periods for fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software, SOP 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company does not expect the adoption of SOP 98-1 will have a material impact
on its results of operations.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to its investment portfolio. The Company does not use
derivative financial instruments for speculative or trading purposes. The
Company places its investments in instruments that meet high credit quality
standards, as specified in the Company's investment policy. The policy also
limits the amount of credit exposure to any one issue, issuer and type of
instrument. The Company does not expect any material loss with respect to it
investment portfolio.
<PAGE>
The table below presents the carrying value and related weighted
average interest rates for the Company's investment portfolio. The carrying
value approximates fair value at September 30, 1998. All the Company's
investments mature in twelve months or less.
<TABLE>
<CAPTION>
Carrying Average
Amount Interest Rate
------------------ ------------------
<S> <C> <C>
Principal (notional) amounts in United States dollars:
Cash equivalents - fixed rate................................. $ 11,657 5.31%
Short-term investments - fixed rate........................... 24,461 5.61
------------------
$ 36,118
==================
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements
and supplementary financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the information contained in the section captioned "Proposal 1 Election of
Directors" in the Proxy Statement to be filed with the Commission within 120
days after the end of the fiscal year ended September 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3) to Form 10-K, the information
required by this item is incorporated by reference to the information contained
in the section captioned "Executive Compensation and Other Matters" in the Proxy
Statement to be filed with the Commission within 120 days after the end of the
fiscal year ended September 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement to be filed
with the Commission within 120 days after the end of the fiscal year ended
September 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information contained in the section captioned "Compensation Committee and
Insider Participation" in the Proxy Statement to be filed with the Commission
within 120 days after the end of the fiscal year ended September 30, 1998.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Schedules
The following financial statements of Netopia, Inc. are filed as part
of this Report on Form 10-K:
INDEX TO FINANCIAL STATEMENTS PAGE
Independent Auditors'Report...................................................41
Consolidated Balance Sheets at September30, 1998 and 1997.....................42
ConsolidatedStatements of Operations for the fiscal years ended September 30,
1998, 1997 and 1996........................................................43
Consolidated Statements of Stockholders'Equity for the fiscal years ended
September 30, 1998, 1997 and 1996..........................................44
Consolidated Statements of CashFlows for the fiscal years ended September 30,
1998, 1997 and 1996........................................................45
Notes to Consolidated FinancialStatements.....................................46
(b) Reports on Form 8-K
The Company filed the following Reports on Form 8-K during the three
months ended September 30, 1998:
Event Reported Items Reported Date Filed Financial Statements Filed
Sale of Farallon Item 2. Disposition August 20, None (such statements filed
LAN Division of Assets 1998 by amendment on Form 8-K/A
Item 7. Financial dated October 19, 1998 and
Statements on Form 8-K/A dated
and Exhibits December 1, 1998)
(c) Exhibits
Exhibits have been filed separately with the United States Securities
and Exchange Commission in connection with the Annual Report on Form 10-K or
have been incorporated into the report by reference. Copies of such exhibits may
be obtained from the Company upon request.
Exhibit
Number Description
3.1(a) Restated and Amended Certificate of Incorporation
3.2(a) Restated and Amended Bylaws of the Registrant
3.3(b) Certificate of Ownership and Merger (Corporate Name Change)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2(a) Amended and Restated Investor Rights Agreement, dated March 27, 1992,
among the Registrant and the Investors and Founders named therein,
as amended
10.1(a) Form of Indemnification Agreement entered into between the Registrant
and it Directors and Officers
10.2(a) 1996 Stock Option Plan and forms of agreements thereunder
10.3(a) Employee Stock Purchase Plan
10.4(b) Office Lease Agreement between the Company and WHLW Real Estate Limited
Partnership, dated May 1, 1997
10.5(b) Real Property Lease Extension Agreement between the Company and
Bobwhite Meadow, L.P., dated March 1,1996
10.6(c) Agreement of Purchase and Sale of Assets, dated August 5, 1998, by and
between Netopia, Inc., a Delaware corporation, and Farallon Networking
Corporation, a Delaware corporation
<PAGE>
10.7 Serus Asset Purchase Agreement by and among Netopia, Inc., Serus LLC,
Serus Acquisition Corporation and the Members of Serus LLC dated as
of December 16, 1998 (including exhibits thereto)
11.1 Reference is made to Note 1 of Notes to Consolidated Financial
Statements
21.1(a) Subsidiary of the Registrant
23.1 Report on Schedule and Consent of Independent Auditors
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
- ------------------------------------
(a) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (No. 333-3868).
(b) Incorporated herein by reference to the Company's Form 10-K for the fiscal
year ended September 30, 1997.
(c) Incorporated herein by reference to the Company's Form 8-K as filed on
August 20, 1998.
(d) Financial Statement Schedule
Schedule - Valuation and Qualifying Accounts (in thousands)
<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance
beginning of to costs and at end of
Description period expenses Deductions Other(a) period
------------------------------------------ --------------- -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Fiscal year ended September 30, 1998.... $ 566 $ 96 $ 31 $ 231 $ 400
Fiscal year ended September 30, 1997.... 659 21 114 -- 566
Fiscal year ended September 30, 1996.... 517 179 37 -- 659
Allowance for returns:
Fiscal year ended September 30, 1998.... $ 561 $ 105 $ 210 $ 239 $ 217
Fiscal year ended September 30, 1997.... 669 200 308 -- 561
Fiscal year ended September 30, 1996.... 737 300 368 -- 669
Valuation allowance for deferred tax assets:
Fiscal year ended September 30, 1998.... $ 512 $ 6,082 $ -- $ -- $ 6,594
Fiscal year ended September 30, 1997.... -- 512 -- -- 512
Fiscal year ended September 30, 1996.... 2,295 (2,295) -- -- --
- ------------------------------------
(a) Amounts transferred with sale of LAN Division.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized, in the City of Alameda,
State of California on this 22nd day of December, 1998.
NETOPIA, INC.
BY: /s/ Alan B. Lefkof
----------------------------------------
Alan B. Lefkof
President and Chief Executive Officer
Dated: December 22, 1998
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------- -------------------------------------------------- ----------------------
<S> <C> <C>
/s/ Alan B. Lefkof President, Chief Executive Officer and Director December 22, 1998
- ---------------------------------------
Alan B. Lefkof (Principal Executive Officer)
/s/ James A. Clark Vice President and Chief Financial Officer December 22, 1998
- ---------------------------------------
James A. Clark (Principal Financial and Accounting Officer)
/s/ Reese M. Jones Chairman of the Board of Directors December 22, 1998
- ---------------------------------------
Reese M. Jones
/s/ David F. Marquardt Director December 22, 1998
- ---------------------------------------
David F. Marquardt
/s/ James R. Swartz Director December 22, 1998
- ---------------------------------------
James R. Swartz
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netopia, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheets of
Netopia, Inc. and subsidiary as of September 30, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended September 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Netopia,
Inc. and subsidiary as of September 30, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Francisco, California
November 4, 1998, except as to Note 9, which is as of December 17, 1998
<PAGE>
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands; except for share and per share amounts)
September 30,
----------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 19,244 $ 14,444
Short-term investments..................................................... 22,851 27,192
Trade accounts receivable less allowance for doubtful accounts and
returns of $617 and $1,127, respectively.............................. 4,358 8,332
Royalties receivable....................................................... 410 --
Inventories, net........................................................... 1,591 4,421
Deferred tax assets........................................................ -- 1,463
Prepaid expenses and other current assets.................................. 929 790
-------------- ---------------
Total current assets............................................... 49,383 56,642
Note receivable................................................................ 900 --
Royalties receivable........................................................... 1,372 --
Furniture, fixtures and equipment, net......................................... 2,068 2,321
Deferred tax assets............................................................ -- 1,406
Deposits and other assets...................................................... 2,569 632
============== ===============
$ 56,292 $ 61,001
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 5,440 $ 4,302
Accrued compensation ...................................................... 1,217 1,237
Accrued liabilities........................................................ 3,468 195
Deferred revenue........................................................... 807 874
Other current liabilities.................................................. 299 55
-------------- ---------------
Total current liabilities.......................................... 11,231 6,663
Long-term liabilities.......................................................... 260 361
-------------- ---------------
Total liabilities.................................................. 11,491 7,024
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; 11,953,908 and
11,492,732 shares issued and outstanding at September 30, 1998
and 1997, respectively............................................... 12 12
Additional paid-in capital................................................. 51,871 50,568
Deferred compensation...................................................... -- (54)
Retained earnings (deficit)................................................ (7,082) 3,451
-------------- ---------------
Total stockholders' equity......................................... 44,801 53,977
-------------- ---------------
$ 56,292 $ 61,001
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands; except for per share amounts)
Fiscal years ended September 30,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Revenues........................................................ $ 24,836 $ 20,170 $ 16,718
Cost of revenues................................................ 7,955 6,396 3,811
--------------- -------------- --------------
Gross profit................................................ 16,881 13,774 12,907
Operating expenses:
Research and development.................................... 7,201 7,177 7,603
Selling and marketing ...................................... 14,404 11,288 9,410
General and administrative.................................. 3,380 2,945 2,835
--------------- -------------- --------------
Total operating expenses.................................... 24,985 21,410 19,848
--------------- -------------- --------------
Operating loss........................................... (8,104) (7,636) (6,941)
Other income, net............................................... 2,222 1,869 1,040
--------------- -------------- --------------
Loss from continuing operations
before income taxes...................................... (5,882) (5,767) (5,901)
Income tax provision (benefit).................................. 2,155 (2,217) (4,619)
--------------- -------------- --------------
Loss from continuing operations.......................... (8,037) (3,550) (1,282)
Discontinued operations:
Income from discontinued operations, net of taxes........... 602 3,021 4,983
Loss on sale of discontinued operations, net of taxes....... (3,098) -- --
--------------- -------------- --------------
Net income (loss)....................................... $ (10,533) $ (529) $ 3,701
=============== ============== ==============
Per share data, continuing operations:
Basic and diluted loss per share............................ $ (0.69) $ (0.31) $ (0.13)
=============== ============== ==============
Shares used in the per share calculations................... 11,687 11,335 9,890
=============== ============== ==============
Per share data, discontinued operations:
Basic income per share...................................... $ 0.05 $ 0.27 $ 0.50
=============== ============== ==============
Diluted income per share.................................... $ 0.05 $ 0.24 $ 0.46
=============== ============== ==============
Common shares used in the calculations of basic income
per share............................................... 11,687 11,335 9,890
=============== ============== ==============
Common and common equivalent shares used in the calculations
of diluted income per share............................... 12,830 12,350 10,887
=============== ============== ==============
Basic and diluted per share loss on sale.................... $ (0.27) $ -- $ --
=============== ============== ==============
Shares used in the per share calculation.................... 11,687 -- --
=============== ============== ==============
Per share data, net income (loss):
Basic net income (loss) per share........................... $ (0.90) $ (0.05) $ 0.37
=============== ============== ==============
Diluted net income (loss) per share......................... $ (0.90) $ (0.05) $ 0.34
=============== ============== ==============
Common shares used in the calculations of basic net income
(loss) per share.......................................... 11,687 11,335 9,890
=============== ============== ==============
Common and common equivalent shares used in the calculations
of diluted net income (loss) per share..................... 11,687 11,335 10,887
=============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands; except for share amounts)
Preferred Stock Common Stock Additional Deferred Retained Total
-------------------- -------------------- paid-in compen- earnings stockholders'
Shares Amount Shares Amount capital sation (deficit) equity
----------- -------- ----------- -------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances , September 30, 1995. 5,591,207 $ 6 3,624,231 $ 4 $23,990 $ -- $ 279 $ 24,279
Exercise of stock options...... -- -- 135,238 -- 148 -- -- 148
Issuance of common stock net
of issuance costs of $1,222. -- -- 1,750,000 2 24,812 -- -- 24,814
Conversion of preferred stock
to common stock............. (5,591,207) (6) 5,591,207 6 -- -- -- --
Issuance of common stock for
consulting services......... -- -- 5,000 -- 30 -- -- 30
Issuance of common stock for
rights and services......... -- -- 14,285 -- 162 -- -- 162
Deferred compensation related
to grant of stock options... -- -- -- -- 90 (90) -- --
Amortization of deferred
compensation................ -- -- -- -- -- 9 -- 9
Net income..................... -- -- -- -- -- -- 3,701 3,701
----------- -------- ----------- -------- ---------- --------- --------- -----------
Balances, September 30, 1996... -- -- 11,119,961 12 49,232 (81) 3,980 53,143
----------- -------- ----------- -------- ---------- --------- --------- -----------
Exercise of stock options...... -- -- 194,535 -- 443 -- -- 443
Issuance of common stock under
Employee Stock Purchase Plan -- -- 178,236 -- 833 -- -- 833
Issuance of stock warrants..... -- -- -- -- 60 -- -- 60
Amortization of deferred
compensation................ -- -- -- -- -- 27 -- 27
Net loss....................... -- -- -- -- -- -- (529) (529)
----------- -------- ----------- -------- ---------- --------- --------- -----------
Balances, September 30, 1997... -- -- 11,492,732 12 50,568 (54) 3,451 53,977
----------- -------- ----------- -------- ---------- --------- --------- -----------
Exercise of stock options...... -- -- 308,019 -- 729 -- -- 729
Issuance of common stock under
Employee Stock Purchase Plan -- -- 153,157 -- 604 -- -- 604
Amortization of deferred
compensation................ -- -- -- -- -- 24 -- 24
Forfeiture of deferred
compensation................ -- -- -- -- (30) 30 -- --
Net loss....................... -- -- -- -- -- -- (10,533) (10,533)
----------- -------- ----------- -------- ---------- --------- --------- -----------
Balances, September 30, 1998... -- $-- 11,953,908 $ 12 $51,871 $ -- $(7,082) $ 44,801
=========== ======== =========== ======== ========== ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal years ended September 30,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................. $ (10,533) $ (529) $ 3,701
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 995 1,812 1,757
Deferred income taxes........................................ 2,869 (673) (2,197)
Amortization of deferred compensation........................ 24 27 9
Noncash compensation for services............................ -- 60 192
Changes in allowance for doubtful accounts and returns
on accounts receivable.................................. (40) (201) 74
Changes in operating assets and liabilities:
Trade accounts receivable................................. 1,549 3,041 (3,522)
Inventories............................................... (618) 1,874 (1,537)
Prepaid expenses and other current assets................. (443) 667 (453)
Deposits and other assets................................. (127) 49 (186)
Accounts payable and accrued liabilities.................. 5,310 (1,508) (1,563)
Deferred revenue.......................................... (67) 87 619
Other liabilities......................................... 155 185 (173)
--------------- -------------- --------------
Net cash provided by (used in) operating activities.... (926) 4,891 (3,279)
--------------- -------------- --------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment................ (711) (1,111) (2,182)
Acquisition of trademark license............................. (1,000) -- --
Capitalization of software development costs................. (237) (350) --
Proceeds from sale of discontinued operations................ 2,000 -- --
Purchase of short-term investments........................... (47,706) (35,900) (124,337)
Proceeds from the sale of short-term investments............. 52,047 25,943 110,783
--------------- -------------- --------------
Net cash provided by (used in) investing activities.... 4,393 (11,418) (15,736)
--------------- -------------- --------------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net.............. 1,333 1,061 24,962
--------------- -------------- --------------
Net cash provided by financing activities.............. 1,333 1,061 24,962
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents............ 4,800 (5,466) 5,947
Cash and cash equivalents, beginning of year.................... 14,444 19,910 13,963
--------------- -------------- --------------
Cash and cash equivalents, end of year.......................... $ 19,244 $ 14,444 $ 19,910
=============== ============== ==============
Supplemental disclosures of cash flow activities:
Income taxes paid............................................ $ 193 $ 289 $ 1,050
=============== ============== ==============
Supplemental disclosures of noncash investing and
financing activities:
Accrual of stock option deferred compensation................ $ -- $ -- $ 90
=============== ============== ==============
Issuance of warrants for consulting services................. $ -- $ 60 $ --
=============== ============== ==============
Issuance of common stock for consulting services............. $ -- $ -- $ 30
=============== ============== ==============
Issuance of common stock and redeemable common stock
for rights and services................................. $ -- $ -- $ 162
=============== ============== ==============
Tax benefit of stock options exercised....................... $ -- $ 215 $ --
=============== ============== ==============
Note receivable from sale of discontinued operations......... $ 888 $ -- $ --
=============== ============== ==============
Royalties receivable from sale of discontinued operations.... $ 1,782 $ -- $ --
=============== ============== ==============
Note issued for other assets................................. $ 800 $ -- $ --
=============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Netopia, Inc. (the "Company") develops, markets, and supports web
site software and services high-speed, multi-user Internet connectivity
products and collaboration software.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary located in France. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of instruments with purchased maturities of 90
days or less. Certain cash equivalents and all of the Company's investments are
classified as available-for-sale under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The securities are carried at fair value, which
approximates cost.
The amortized cost of available-for-sale debt securities are adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in other income, net. Realized gains and losses, and
declines in value judged to be other than temporary on available-for-sale
securities are included in other income, net. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in other income, net.
Cash equivalents and short-term investments classified as
available-for-sale as of September 30, 1998 and 1997, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
U.S. Treasury Securities and obligations of U.S.
Government agencies......................................... $ 10,554 $ 8,193
Corporate debt................................................ 3,997 22,526
Commercial paper.............................................. 21,567 7,102
------------------ ------------------
$ 36,118 $ 37,821
================== ==================
</TABLE>
The available-for-sale securities as of September 30, 1998 were all due
in one year or less.
Expected maturities may differ from contractual maturities because
issuers of the securities may have the right to prepay obligations without
penalties.
Revenue Recognition
The Company recognizes revenue from sales of its hardware products upon
shipment of the product. The Company recognizes revenues from licenses of
computer software provided that a firm purchase order has been received, the
software and related documentation have been shipped, collection of the
resulting receivable is deemed probable, and no other significant vendor
obligations exist. Patent revenue is recognized upon the licensing of the rights
to the patent. Maintenance and service revenues are recognized over the period
in which services are provided. Hardware revenues are recognized upon shipment.
Certain of the Company's sales are made to customers under agreements permitting
right of return for stock balancing and price protection. Revenue is recorded
net of an estimated allowance for returns. Revenues and Cost of Revenues are
broken down as follows (in thousands):
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Revenues:
Hardware products........................ $ 10,884 $ 8,134 $ 3,741
Software products........................ 13,952 12,036 12,977
------------------ ------------------ -----------------
$ 24,836 $ 20,170 $ 16,718
================== ================== =================
Cost of revenues:
Hardware products........................ $ $ $
7,064 5,258 2,584
Software products........................ 891 1,138 1,227
------------------ ------------------ -----------------
$ 7,955 $ 6,396 $ 3,811
================== ================== =================
</TABLE>
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition
("SOP 97-2"). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products, upgrades,
enhancements, postcontract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence which is specific to the
vendor. The revenue allocated to software products, including specified upgrades
or enhancements generally is recognized upon delivery of the products. The
revenue allocated to post contract customer support generally is recognized
ratably over the term of the support, and revenue allocated to service elements
generally is recognized as the services are performed. If evidence of the fair
value for all elements of the arrangement does not exist, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered. SOP 97-2 will be adopted by the Company effective October 1, 1998.
The Company does not expect the adoption of SOP 97-2 will have a material impact
on the Company's consolidated results of operations.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to
concentrations of credit risk principally consist of cash, cash equivalents,
short-term investments, and accounts receivable.
The Company limits the amounts invested in any one type of investment.
The Company maintains its cash investments with two financial institutions.
Management believes the financial risks associated with such deposits are
minimal.
The Company sells its products primarily through distributors and other
large scale resellers. Sales are generally not collateralized, credit
evaluations are performed as appropriate, and allowances are provided for
estimated credit losses. Historically, the Company has not experienced
significant losses on trade receivables from any particular customer, industry,
or geographic region.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out ("FIFO") method.
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the shorter of estimated useful
lives or related lease terms ranging from one to seven years.
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in
fiscal 1997. SFAS No. 121 requires that long-lived assets and certain
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying value amount or the fair
value less costs to sell. The adoption of SFAS No. 121 did not have a material
impact on the Company's financial position, results of operations, or liquidity.
Software Development Costs
Research and development costs include costs related to software
products that are expensed as incurred until the technological feasibility of
the product has been established. The Company has defined technological
feasibility as completion of a working model. After technological feasibility is
established, any additional software development costs are capitalized in
accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. Product development costs capitalized are
amortized over a future period. Amortization of capitalized product development
costs is computed on a straight-line basis over the estimated economic life of
the product, which is generally 1-2 years. All other research and development
expenditures are charged to research and development expense in the period
incurred. During fiscal 1998, 1997 and 1996, $237,000, $350,000 and $0,
respectively, of product development cost incurred subsequent to delivery of a
working model, under a development agreement with a third party, have been
capitalized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
was $1.3 million, $1.0 million and $845,000 for fiscal 1998, 1997 and 1996,
respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years that those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided to
the extent such deferred tax assets may not be realized.
Stock-Based Compensation
The Company has elected to continue to use the intrinsic value-based
method as allowed under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, to account for all of its stock-based
employee compensation plans. Pursuant to SFAS No. 123, Accounting for
Stock-Based Compensation, the Company is required to disclose the pro forma
effects on operating results as if the Company had elected to use the fair value
approach to account for all its stock-based employee compensation plans.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the recorded amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
Per Share Calculations
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. SFAS No. 128 established standards for the
computation, presentation and disclosure of earnings per share ("EPS") and also
requires dual presentation of basic EPS and diluted EPS for entities with
complex capital structures. SFAS No. 128 became effective for the Company's
consolidated financial statements for quarterly and annual periods beginning
October 1, 1997, and requires restatement of EPS for periods prior to the
effective date.
Basic net income (loss) per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is based on the weighted average number of shares of
common stock outstanding during the period and dilutive common equivalent shares
from options and warrants outstanding during the period. No common equivalent
shares are included for loss periods as they would be anti-dilutive. Dilutive
common equivalent shares consist of stock options and stock warrants.
In conjunction with the Company's adoption of SFAS No. 128, the Company
also adopted the provisions of Staff Accounting Bulletin ("SAB") No. 98,
issued in February 1998. Accordingly, shares previously included pursuant to
SAB No. 83 have been omitted from both basic and diluted net income per share
amounts. Prior periods have been restated to conform to SFAS No. 128.
Potential common shares have been excluded from the computation of
diluted EPS for fiscal 1998 and 1997 since their effect on EPS is antidilutive
due to the losses incurred in each period. Consequently, the number of shares in
the computations of basic and diluted EPS is the same for each period. Potential
common shares which were excluded from the computation of diluted EPS consisted
of options to purchase common stock totaled 3,520,899 shares in fiscal 1998 and
2,867,200 shares in fiscal 1997.
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Computation of basic net income (loss) per share:
Net income (loss) .............................. $ (10,533) $ (529) $ 3,701
================== ================== ==================
Weighted average number of common shares
outstanding................................... 11,687 11,335 9,890
================== ================== ==================
Basic net income (loss) per share............... $ (0.90) $ (0.05) $ 0.37
================== ================== ==================
Computation of diluted net income (loss) per share:
Net income (loss) .............................. $ (10,533) $ (529) $ 3,701
================== ================== ==================
Weighted average number of common shares
outstanding................................... 11,687 11,335 9,890
Number of dilutive common stock equivalents -
stock options................................. -- -- 997
------------------ ------------------ ------------------
Shares used in per share calculation............ 11,687 11,335 10,887
================== ================== ==================
Diluted net income (loss) per share............. $ (0.90) $ (0.05) $ 0.34
================== ================== ==================
</TABLE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued 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
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
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 non-owner sources, such as foreign currency
translation adjustments and unrealized gains or losses on available-for-sale
securities. SFAS No. 131 establishes annual and interim reporting standards
relating to the disclosure of an enterprise's business segments, products,
services, geographic areas and major customers. Adoption of these standards is
not expected to have a material effect on the Company's consolidated financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. This statement will be
effective for all annual and interim periods for fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software, SOP 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company does not expect the adoption of SOP 98-1 will have a material impact
on its results of operations.
(2) Discontinued Operations
On August 5, 1998, the Company sold its Farallon LAN Division (the "LAN
Division") including the LAN Division's products, accounts receivable,
inventory, property and equipment, intellectual property and other related
assets to Farallon Communications, Inc. ("Farallon"), formerly known as Farallon
Networking Corporation, a Delaware corporation and an affiliate of Gores
Technology Group ("Gores"). The consideration the Company received for the sale
of the LAN Division consisted of the following (in thousands):
<TABLE>
<S> <C>
Cash............................................... $ 2,000
Note receivable.................................... 888
Royalties receivable............................... 1,782
Warrants. 189
------------------
$ 4,859
==================
</TABLE>
The note receivable is for $1.0 million payable on July 31, 2000,
bearing interest at 8% per annum. The value of the note has been discounted to
reflect a rate of 15%, the assumed fair market rate of interest for a similar
financial instrument.
The royalties receivable are based upon Farallon's total annual
revenues over each of the next five fiscal years ending on July 31, 2003. If
total annual revenues of at least $15.0 million are reached, the royalty rate
applies to total revenues, including the first $15.0 million. The royalties to
be received are based on the following schedule:
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Royalty Rate on
If Farallon Revenues are Total Farallon
(in thousands): Revenue Equals
---------------------------------------------------- -----------------
<S> <C>
Less than $15,001 0.0%
$15,001 - $16,000 1.5%
$16,001 - $17,000 2.5%
greater than $17,000 5.0%
</TABLE>
The value of the royalties accrued at the close of the transaction was
based upon the present value of the Company's assumptions as to the projected
future revenue of the LAN Division. Royalties accrued; however, have not been
recorded to the extent that total consideration on the transaction exceeds the
net asset value of the LAN Division assets being sold.
Additionally, the Company received and valued warrants to purchase up
to 5% of the equity of Farallon as of the closing of the transaction.
The disposition of the LAN Division in August 1998 has been accounted
for as a discontinued operation in accordance with APB Opinion No. 30, and prior
period consolidated financial statements have been restated to reflect the LAN
Division's operations as a discontinued operation. Revenue from discontinued
operations was $15.1 million, $32.0 million, and $44.9 million, respectively, in
fiscal 1998, 1997, and 1996. The income from discontinued operations of
$602,000, $3.0 million, and $5.0 million in fiscal 1998, 1997, and 1996,
respectively, represents operating income, net of taxes, of the discontinued
operation. The loss on sale of discontinued operations of $3.1 million in fiscal
1998 is principally comprised of the transaction expenses and costs incurred and
accrued as a result of the sale of the LAN Division. Such expenses are directly
attributable to the sale transaction and are primarily related to reserves taken
against the lease of the Company's Alameda, California headquarters, investment
advisory, legal and accounting fees and certain expenses related to employees of
the LAN Division. Of the amount recorded as a loss on the sale of discontinued
operations, $2.5 million is included in accrued liabilities at September 30,
1998. Such accrual consists of $1.7 million of facility costs, approximately
$300,000 in employee-related costs and other costs consisting primarily of
services fees of approximately $500,000. As of September 30, 1998, the Company
has recorded a payable to Farallon for $736,000 related to LAN Division
receivables collected subsequent to the sale of the LAN Division. The following
approximates assets and liabilities of the LAN Division which are included in
the consolidated balance sheet as of September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
------------------
<S> <C>
Accounts receivable, net........................... $ 4,832
Inventory.......................................... 3,247
Prepaid expenses and other current assets.......... 209
Property and equipment............................. 359
Deposits and other assets.......................... 54
------------------
Total..................................... 8,701
Other liabilities.................................. (1,970)
------------------
Net assets................................ $ 6,731
==================
</TABLE>
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
(3) Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Raw materials and work in process................................ $ $
1,080 1,966
Finished goods................................................... 511 2,455
------------------ ------------------
$ $
1,591 4,421
================== ==================
</TABLE>
(4) Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Office equipment................................................. $ 2,457 $ 3,263
Furniture and fixtures........................................... 1,186 1,367
Computers........................................................ 7,757 7,954
Leasehold improvements........................................... 540 521
------------------ ------------------
11,940 13,105
Accumulated depreciation and amortization........................ (9,872) (10,784)
------------------ ------------------
$ 2,068 $ 2,321
================== ==================
</TABLE>
(5) Income Taxes
Total income tax expense for the years ended September 30, 1998, 1997
and 1996 are allocated as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Continuing operations....................... $ 2,155 $ (2,217) $ (4,619)
Discontinued operations..................... 385 1,932 3,186
------------------ ------------------ -----------------
$ 2,540 $ (285) $ (1,433)
================== ================== =================
</TABLE>
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
Income tax expense (benefit) related to continuing operations consisted
of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current:
Federal.................................. $ (596) $ (1,753) $ (2,714)
State.................................... (118) (6) 244
Foreign.................................. -- -- 48
------------------ ------------------ -----------------
(714) (1,759)
(2,422)
------------------ ------------------ -----------------
Deferred:
Federal.................................. 2,191 (378) (1,814)
State.................................... 678 (295) (383)
------------------ ------------------ -----------------
2,869 (673) (2,197)
Charge in lieu of taxes attributable to
employer stock option plans.............. -- 215 --
------------------ ------------------ -----------------
Total............................... $ 2,155 $ (2,217) $ (4,619)
================== ================== =================
</TABLE>
Income tax expense (benefit) related to continuing operations differs
from the amounts computed by applying the statutory income tax rate of 34% to
pretax income as a result of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Computed "expected" tax (benefit) of 34%.... $ (2,000) $ (1,960) $ (2,006)
Change in valuation allowance for deferred
tax assets............................... 5,459 512 (2,295)
Tax exempt interest income.................. -- (163) --
Research credits............................ (770) (172) (72)
State tax and other, net.................... (534) (434) (246)
------------------ ------------------ -----------------
$ 2,155 $ (2,217) $ (4,619)
================== ================== =================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Deferred tax asset:
Reserves and accruals not currently deductible............... $ 1,010 $ 1,541
Deferred rent................................................ 119 16
Research and other credits................................... 1,782 1,012
Alternative minimum tax credit carryforward.................. -- 183
Tangible and intangible assets............................... 349 462
Net operating losses......................................... 2,377 --
State tax and other, net..................................... 957 167
------------------ ------------------
Total gross deferred assets............................. 6,594 3,381
Less valuation allowance......................................... (6,594) (512)
------------------ ------------------
Net deferred tax assets................................. $ -- $ 2,869
================== ==================
</TABLE>
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
The net change in the total valuation allowance for the years ended
September 30, 1998 and 1997 was increases of $6,082,000 and $512,000,
respectively.
At September 30, 1998, the Company believed that based upon available
objective evidence, there was sufficient uncertainty regarding the realizability
of its deferred tax assets to warrant a full valuation allowance. The factors
considered included the relative shorter life cycles in the high technology
industry and the uncertainty of longer-term taxable income estimates related
thereto and as a result of the sale of the historically profitable LAN Division.
At September 30, 1997, the Company believed that based upon the then
available objective evidence, there was sufficient uncertainty regarding the
realizability of certain of its tax assets to warrant a partial valuation
allowance, primarily related to the expected realizability of its research
credit carryforwards. The factors considered included the relative shorter
product life cycles in the high technology industry and the uncertainty of
longer-term taxable income estimates related thereto and limits on the carryback
potential for realizing deferred tax assets.
At September 30, 1996, the Company believed that due to the
demonstrated market acceptance of its products over the previous year, the
uncertainty regarding the realizability of its deferred tax assets had
diminished to the point where it was more likely than not that the deferred tax
asset at such date would be realized, and, as such, the previously established
valuation allowance was reversed in fiscal 1996.
At September 30, 1998, the Company had net operating loss carryforwards
of approximately $6.0 million for federal tax purposes and $4.5 million for
state tax purposes. If not earlier utilized, the federal net operating loss
carryforwards will expire in 2018 and the state net operating loss carryforwards
will expire in 2003. At September 30, 1998, the Company had research credit
carryforwards of approximately $1.4 million for federal tax purposes and
$280,000 for state tax purposes. If not earlier utilized, the federal research
credit carryforwards will expire in years 2009 through 2018. Also, the Company
had alternative minimum tax credit carryforwards of approximately $92,000. The
Company's future ability to utilize the net operating loss carryforwards and
research credit carryforwards may be subject to limitations in the event of
ownership changes as defined in the Internal Revenue Code of 1986.
(6) Stockholders' Equity and Stock Option Plan
On April 23, 1996 the Company was reincorporated in the State of
Delaware. The Company's authorized capital consists of 25,000,000 shares of
$0.001 par value Common Stock and 5,000,000 shares of $0.001 par value Preferred
Stock.
Common Stock
In June 1996, the Company completed the sale of 1,750,000 shares of
Common Stock, which generated net proceeds of approximately $24.8 million.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefore. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights.
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
Preferred Stock
Upon the Company's initial public offering of its Common Stock on June
13, 1996, all shares of issued and outstanding Preferred Stock were converted to
5,591,207 shares of Common Stock. Following the conversion, the Company had no
Preferred Stock outstanding.
Common Stock Warrants
Warrants to purchase 60,000 shares of common stock were issued in
fiscal 1997 for consulting services provided. The warrants will expire on April
22, 2002. The exercise price of the warrants was $4.00. The Company recognized
an expense of $60,000 for the issuance of these warrants.
Stock Option Plan
On April 16, 1996, the Board adopted the 1996 Stock Option Plan (the
1996 Plan) providing for the issuance of incentive or non-statutory options to
directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors.
The 1996 Plan succeeds the previous equity incentive program and
4,243,141 shares of the Company's Common Stock have been authorized under the
1996 Plan. This share reserve is comprised of (i) 294,945 shares available for
issuance under the predecessor plan and 1,372,050 shares subject to outstanding
options thereunder at March 31, 1996; and (ii) an additional increase of
2,576,146 shares. As of September 30, 1998 the 1996 Plan share reserve of
3,673,640 shares is comprised of (i) 3,520,899 shares subject to outstanding
options and (ii) 152,741 shares available for grant.
Incentive stock may be granted at not less than 100% of the fair market
value per share and non-statutory stock options may be granted at not less than
85% of the fair market value per share at the date of grant as determined by the
Board of Directors or committee thereof, except for options granted to a person
owning greater than 10% of the total combined voting power of all classes of
stock of the Company, for which the exercise price of the options must be not
less than 110% of the fair market value.
Included in the 1996 Plan is a provision for the automatic grant of
non-statutory options to non-employee Board of Director members of 25,000 shares
on the effective date of the Company's proposed IPO at the initial offering
price. These shares have been granted to three non-employee Board of Director
members. Thereafter, each new director will be granted an option to purchase
25,000 shares of Common Stock on the date they become a Board member of the
Company at the then current fair market value. Options issued to Directors are
exercisable immediately subject to the Company's right of repurchase. The
Company's right to repurchase will lapse ratably over five years or upon the
Director's departure from the Board.
The Board of Directors, on July 24, 1996, unanimously amended the
Notice of Grant to provide for a four year vesting schedule commencing on the
date of the grant. Grants prior to that date normally vest over five years
commencing on the date of the grant.
The Company has recorded deferred compensation of $90,000 for the
difference between the grant price and the deemed fair value of the Common Stock
underlying options granted in October and December of 1995. This amount is being
amortized over the vesting period of the individual options, generally five
years. Amortization of deferred compensation is being charged to operating
expense. The balance has been fully amortized as of September 30, 1998.
In 1990, the Company effected a recapitalization whereby each share of
the Company's Common Stock outstanding or reserved for issuance upon exercise of
options was converted into a unit for one share of Common Stock and one share of
Series A Preferred Stock. The options relating to these units are included in
the table below. In January 1997, the Company repriced 180,840 outstanding
options to $5.63, no directors or officers of the Company received repriced
options. The options relating to this action are reflected in the table below.
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
The following table summarizes activity under the 1996 Plan (and its
predecessor):
<TABLE>
<CAPTION>
Incentive Stock Options
---------------------------------------------------------
Weighted
Number of Average
Options Price Range Exercise Price
------------------ ------------------ ------------------
<S> <C> <C> <C>
Outstanding as of September 30, 1995............ 1,350,539 $ 1.00 - 1.60 $ 1.19
Options granted................................. 518,975 1.60 - 16.00 9.07
Options exercised............................... (135,238) 1.00 - 1.60 1.10
Options cancelled............................... (132,971) 1.00 - 12.50 2.58
------------------
Outstanding as of September 30, 1996............ 1,601,305 1.00 - 16.00 3.64
Options granted................................. 1,787,365 4.00 - 13.25 5.36
Options exercised............................... (194,535) 1.00 - 11.25 1.17
Options cancelled............................... (326,935) 1.00 - 15.00 8.53
------------------
Outstanding as of September 30, 1997............ 2,867,200 1.00 - 16.00 4.32
Options granted................................. 1,409,425 4.38 - 8.19 5.51
Options exercised............................... (312,090) 1.00 - 11.25 2.40
Options cancelled............................... (443,636) 1.20 - 10.50 4.80
------------------
Outstanding as of September 30, 1998............ 3,520,899 $ 1.00 - 16.00 4.90
==================
Exercisable..................................... 1,338,228 $ 3.88
==================
</TABLE>
The following table summarizes information about stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Number of Weighted - Number
outstanding average Weighted - exercisable Weighted -
Range of exercise shares as of remaining average as of average
prices September 30, contractual exercise September 30, exercise
1998 life (years) price 1998 price
------------------- --------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 251,577 2.86 $ 1.00 251,577 $ 1.00
$1.20 270,746 5.48 1.20 219,651 1.20
$1.60 - $4.00 300,641 7.51 2.96 165,889 2.71
$4.25 - $4.50 418,437 8.89 4.39 120,737 4.38
$4.63 - $5.19 347,406 9.62 4.72 69,708 4.63
$5.25 - $5.63 608,056 8.73 5.35 207,309 5.37
$5.69 620,500 9.53 5.69 69,131 5.69
$5.75 - $6.75 393,761 8.30 6.37 172,689 6.37
$7.13 - $11.25 234,775 9.42 7.81 31,537 9.02
$16.00 75,000 7.70 16.00 30,000 16.00
--------------- ---------------- ---------------- ---------------- ----------------
$1.00 - $16.00 3,520,899 8.18 $ 4.90 1,338,228 $ 3.88
=============== ================ ================ ================ ================
</TABLE>
1996 Employee Stock Purchase Plan
On April 16, 1996, the Board adopted the 1996 Employee Stock Purchase
Plan (the Purchase Plan) and reserved 300,000 shares of Common Stock for
issuance under the Purchase Plan. To date an additional 300,000 shares have been
approved for issuance under the Purchase Plan. As of September 30, 1998, 331,393
shares have been issued under the Purchase Plan.
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
Pro Forma Disclosure - Compensatory Stock Arrangements
Stock options are granted at not less than the fair market value of the
Common Stock on the date of grant. All options expire no later than 10 years
from the date of grant. The Company has adopted the disclosure provisions of
SFAS No. 123, Accounting for Stock Based Compensation, which was issued in
October 1995. As permitted by the provisions of SFAS No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its stock
option plans.
If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date and the fair value of shares
purchased under the plan as prescribed by SFAS 123, net income (loss) and per
share results would have been the pro forma amounts indicated in the table below
(in thousands except per share amounts):
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) - as reported....................... $ (10,533) $ (529) $ 3,701
Net income (loss) - pro forma......................... (13,384) (1,109) 3,492
Basic net income (loss) per share - as reported....... $ (0.90) $ (0.05) $ 0.37
Basic net income (loss) per share - pro forma......... (1.15) (0.10) 0.35
Diluted net income (loss) per share - as reported..... $ (0.90) $ (0.05) $ 0.34
Diluted net income (loss) per share - pro forma....... (1.15) (0.10) 0.32
</TABLE>
The effect on net income (loss) and net income (loss) per share is not
expected to be indicative of the effects on results in future years.
The effect of applying SFAS No. 123 for disclosing compensation costs
may not be representative of the effects on reported net income (loss) for the
future years because pro forma net income (loss) reflects compensation costs
only for stock options granted in fiscal 1998, 1997 and 1996. The fair value of
options granted during fiscal 1998 under SFAS 123 was $4,906,099.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable while the Company's employee stock options have
characteristics significantly different from those of traded options. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The fair value of
each option grant and share purchased under the Purchase Plan are estimated on
the date of grant or share purchase using the Black-Scholes option-pricing model
with the following assumptions:
<TABLE>
<CAPTION>
Fiscal years ended September 30,
-------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Expected volatility................................... 84% 70% 70%
Risk-free interest rate............................... 4.25% 5.60% 5.60%
Expected dividend yield............................... -- -- --
</TABLE>
The expected lives of options under the Employee Stock Option and
Employee Stock Purchase Plans are estimated at four years and six months,
respectively.
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
(7) Commitments and Contingencies
Leases
The Company conducts its operations in leased facilities and with
equipment under operating lease agreements expiring at various dates through
2002.
The following is a schedule of future minimum rental payments required
under these leases that have initial or remaining non-cancelable lease terms in
excess of one year (in thousands):
<TABLE>
<CAPTION>
Year ending September 30,
---------------------------------
<S> <C> <C>
1999......................................................... $ 1,210
2000......................................................... 1,114
2001......................................................... 1,116
2002......................................................... 1,111
2003......................................................... 55
thereafter................................................... 42
----------------
Total minimum lease payments............................. $ 4,648
================
</TABLE>
Total rental expense for all operating leases amounted to approximately
$1,244,000, $1,157,000 and $1,117,000 for the years ended September 30, 1998,
1997 and 1996, respectively.
Litigation
The Company is involved in various legal matters that have arisen in
the normal course of business. Management believes, after consultation with
counsel, any liability that may result from the disposition of such legal
matters will not have a material adverse effect on the Company's operating
results and financial condition.
Plan for Savings and Investments
The Company maintains a plan for savings and investments under which
eligible employees may contribute up to 15% of their annual compensation. In
addition, the Company may make discretionary retirement contributions to the
plan. No discretionary retirement contributions were made in any period
presented.
(8) Significant Customers and Revenue by Geographic Region
During the years ended September 30, 1998, 1997 and 1996, one customer
accounted for approximately 12%, 14% and 12%, respectively, of total net
revenues. No other customers have accounted for 10% or more of the Company's
total revenue for the last three fiscal years.
Revenues outside of the United States are primarily export sales
denominated in United States dollars. Revenue by geographic region is as follows
(in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
United States.................................. $ 16,670 $ 14,637 $ 13,412
Europe......................................... 6,215 3,929 1,769
Asia/Pacific................................... 1,175 1,018 1,219
Canada......................................... 706 542 308
Latin America.................................. 70 44 10
----------------- ------------------ ------------------
Total revenues.............................. $ 24,836 $ 20,170 $ 16,718
================= ================== ==================
</TABLE>
<PAGE>
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
The Company has no material operating assets outside the United States.
(9) Subsequent Event
On December 17, 1998, the Company signed a definitive agreement and
closed a transaction to purchase Serus LLC ("Serus"), a Utah limited liability
company. Serus is a developer of java-based web site editing software products.
Upon completion of the development of such products, Netopia intends to market
the products both independently and along with its Netopia Virtual Office
software platform. As per the SERUS ASSET PURCHASE AGREEMENT by and among
Netopia, Inc. and Serus LLC (the "Purchase Agreement"), Netopia will acquire
substantially all of the assets and assume certain liabilities of Serus and
existing operations which include in-process research and development. The
maximum aggregate purchase price of the Serus transaction is approximately $7.0
million including (i) $3.0 million of cash, (ii) 409,556 shares of the Company's
Common Stock, and (iii) a $1.0 million earnout opportunity based upon certain
criteria as set forth in the Purchase Agreement.
<PAGE>
EXHIBIT 10.7
Exhibit
Number Description
10.7(a) Serus Asset Purchase Agreement by and among Netopia, Inc.,
Serus LLC, Serus Acquisition Corporation and the Members of
Serus LLC dated as of December 16, 1998
10.7(b) Bill of Sale and Assignment
10.7(c) Escrow Agreement
10.7(d) Form of Non-Competition Agreement
10.7(e) Registration Rights Agreement
EXHIBIT 10.7(a)
Serus ASSET PURCHASE AGREEMENT
by and among
Netopia, Inc.
Serus, LLC,
Serus Acquisition Corporation, and
Shayne McQuade, Mark Hendricks, Jody Rookstool,
Scott Iverson, Todd Shepherd and Studeo, Inc.
dated as of
December 16, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1: PURCHASE AND SALE OF ASSETS........................................1
1.1 Description of Assets to be Acquired....................................1
1.2 Excluded Assets.........................................................2
1.3 Non-Assignment of Certain Contracts.....................................2
ARTICLE 2: LIABILITIES ASSUMED................................................3
2.1 Liabilities Assumed.....................................................3
ARTICLE 3: PURCHASE PRICE.....................................................3
3.1 Consideration...........................................................3
3.2 Purchase Price..........................................................3
3.3 Earnout.................................................................3
ARTICLE 4: CLOSING............................................................3
4.1 Closing..................................................................3
4.2 Deliveries by Seller and the Members....................................3
4.3 Deliveries by Netopia and Purchaser.....................................3
4.4 Further Assurances......................................................3
ARTICLE 5: REPRESENTATIONS AND WARRANTIES.....................................3
5.1 Representations and Warranties of Netopia and Purchaser.................3
(a) Organization.................................................3
(b) Authorization................................................3
(c) Exchange Act Filings.........................................3
(d) Litigation...................................................3
(e) Shares Validly Issued........................................3
(f) Form 8-K.....................................................3
(g) No Conflict or Default.......................................3
5.2 Representations and Warranties of Seller and the Members................3
(a) Organization, Good Standing and Qualification of Seller......3
(b) Authorization of Seller......................................3
(c) Authorization of the Members.................................3
(d) Capital Structure............................................3
(e) Assets and Bulk Sales Laws...................................3
(f) Title to Assets..............................................3
(g) Financial Information........................................3
(h) Absence of Certain Changes and Events........................3
(i) Taxes........................................................3
(j) Compliance with Law..........................................3
(k) Proprietary Rights...........................................3
(l) Contracts and Commitments....................................3
(m) Litigation...................................................3
(n) No Conflict or Default.......................................3
<PAGE>
(o) Third-Party Consents.........................................3
(p) Employees and Employee Benefit Plans.........................3
(q) Interested Party Relationships...............................3
(r) Indebtedness.................................................3
(s) Books and Records............................................3
(t) Complete Disclosure..........................................3
5.3 Additional Representations and Warranties of Seller and the Members.....3
(a) Investment Intent............................................3
(b) Information..................................................3
(c) Accredited Investor Status...................................3
(d) Knowledge and Experience.....................................3
ARTICLE 6: ADDITIONAL AGREEMENTS..............................................3
6.1 Restricted Securities...................................................3
6.2 Restrictions on Disposition of Shares...................................3
6.3 Restrictive Legends.....................................................3
6.4 Post-Closing Access to Information......................................3
6.5 Taxes 3
6.6 Publicity...............................................................3
6.7 Allocation of Purchase Price............................................3
ARTICLE 7: CONDITIONS.........................................................3
7.1 Conditions to Obligations of Purchaser..................................3
(a) Representations and Warranties...............................3
(b) Consents.....................................................3
(c) Performance of Agreement.....................................3
(d) Registration Rights Agreement................................3
(e) Absence of Governmental or Other Objection...................3
(f) Approval of Documentation....................................3
(g) Non-Competition Agreements...................................3
(h) Employee Confidential Information and Inventions Agreements..3
(i) Due Diligence Review.........................................3
(j) Board Approval...............................................3
(k) Escrow Agreement.............................................3
7.2 Conditions to Obligations of Members and Seller.........................3
(a) Representations and Warranties...............................3
(b) Performance of Agreement.....................................3
(c) Registration Rights Agreement................................3
(d) Absence of Governmental or Other Objection...................3
(e) Approval of Documentation....................................3
(f) Escrow Agreement.............................................3
ARTICLE 8: INDEMNIFICATION....................................................3
8.1 Survival of Representations, Warranties, and Agreements................3
8.2 Indemnification of Purchaser...........................................3
8.3 Indemnification of Seller and the Members..............................3
8.4 Procedure for Indemnification With Respect to Third-Party Claims.......3
8.5 Procedure for Indemnification with Respect to Non-Third Party Claims...3
<PAGE>
8.6 Threshold Determination of and Limitations on Indemnification..........3
8.7 Escrow Fund............................................................3
8.8 Resolution of Disputed Claims..........................................3
ARTICLE 9: MEMBERS'REPRESENTATIVE.............................................3
9.1 Duties and Powers.......................................................3
9.2 Limit on Liability......................................................3
9.3 Use of Escrow Funds; Power of Attorney..................................3
ARTICLE 10: MISCELLANEOUS PROVISIONS..........................................3
10.1 Notices................................................................3
10.2 Entire Agreement.......................................................3
10.3 Binding Effect; Assignment.............................................3
10.4 Captions...............................................................3
10.5 Expenses of Acquisition................................................3
10.6 Waiver; Consent........................................................3
10.7 Third-Party Beneficiaries..............................................3
10.8 Counterparts...........................................................3
10.9 Gender.................................................................3
10.10 Severability..........................................................3
10.11 Remedies of the Purchaser.............................................3
10.12 Governing Law.........................................................3
10.13 Venue.................................................................3
10.14 Attorney's Fees.......................................................3
10.15 Rules of Construction.................................................3
10.16 Arbitration...........................................................3
<PAGE>
SERUS ASSET PURCHASE AGREEMENT
THIS AGREEMENT is dated as of December 16, 1998. by and among
Netopia, Inc., a Delaware corporation ("Netopia"), Serus Acquisition
Corporation, a Delaware corporation and a wholly-owned subsidiary of Netopia
("Purchaser"), Serus, LLC, a Utah limited liability company ("Serus" or
"Seller"), and Shayne McQuade, Mark Hendricks, Jody Rookstool, Scott Iverson,
Todd Shepherd and Studeo, Inc., who are all of the members of Seller (each, a
"Member," and collectively, the "Members").
WHEREAS, Serus is engaged in the business of designing,
developing, marketing and selling software products for internet applications
(the "Business"); and
WHEREAS, Purchaser desires to acquire from Seller, and Seller
desires to transfer to Purchaser, substantially all of the assets, properties,
and rights of Seller in the Business (except as provided in Section 1.2 below)
as provided by this Agreement, upon the terms and conditions of this Agreement
(the "Acquisition").
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 Description of Assets to be Acquired. Upon the terms and subject to the
conditions set forth in this Agreement, at the Closing (as defined in Section
4.1), Seller agrees to convey, sell, transfer, assign and deliver to Purchaser,
and Purchaser shall purchase from Seller, all right, title and interest of
Seller at the Closing in and to the assets, properties, and rights of the
Business of every kind, nature and description, personal, tangible and
intangible, known or unknown, wherever located, including, without limiting the
generality of the foregoing (but excluding the "Excluded Assets," as such term
is defined in Section 1.2 below):
(a) All interests in machinery, equipment, copiers, computers, furniture,
fixtures, supplies, other tangible personal property and fixed assets and all
proprietary rights relating thereto (the "Personal Property"), including without
limitation those listed on Schedule 1.1(a) hereto;
(b) All lease deposits, prepaid expenses, prepaid property taxes and all other
current assets, including without limitation those listed on Schedule 1.1(b)
hereto;
(c) All claims and rights under all agreements, contracts, contract rights,
licenses, evidences of indebtedness, purchase and sale orders, quotations and
other executory commitments (but, except as provided in Section 2.1, excluding
any liabilities associated therewith) (collectively, the "Contracts"),
including, without limitation those listed on Schedule 1.1(c) hereto;
<PAGE>
(d) All franchises, licenses, permits, consents, authorizations and approvals of
any federal, state or local regulatory, administrative or other governmental
agency or body;
(e) All Intellectual Property (as such term is defined in Section 4.2(l) below);
(f) Originals of all sales invoices, revenue registers and accounts receivable
records, and originals of all warranties on all supplies and equipment, files,
papers and all other records of Seller, that relate to the Business;
(g) All rights under express or implied warranties from suppliers of Seller
and/or the Business to the extent assignable;
(h) All causes of action, judgments and claims or demands of whatever kind or
description of Seller, or that arise out of or relate to the Business;
(i) All rights and interests of Seller to the proceeds of insurance claims
arising from damage to the Assets (as defined below) prior to Closing;
(j) All employee and customer lists and records of Seller;
(k) All interests in the lease of office space described in Schedule 1.1(k),
including all leasehold improvements thereto, and all related rights; and
(l) All goodwill of the Business.
The assets, properties, and rights to be conveyed, sold,
transferred, assigned, and delivered to Purchaser pursuant to this Section 1.1
are sometimes hereinafter collectively referred to as the "Assets."
1.2 Excluded Assets. Notwithstanding the provisions of Section 1.1 hereof, the
Assets to be transferred to Purchaser pursuant to this Agreement shall not
include the assets, if any, listed on Schedule 1.2 (collectively, the "Excluded
Assets").
1.3 Non-Assignment of Certain Contracts. Notwithstanding anything to the
contrary in this Agreement, to the extent that the assignment hereunder of any
of the Assets shall require the consent of any other party (or in the event that
any of the same shall be nonassignable), neither this Agreement nor any action
taken pursuant to its provisions shall constitute an assignment or an agreement
to assign if such assignment or attempted assignment would constitute a breach
thereof or result in the loss or diminution thereof; provided, however, that in
each such case, Seller shall, at its own expense, use its commercially
reasonable efforts to obtain the consent of such other party to an assignment to
Purchaser.
<PAGE>
ARTICLE 2
LIABILITIES ASSUMED
2.1 Liabilities Assumed. Purchaser hereby agrees to assume, satisfy, and/or
perform when due and to indemnify and hold harmless Seller and the Members from
those liabilities and obligations of Seller specifically listed on Schedule 2.1
attached hereto (the "Assumed Liabilities"). Purchaser shall not assume any
liabilities of Seller not specifically set forth on Schedule 2.1.
ARTICLE 3
PURCHASE PRICE
3.1 Consideration. Upon the terms and subject to the conditions contained in
this Agreement, in consideration for the Assets and the covenants set forth
herein and in the Related Agreements, Purchaser will pay to Seller (or cause to
be paid to Seller) the purchase price set forth in Section 3.2. The "Related
Agreements" shall mean the Registration Rights Agreement (as such term is
defined in Section 7.1(d)), the Non-Competition Agreements (as such term is
defined in Section 7.1(g)), the Employee Confidential Information and Inventions
Agreements (as such term is defined in Section 7.1(h)) and the Escrow Agreement
(as such term is defined in Section 7.1(k)).
3.2 Purchase Price. The purchase price ("Purchase Price") shall be as follows:
(a) The assumption of the Assumed Liabilities;
(b) Three Million Dollars ($3,000,000) in cash, payable to Seller by check or
wire transfer at the Closing (the "Initial Cash Consideration");
(c) Four Hundred Nine Thousand Five Hundred Fifty Six (409,556) validly issued,
fully paid and nonassessable shares of Purchaser's Common Stock issued to Seller
at the Closing (the "Stock Consideration" or the "Shares"), said Shares being
subject to the restrictions, rights and obligations described in this Agreement
and the Related Agreements; and
(d) The Earnout (as such term is defined in Section 3.3 below).
3.3 Earnout.
(a) Subject to offset pursuant to Section 8.2(b) hereof, Purchaser shall pay to
Seller up to One Million Dollars ($1,000,000) in cash, payable by check or wire
transfer (the "Earnout"), if, and only if, Earnout Revenues for the Earnout
Period shall meet certain targets as follows:
(i) If Earnout Revenues for the Earnout Period are equal to or greater than
Three Million Dollars ($3,000,000), then one hundred percent (100%) of the
Earnout shall be earned;
<PAGE>
(ii) If Earnout Revenues for the Earnout Period are less than One Million Seven
Hundred Thousand Dollars ($1,700,000), then no portion of the Earnout shall be
earned; and
(iii) If Earnout Revenues are between One Million Seven Hundred Thousand Dollars
($1,700,000) and Three Million Dollars ($3,000,000), then the Earnout will be
equal to the product of (x) Earnout Revenues times (y) thirty-three percent
(33.0%). For example, if Earnout Revenues are Two Million Dollars ($2,000,000),
then the Earnout shall be Six Hundred and Sixty Thousand Dollars ($660,000), and
if Earnout Revenues are One Million Six Hundred Thousand Dollars ($1,600,000),
then no Earnout shall be earned.
(b) "Earnout Period" shall mean the eighteen (18)-month period commencing upon
the earlier to occur of (i) establishment of technological feasibility of the
Splash Site Software ("Splash Site") defined as completion of final beta prior
to acceptance for commercial shipment or (ii) April 30, 1999, whichever is
sooner.
(c) "Earnout Revenues" shall mean Purchaser's gross revenues during the Earnout
Period, plus any revenue paid before the Earnout Period as pre-payments or fees
for initiation of development, and subtracting from that sum actual returns
and/or accounts actually written off, and derived from the following:
(i) With respect to any new license of Splash Site on a stand-alone basis,
Earnout Revenues shall be all royalty, license and services, and integration
fees associated therewith;
(ii) With respect to any add-on license of Splash Site to existing Netopia
Virtual Office ("NVO") hosting partners, either (a) Earnout Revenues shall be
the add-on royalty and/or license fees associated therewith or (b) in the event
Splash Site is added with no incremental licensing fee, Earnout Revenues shall
be attributed 50-50;
(iii) With respect to any license of NVO and Splash Site to new hosting partners
on an integrated basis, Earnout Revenues shall be attributed 50-50;
(iv) With respect to any addition of Splash Site to Netopia's existing Hosted
Services, Earnout Revenues shall be based upon the incremental monthly fees
attributed to Splash Site (e.g. current $20/month services include only form
based editing. Current plans call for Java-based editing to be priced at
$25-30/month, yielding $5-$10/month revenue attribution for Splash Site). In the
event competitive requirements cause Java-based editing to be added to $20/month
services with no incremental charge, then Earnout Revenues shall be twenty
percent (20%) of revenues from such Hosted Services; and
(v) With respect to any new NVO Hosted Services with integrated Java-based
Splash Site editing, Earnout Revenues shall be attributed 50-50.
<PAGE>
(d) Netopia's Chief Financial Officer shall prepare and deliver to Seller and
the Members a report detailing the Earnout Revenues for the Earnout Period not
later than ninety (90) days after the expiration of the Earnout Period (the
"Earnout Determination") or the date on which Earnout Revenues equal or exceed
Three Million Dollars ($3,000,000), whichever is sooner. The report will detail
gross revenues less any actual returns and accounts actually written off, and
any returns or write-offs after that period shall not reduce the amount of
Earnout Revenue. Seller and its Members shall have the right to inspect
Netopia's books and records or other supporting documentation to confirm the
report of Earnout Revenues. If Seller or its Members do not agree that the
Earnout Determination correctly states the Earnout Revenue for the Earnout
Period, Seller and the Members shall promptly (but not later than thirty (30)
days after the later of the delivery of the Earnout Determination or the receipt
by Seller and the Members of all supporting documentation reasonably requested
by Seller and the Members to confirm the Purchaser's report of Earnout Revenues)
give written notice to Netopia of any exceptions thereto (in reasonable detail
describing the nature of the disagreement asserted). If Seller and the Members
and Netopia reconcile their differences, such Earnout Determination shall be
adjusted accordingly and shall thereupon become final and conclusive upon all of
the parties hereto and enforceable in a court of law. If Seller and the Members
and Netopia are unable to reconcile their differences the items in dispute shall
be submitted to an outside independent accounting firm reasonably acceptable to
Seller, the Members and Netopia (the "Independent Auditors") for final
determination, and such Earnout Determination shall be deemed adjusted in
accordance with the determination of the Independent Auditors and shall become
binding, final and conclusive upon all of the parties hereto and enforceable in
a court of law. The Independent Auditors shall consider only the items in
dispute and shall be instructed to act within twenty (20) days of their
appointment (or such longer period as Seller, the Members and Netopia may agree)
to resolve all items in dispute. If Seller and the Members do not give notice of
any exception within thirty (30) days after delivery of such Earnout
Determination or if Seller and the Members in their discretion give written
notification of their acceptance of an Earnout Determination prior to the end of
such thirty (30) day period, such Earnout Determination shall thereupon become
binding, final and conclusive upon all the parties hereto and enforceable in a
court of law. The fees and expenses of the Independent Auditors shall be borne
equally by Netopia and Purchaser on the one hand and Seller and the Members on
the other hand.
ARTICLE 4
CLOSING
4.1 Closing. The transactions contemplated by this Agreement shall be effective
as of December 16, 1998 (the "Closing"). The Closing shall take place at the
offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo
Park, California, or at such other place or date as may be agreed upon from time
to time in writing by the parties.
4.2 Deliveries by Seller and the Members. At the Closing, Seller and the Members
shall deliver to Purchaser, all duly and properly executed, the following:
<PAGE>
(a) A good and sufficient Bill of Sale, which shall be in form and substance
reasonably satisfactory to Purchaser, selling, delivering, transferring and
assigning to Purchaser all right, title and interest to the Assets (other than
the Contracts), free and clear of all mortgages, pledges, liens, encumbrances,
security interests, equities, charges, clouds and restrictions of any nature
whatsoever, except for (i) liens for taxes not yet due and payable; (ii)
statutory liens that were created in the ordinary course of business and secure
obligations which are not past due; (iii) restrictions or rights required to be
granted to governmental authorities or otherwise imposed by governmental
authorities under applicable law; or (iv) liens and encumbrances disclosed in
the Disclosure Letter (as defined in Section 5.2) (the "Permitted Liens");
(b) Good and sufficient assignments of the Contracts, which shall be in form and
substance reasonably satisfactory to Purchaser and shall include, subject to
Section 1.3 hereof, the written consents of all parties necessary in order to
transfer all of Seller's rights thereunder to Purchaser.
(c) An opinion of Dow Lohnes & Albertson, counsel to Seller and the Members,
dated the Closing, in substantially the form attached hereto as Exhibit 4.2(c)
(the "Seller's Counsel Opinion").
(d) Executed copies of the Related Agreements to which each is a party.
4.3 Deliveries by Netopia and Purchaser. At the Closing, Purchaser and Netopia
shall deliver, or cause to be delivered to Seller and the Members, as
applicable, all duly and properly executed, the following:
(a) The portion of the Purchase Price set forth in Section 3.2(a) in the form of
executed assumption agreements or conclusive evidence of satisfaction of the
assumed liabilities, Section 3.2(b) and Section 3.2(c).
(b) An opinion of Gunderson Dettmer, counsel to Purchaser, dated the Closing, in
substantially the form attached hereto as Exhibit 4.3(b) (the "Purchaser's
Counsel Opinion").
(c) Executed copies of the Related Agreements to which it is a party.
4.4 Further Assurances. At or after the Closing, each party shall each prepare,
execute and deliver, at such party's expense, such further instruments of
conveyance, sale, assignment or transfer, and shall take or cause to be taken
such other or further action, as any party shall reasonably request of any other
party at any time or from time to time in order to perfect, confirm or evidence
in Purchaser title to all or any part of the Assets or to consummate, in any
other manner, the terms and provisions of this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
<PAGE>
5.1 Representations and Warranties of Netopia and Purchaser. Each of Netopia and
Purchaser hereby represents and warrants jointly and severally to Seller that:
(a) Organization. It is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
(b) Authorization. It has full corporate power and authority to enter into this
Agreement and the Related Agreements to which it is a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby, including, without limitation, the execution
and delivery of this Agreement and the Related Agreements to which it is a
party. It has taken all necessary and appropriate corporate action with respect
to the execution and delivery of this Agreement and the Related Agreements, to
which it is a party, and this Agreement and each of the Related Agreements to
which it is a party (to the extent to which it is a party) constitute valid and
binding obligations of it enforceable against it in accordance with their
respective terms, except as limited by applicable bankruptcy, insolvency,
moratorium, reorganization or other laws affecting creditors' rights and
remedies generally.
(c) Exchange Act Filings. Netopia has timely filed all filings with the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
or under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or under the rules and regulations promulgated by
the SEC (any such filing, an "SEC Filing") required to be filed by Netopia
pursuant to such acts and no SEC Filing contained, on the date on which such
document was filed with the SEC, any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements, in the light of the circumstances under which they
were made, not misleading. The financial statements of Netopia included in SEC
Filings (including any similar documents filed after the date of this Agreement)
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto), and fairly present the
consolidated financial position of Netopia and its consolidated subsidiaries as
of the dates thereof and the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
(d) Litigation. Except as set forth in the statements, reports and other
documents filed or required to be filed by Netopia with the Securities and
Exchange Commission, there is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Purchaser, threatened
against Purchaser or any of its subsidiaries or any of their respective
properties or any of their respective officers or directors (in their capacities
as such) that, individually or in the aggregate, could reasonably be expected to
have a material adverse effect on the business of Purchaser. There is no
judgment, decree or order against Purchaser or any of its subsidiaries or, to
the knowledge of Purchaser or any of its subsidiaries, any of their respective
directors or officers (in their capacities as such) that could prevent, enjoin,
or materially alter or delay any of the transactions contemplated by this
Agreement or the Related Agreements.
<PAGE>
(e) Shares Validly Issued. Netopia represents that the Shares when issued, sold
and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and under applicable state and
federal securities laws.
(f) Form 8-K. Since the date of Netopia's most recent quarterly report on Form
10-Q or most recent periodic report on Form 8-K filed with the SEC, there has
not been any development that has not otherwise been publicly disclosed that is
reasonably likely to result in any material adverse change in the financial
condition or results of operations of Netopia.
(g) No Conflict or Default. Neither the execution and delivery of this Agreement
nor the Related Agreements by Purchaser or Netopia, nor compliance by each of
Purchaser and Netopia with the terms and provisions hereof or thereof, including
without limitation, the consummation of the transactions contemplated hereby and
thereby, will violate any statute, regulation, or ordinance of any governmental
authority, or conflict with or result in the breach of any term, condition, or
provision of the charter documents of Purchaser or Netopia or of any agreement,
deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or
instrument to which Purchaser or Netopia is a party or by which Purchaser or
Netopia may be bound, or constitute a default (or an event which, with the lapse
of time or the giving of notice, or both, would constitute a default)
thereunder.
5.2 Representations and Warranties of Seller and the Members. Except as
otherwise set forth in the disclosure letter dated as of the date hereof and
delivered by Seller and the Members to Purchaser and its counsel (the
"Disclosure Letter") or as set forth in the Schedules to this Agreement, Seller
and the Members hereby jointly and severally represent and warrant to Purchaser
that:
(a) Organization, Good Standing and Qualification of Seller. Seller is a limited
liability company duly organized and validly existing under the laws of the
State of Utah and has all limited liability company power and authority to carry
on its business as now conducted. Seller is qualified to transact business and
in good standing in each jurisdiction where failure to qualify would have a
material adverse effect on the Business or the Assets.
<PAGE>
(b) Authorization of Seller. Seller has full limited liability company power and
authority to enter into this Agreement and those Related Agreements to which it
is a party, to perform its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby, including, without
limitation, the execution and delivery of this Agreement, general conveyances,
bills of sale, assignments and other documents and instruments evidencing the
conveyance of the Assets or delivered in accordance with Section 4.2 or Article
7 hereunder (the "Closing Documents") and the Related Agreements to which it is
a party. Seller has taken all necessary and appropriate company action with
respect to the execution and delivery of this Agreement, the Closing Documents,
and the Related Agreements to which it is a party. This Agreement, the Closing
Documents and the Related Agreements to which Seller is a party (to the extent
to which it is a party) constitute valid and binding obligations of Seller
enforceable against it in accordance with their respective terms, except as
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting creditors' rights and remedies generally.
(c) Authorization of the Members. Each of the Members has full power and
authority to enter into this Agreement and those Related Agreements to which he
or she or it is a party, to perform his or her or its obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and thereby.
The Members have taken all necessary and appropriate Member action with respect
to the execution and delivery of this Agreement, the Closing Documents, and the
Related Agreements to which he or she or it is a party. This Agreement, the
Closing Documents and the Related Agreements (to the extent to which he or she
or it is a party) constitute valid and binding obligations of each Member
enforceable against him or her or it in accordance with their respective terms,
except as limited by applicable bankruptcy, insolvency, moratorium,
reorganization, or other laws affecting creditors' rights and remedies
generally.
(d) Capital Structure. The membership interests of Serus are held by the
individuals and entities in the percentages set forth on Schedule 5.2(d). These
interests constitute all of the membership interests of Serus. There are no
outstanding subscriptions, options, warrants, calls, conversion rights, rights
of exchange, or other rights, plans, agreements or commitments of any character
whatsoever (including, without limitation, conversion or preemptive rights)
providing for the purchase, issuance or sale of any membership interest of Serus
or any securities convertible into or exchangeable for any membership interest
of Serus. There are no obligations, contingent or otherwise, of Serus to
repurchase, redeem or otherwise acquire any membership interest of Serus.
(e) Assets and Bulk Sales Laws. There are no "bulk sales" laws in the State of
Utah that impose any obligation on Purchaser regarding the sale and transfer of
the Assets contemplated hereunder.
(f) Title to Assets.
(i) Seller has good and marketable title to the Assets, free and clear of all
mortgages, pledges, liens, encumbrances, security interests, equities, charges
and restrictions of any nature whatsoever, except for Permitted Liens.
(ii) By virtue of the deliveries made at the Closing, Purchaser will obtain good
and marketable title to the Assets, free and clear of all liens, mortgages,
pledges, encumbrances, security interests, charges, equities, and restrictions
of any nature whatsoever, other than those described in Section 5.2(f)(i)
hereof.
<PAGE>
(g) Financial Information. Seller has delivered to Purchaser unaudited financial
statements (Balance Sheet, Profit and Loss Statement, Statement of Cash Flows,
and Statement of Members Equity) for Seller for the period April 1, 1998 through
November 30, 1998 (collectively, the "Financial Statements"), a copy of which is
attached hereto as Schedule 5.2(g). The Financial Statements present fairly
Seller's financial condition and the results of its operations. Except as set
forth in the Financial Statements, there are no debts, liabilities or
obligations of Seller to which the Assets or the Business are subject,
contingent or otherwise (whether or not such debts, liabilities or obligations
would be required to be described or included under generally accepted
accounting principles), other than liabilities incurred in the ordinary course
of business subsequent to November 30, 1998.
(h) Absence of Certain Changes and Events. Except as contemplated herein, since
November 30, 1998, there has not been:
(i) Any material adverse change in the financial condition, assets or
liabilities, or, to the knowledge of Seller and the Members any occurrence,
circumstance, or combination thereof which reasonably could be expected to
result in any such material adverse change;
(ii) Any material transaction relating to or involving the Business or Seller
(other than the transactions contemplated herein) which was entered into or
carried out by Seller other than in the ordinary and usual course of business;
(iii) Any mortgage, pledge, lien, security interest, hypothecation, charge, or
other encumbrance imposed or agreed to be imposed on or with respect to Seller,
the Business or the Assets;
(iv) Any sale, lease, or disposition of, or any agreement to sell, lease or
dispose of any of the Assets, other than sales, leases, or dispositions in the
usual and ordinary course of business and consistent with prior practice;
(v) Any agreement to do any of the foregoing or any other change, event or
condition (whether or not covered by insurance) that has resulted in, or might
reasonably be expected to result in, a material adverse effect, on the financial
condition or assets or liabilities of Seller.
<PAGE>
(i) Taxes. Seller has completed and duly and timely filed in correct form with
the appropriate tax authorities all tax returns and reports required to be filed
on or prior to the date hereof. All of such tax returns that have been filed
were accurate and complete as filed. Sellers have paid in full all taxes,
assessments or deficiencies shown to be due on those tax returns that have been
filed, claimed to be due by any taxing authority or otherwise due or owing.
Seller has made all withholdings of tax required to be made under all applicable
tax laws and regulations; and such withholdings have been or will be paid to the
respective governmental agencies when due and to the extent not yet due have
been set aside in accounts for purposes of such payment. The Assets are not
subject to any liens for taxes, except liens for current ad valorem taxes not
yet due, and neither Purchaser nor any affiliate thereof will become directly or
indirectly liable for, and no lien, claim or encumbrance will be placed upon the
Assets with respect to, (A) any taxes attributable to the ownership or use of
the Assets with respect to periods prior to and including the date of the
Closing (other than ad valorem taxes not yet due and payable as of the Closing)
or (B) any other taxes (regardless of whether attributable to periods prior to
and including the date of the Closing) imposed upon Seller or attributable to
the actions or activities of Seller.
(j) Compliance With Law. The use of the Assets and Seller's conduct of the
Business is and has been in compliance, in all material respects, with all
applicable laws, statutes, ordinances, rules regulations, decrees and orders
(each and all of the foregoing being herein referred to as "Laws"), including
Laws respecting employment, employment practices, labor and safety.
(k) Proprietary Rights. Seller is the sole and exclusive owner of all Seller
Intellectual Property (defined below) free of all contingent and noncontingent
liens, restrictions, interests, rights of reversion or termination, and all
other encumbrances of any nature. The conduct of Seller's business as currently
conducted or as proposed to be conducted will not infringe, misappropriate or
violate any Intellectual Property (defined below) of others. All Seller
Intellectual Property that is the subject of any application, registration or
issuance with or from any governmental entity is identified on Schedule 5.2(k);
all such registered or issued Intellectual Property is valid and subsisting and
is free from any challenge (or threat thereof) and Seller is not aware of any
specific basis therefor. All such applications, registrations and issuances have
been properly maintained. Seller has reasonably endeavored to adequately protect
all other Seller Intellectual Property through the use of confidentiality
agreements and otherwise and Seller is not aware of any use, exercise or
exploitation of any Seller Intellectual Property, except as authorized by
Seller. Each current and former employee and contractor of Seller has executed
and delivered (and to Seller's knowledge, is in compliance with) an enforceable
agreement in substantially the form of Seller's standard Proprietary Information
and Inventions Agreement (in the case of an employee) or Seller's standard
Consulting Agreement (in the case of a contractor) (which agreement provides
valid written assignments of all title and rights to any Seller Intellectual
Property conceived or developed thereunder or otherwise in connection with his
or her consulting or employment. "Intellectual Property" means patent rights;
trade name, trademark, service mark and similar rights ("Mark" rights);
copyrights; mask work rights; sui generis database rights; trade secret rights;
moral rights; software; source code; and all other intellectual and industrial
property rights of any sort throughout the world, and all applications,
registrations, issuances and the like with respect thereto. "Seller Intellectual
Property" also means all Intellectual Property that has been, is, or is proposed
to be owned by Seller, or used, exercised, or exploited, or otherwise necessary
for the Assets.
(l) Contracts and Commitments. Except as set forth in the Disclosure Letter,
there are no agreements or contracts, whether or not in writing, to which Seller
is a party which may:
<PAGE>
(i) involve obligations of, or payments by (contingent or otherwise), Seller in
excess of $25,000;
(ii) contain provisions restricting and/or affecting the development,
distribution, marketing or sales of the Assets;
(iii) involve any joint venture or partnership contract or arrangement or any
other agreement which has involved or is expected to involve a sharing of
profits with other persons;
(iv) involve any agreement containing covenants purporting to limit the freedom
of Seller to compete in any line of business or geographic area or involve the
distribution of Seller's or the Business' products or services;
(v) involve any agreement of indemnification regarding Seller or the Business;
(vi) establish any powers of attorney regarding Seller or the Business;
(vii) obligate Seller for the repayment of borrowed money;
(viii) involve any license, sublicense or other agreement to which Seller is a
party (or by which it or any Seller Intellectual Property is bound or subject)
and pursuant to which any person has been or may be assigned, authorized to Use,
or given access to any Seller Intellectual Property;
(ix) involve any license, sublicense or other agreement pursuant to which Seller
has been or may be assigned or authorized to use, or has or may incurred any
obligation in connection with, (A) any third party Intellectual Property or (B)
any Seller Intellectual Property; or
(x) involve any other agreement, contract, or commitment which is material to
the Assets. Each such contract is valid and binding on all parties thereto and
in full force and effect. Neither Seller nor any of the Members have received
any notice of default, cancellation, or termination in connection with any such
contract.
(m) Litigation. Neither Seller nor any of Seller's officers or directors is
engaged in, or has received any threat of, any litigation, arbitration,
investigation, or other proceeding, at law or in equity, before any federal,
state, local or foreign court, or regulatory agency, or other governmental
authority, involving Seller, the Business, the Assets, or employees or
consultants of Seller; or against or affecting the transactions contemplated by
the Agreement and the Related Agreements. There is no action, suit, proceeding,
or investigation pending or to the knowledge of Seller and the Members
threatened against Seller or Seller's officers or directors that questions the
validity of this Agreement, the Related Agreements to which it is or they are a
party, or the right of Seller, to enter into this Agreement, the Related
Agreements, to consummate the transactions contemplated hereby or thereby, or
which might result in any material adverse change in Seller, the Business, the
Assets or the results of operations, prospects, or financial condition of the
Business or Seller. There is no action, suit, proceeding, or investigation by
Seller currently pending or which it currently intends to initiate. None of
Seller nor Seller's officers or directors is bound by any judgment, decree,
injunction, ruling, or order of any court, governmental, regulatory or
administrative department, commission, agency or instrumentality, arbitrator, or
any other person which has or could have a material adverse effect on the
Business, the Assets, or the results of operations, prospects, or financial
condition of the Business or Seller.
<PAGE>
(n) No Conflict or Default. Neither the execution and delivery of this Agreement
nor the Related Agreements by Seller or the Members, nor compliance by each of
Seller and each of the Members with the terms and provisions hereof or thereof,
including without limitation, the consummation of the transactions contemplated
hereby and thereby, will violate any statute, regulation, or ordinance of any
governmental authority, or conflict with or result in the breach of any term,
condition, or provision of the charter documents of Seller or of any agreement,
deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or
instrument to which Seller or any of the Members is a party or by which it or
her or she or any of the Assets are or may be bound, or constitute a default (or
an event which, with the lapse of time or the giving of notice, or both, would
constitute a default) thereunder.
(o) Third-Party Consents. No consent, approval, or authorization of any third
party on the part of Seller is required in connection with the consummation of
the transactions contemplated hereunder.
(p) Employees and Employee Benefit Plans.
(i) The Disclosure Letter sets forth a full and complete list of all directors,
officers, employees, and consultants of Seller and the Business (collectively,
"Service Providers") who rendered services to Seller. Such list includes the
names, job title, and the total amount of base salary, whether fixed or
commission or a combination thereof, and bonus for each Service Provider. None
of the Service Providers is subject to any contracts, written or unwritten, that
specify a particular employment or service term, or limit Seller's right to
terminate the employment or service relationship of such Service Provider with
Seller. Seller does not have any contractual obligation (A) to provide any
particular form or period of notice prior to termination, or (B) to pay any of
such Service Providers any severance benefits in connection with their
termination of employment or service. In addition, no severance pay will become
due to any Service Providers in connection with the transactions contemplated by
this Agreement, as a result of any Seller agreement, plan, or program. Neither
the execution and delivery of this Agreement by Seller nor the consummation of
the transactions contemplated by this Agreement will result in the acceleration
or creation of any rights of any Service Provider to benefits under any employee
plan (including, without limitation, the acceleration of the vesting or
exercisability of any options or equity interests). Following the consummation
of the transactions contemplated by this Agreement, Purchaser will not have any
obligations towards any Service Provider, nor any former director, officer,
employee, or consultant of the Business, or of Seller, other than pursuant to
agreements directly entered into by Purchaser with such persons. Except for
employment with Netopia, neither Seller nor the Members are aware that any
Employee, or that any group of Employees, intends to terminate their employment
with Seller, nor does Seller have a present intention to terminate the
employment of any of the foregoing.
<PAGE>
(ii) Seller has not failed to comply in any respect with Title VII of the Civil
Rights Act of 1964, as amended, the Fair Labor Standards Act, as amended, the
Occupational Safety and Health Act of 1970, as amended, the Safe Drinking Water
and Toxic Enforcement Act of 1986, as amended, all applicable federal, state,
and local laws, rules, and regulations relating to employment, and all
applicable laws, rules, and regulations governing payment of minimum wages and
overtime rates, and the withholding and payment of taxes from compensation of
employees.
(iii) Seller is not a party to any plan defined in Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") including a
pension, profit sharing, savings, or retirement plan; any plan defined in
Section 3(2) of ERISA, including a cafeteria or group health plan; or other
deferred compensation plan, or any bonus (whether payable in cash or stock) or
incentive program; or any stock, stock purchase, option, or similar plan;
director or employee loan or fringe benefit program; or severance plan or
arrangement; or any other plan that provides any benefits to employees,
including but not limited to any plan defined in Section 3(3) of ERISA. If any
such plans exist, Seller has furnished to Purchaser and its counsel complete and
accurate copies of such plans, summaries, summary plan descriptions, annual
reports such as Form 5500s. Seller has prepared in good faith and timely filed
all requisite governmental reports including Form 5500s and a determination
letter with the IRS to the extent applicable and has properly and timely posted,
or distributed all notices and reports to employees required to be filed,
posted, or distributed with respect to each of such plans. The terms of each
such plans comply with all applicable laws, including ERISA, the Internal
Revenue Code of 1986, as amended (the "Code") and the Family Medical Leave Act
(FMLA) and the plans at all times have been operated and administered in all
material respects in accordance with its terms and all applicable laws currently
in effect, including ERISA, the Code and FMLA.
(iv) Seller has not violated any of the health care continuation coverage
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") applicable to its employees prior to the Closing.
(v) There are no pending claims by or on behalf of any ERISA Plan by any
Employee or beneficiary covered under any such plan or otherwise involving any
such plan (other than routine claims for benefits).
(vi) All contributions, premiums or other payments due from Seller to (or under)
any Plan have been fully paid or adequately provided for on the books and
financial statements of Seller. All accruals (including, where appropriate,
proportional accruals for partial periods) have been made in accordance with
prior practices.
<PAGE>
(q) Interested Party Relationships. Neither Seller, nor any officer or director
of Seller (nor any family member of such officer or director of Seller, nor any
corporation, partnership, or other entity that, directly or indirectly, alone or
together with others, controls, is controlled by, or is in common control with
Seller, any officer or director of Seller, or any such family member), have any
financial interest, direct or indirect, in any supplier or customer of or to
Seller or other party to any contract with Seller.
(r) Indebtedness. The Disclosure Letter sets forth a list of all agreements and
other instruments under which Seller is indebted for borrowed money. Seller has
furnished Purchaser with true and correct copies of each such agreement or other
instrument under or pursuant to which it has outstanding indebtedness for
borrowed money. Seller is not in default under any of such agreements or other
instruments, nor are Seller or the Members aware of any event that, with the
passage of time, or notice, or both, would result in an event of default
thereunder.
No employee or consultant of Seller or the Business is indebted to Seller.
(s) Books and Records. The books and records of Seller to which Purchaser has
been given access are the true books and records of Seller and truly and
accurately reflect the underlying facts and transactions in all material
respects.
(t) Complete Disclosure. No representation or warranty by Seller in this
Agreement, and no exhibit, schedule, statement, certificate, or other writing
furnished to Purchaser or its advisors pursuant to this Agreement or the Related
Agreements to which it is a party or in connection with the transactions
contemplated hereby and thereby, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained herein and therein not misleading.
5.3 Additional Representations and Warranties of Seller and the Members. Seller
and the Members hereby jointly and severally represent and warrant to Purchaser
that:
(a) Investment Intent. The Shares are being acquired for Seller's own account
for investment purposes only, and not as a nominee or agent, and not with a view
to the resale or distribution of all or any part of the Shares. Seller is
prepared to hold the Shares for an indefinite period and has no present
intention of selling, granting any participation in, or otherwise distributing
any of the Shares. Seller does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant a participating interest
in, any of the Shares. Seller has no present plan or intention to engage in a
sale, exchange, transfer, distribution, redemption, reduction in any way of its
risk of ownership by short sale or otherwise, or other disposition, directly or
indirectly, of the Shares.
(b) Information. Seller has been furnished with, and has had access to, such
information as he considers necessary or appropriate for deciding whether to
invest in the Shares, and Seller has had an opportunity to ask questions and
receive answers from Netopia and its representatives regarding the terms and
conditions of the issuance of the Shares.
(c) Accredited Investor Status. Seller is an "accredited investor" within the
meaning of the United States Securities and Exchange Commission ("SEC") Rule
501(a) of Regulation D, as presently in effect.
(d) Knowledge and Experience. Seller is able to fend for itself in the
transactions contemplated by this Agreement, can bear the economic risk of
investment in the Shares and has such knowledge and experience in financial or
business matters to be capable of evaluating the merits and risks of the
investment in the Shares.
<PAGE>
ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 Restricted Securities. The Shares have not been registered under the
Securities Act of 1933 as amended (the "1933 Act"), on the ground that the sale
provided for in this Agreement is exempt from the requirements of the 1933 Act
and Purchaser's reliance on such exemptions is predicated on Seller's
representations herein. Seller hereby confirms that Seller has been informed
that the Shares are restricted securities under the 1933 Act and may not be
resold or transferred unless the Shares are first registered under the federal
securities laws or unless an exemption from such registration is available.
Accordingly, Seller hereby acknowledges that Seller is prepared to hold the
Shares for an indefinite period and that Seller is aware that SEC Rule 144 under
the 1933 Act, which exempts certain resales of unrestricted securities, is not
presently available to exempt the resale of the Shares from the registration
requirements of the 1933 Act.
6.2 Restrictions on Disposition of Shares. Seller shall make no distribution or
other disposition of the Shares except pursuant to the exercise of registration
rights under the Registration Rights Agreement for twelve (12) months after the
Closing and Seller or the Members shall take no action which would result in the
termination, dissolution or winding up of Seller during such period. Seller
shall make no distribution or other disposition of the Shares unless and until
there is compliance with all requirements of this Agreement and any applicable
laws. Netopia shall not be required (i) to transfer on its books any Shares
which have been sold or transferred in violation of the provisions of this
Agreement or (ii) to treat as the owner of the Shares any transferee to whom the
Shares have been transferred in contravention of this Agreement.
<PAGE>
6.3 Restrictive Legends. The stock certificates for the Shares shall be
endorsed with one or more of the following restrictive legends:
(a) "The securities represented hereby have not been registered or qualified
under the Securities Act of 1933, as amended, or the securities laws of any
state, and may be offered and sold only if registered and qualified pursuant to
the relevant provisions of federal and state securities laws or if an exemption
from such registration or qualification is available."
(b) Any other legend that may be required by applicable state law.
6.4 Post-Closing Access to Information. With respect to the originals of the
books and records of Seller relating to the Business prior to the Closing
provided to Purchaser pursuant to this Agreement, Purchaser shall allow Seller
or its representatives appropriate access to such original books and records.
Purchaser agrees that for three (3) years after the Closing such originals shall
not be removed from their principal places of business or destroyed without the
prior written consent of the Members, which shall not be unreasonably withheld.
6.5 Taxes. Seller and Members will complete and duly and timely file in correct
form with the appropriate tax authorities all tax returns and reports required
to be filed after the date hereof. All of such tax returns that will be filed
will be accurate and complete when filed. Seller and Members shall pay in full
when due all taxes imposed upon Seller and Members as a result of the sale of
the Assets, including without limitation all state and local sales or transfer
taxes.
6.6 Publicity. Purchaser and Seller agree not to issue any press release or
public statement regarding this Agreement or the transactions contemplated
hereunder without the prior consent of the other party, which shall not be
unreasonably withheld. A mutually agreed upon press release shall be made upon
the execution of the Agreement.
6.7 Allocation of Purchase Price. The Purchase Price shall be allocated among
the Assets in the manner required by Section 1060 of the Internal Revenue Code
of 1986, as amended (the "Code"), and in accordance with Schedule 6.7 hereto.
The parties agree that they will prepare and file their federal and any state or
local tax returns based on such allocation of Purchase Price. The parties
further agree that they will prepare and file any notices or other filings
required pursuant to Section 1060 of the Code, and that any such notices or
filings will be prepared based on such allocation of the Purchase Price.
<PAGE>
ARTICLE 7
CONDITIONS
7.1 Conditions to Obligations of Purchaser. Each and every obligation of
Purchaser to be performed at the Closing shall be subject to the satisfaction as
of, or before, the Closing of the following conditions (unless waived in writing
by Purchaser):
(a) Representations and Warranties. The representations and warranties of Seller
and the Members set forth in Article 5 of this Agreement shall be true and
correct.
(b) Consents. Seller shall have obtained and delivered to Purchaser all consents
Purchaser deems necessary or desirable, in Purchaser's sole discretion, in order
to consummate the transactions contemplated herein.
(c) Performance of Agreement. All covenants and other obligations under this
Agreement that are to be performed or complied with by Seller and the Members at
the Closing shall have been performed and complied with.
(d) Registration Rights Agreement. Seller shall have entered into a registration
rights agreement defining the rights and obligations of the parties with respect
to the Shares in substantially the form attached hereto as Exhibit 7.1(d) (the
"Registration Rights Agreement").
(e) Absence of Governmental or Other Objection. There shall be no pending or
threatened lawsuit challenging the Acquisition by any body or agency of the
federal, state, or local government, or by any third party, and the consummation
of the transaction shall not have been enjoined by a court of competent
jurisdiction as of the Closing.
(f) Approval of Documentation. The form and substance of all certificates,
instruments, opinions, and other documents delivered or to be delivered to
Purchaser under this Agreement shall be satisfactory to Purchaser and its
counsel in all reasonable respects.
(g) Non-Competition Agreements. Purchaser shall have entered into a
non-competition agreement with each of the Members in substantially the form
attached hereto as Exhibit 7.1(g) (the "Non-Competition Agreements").
(h) Employee Confidential Information and Inventions Agreements. Purchaser shall
have entered into a employee confidential information and inventions agreement
with each of the individuals identified on Schedule 7.1(h) in substantially the
form attached hereto as Exhibit 7.1(h) (the "Employee Confidential Information
and Inventions Agreements").
<PAGE>
(i) Due Diligence Review. The Purchaser shall have completed to its sole
satisfaction its due diligence review of Seller and the Assets, the Business and
its business operations, financial condition and prospects, and Purchaser shall
have received favorable review from its advisors of the results of their due
diligence review of the same.
(j) Board Approval. The Board of Directors of Purchaser shall have approved this
Agreement and the Acquisition.
(k) Escrow Agreement. Purchaser, Seller, the Members and Greater Bay Trust
Company, as escrow agent (the "Escrow Agent") shall have entered into an escrow
agreement in substantially the form attached hereto as Exhibit 7.1(k) (the
"Escrow Agreement").
7.2 Conditions to Obligations of Seller. Each and every obligation of Seller to
be performed at the Closing shall be subject to the satisfaction as of or before
such time of the following conditions (unless waived in writing by Seller):
(a) Representations and Warranties. The representations and warranties of
Purchaser and Netopia set forth in Article 5 of this Agreement shall have been
true and correct.
(b) Performance of Agreement. All covenants and other obligations under this
Agreement which are to be performed or complied with by Purchaser and Netopia at
or prior to the Closing shall have been fully performed and complied with.
(c) Registration Rights Agreement. Netopia shall have entered into the
Registration Rights Agreement.
(d) Absence of Governmental or Other Objection. There shall be no pending or
threatened lawsuit challenging the Acquisition by any body or agency of the
federal, state, or local government, or by any third party, and the consummation
of the transaction shall not have been enjoined by a court of competent
jurisdiction as of the Closing;
(e) Approval of Documentation. The form and substance of all certificates,
instruments, opinions, and other documents delivered or to be delivered to
Seller under this Agreement shall be satisfactory to Seller and its counsel in
all reasonable respects.
(f) Escrow Agreement. Netopia, Purchaser, Seller, the Members and Escrow Agent
shall have entered into the Escrow Agreement.
<PAGE>
ARTICLE 8
INDEMNIFICATION
8.1 Survival of Representations, Warranties, and Agreements.
(a) Subject to the terms and conditions of this Article 8, the representations,
warranties, covenants, and agreements of each party in this Agreement shall
survive the execution, delivery, and performance of this Agreement and shall in
no way be affected by any investigation of the subject matter thereof made by or
on behalf of the parties to this Agreement. The obligations of indemnity
provided herein with respect to the representations and warranties of Seller and
the Members set forth in Article 5 shall terminate on June 16, 2000, except with
respect to claims made prior to that date; provided, however, that obligations
of indemnity provided herein with respect to the representations and warranties
set forth in Section 5.2(e) (Assets and Bulk Sales Laws), Section 5.2(f) (Title
to Assets) and Section 5.2(j) (Compliance With Law) shall survive indefinitely,
and the obligations of indemnity provided herein with respect to representations
and warranties set forth in Section 5.2(i) (Taxes) shall survive until the
expiration of the applicable statutes of limitation. The obligations of
indemnity provided herein with respect to the representations and warranties of
Purchaser and Netopia set forth in Article 5 shall terminate June 16, 2000,
except with respect to claims made prior to that date.
(b) As used in this Article, any reference to a representation, warranty, or
covenant contained in this Agreement shall include any Schedule relating to such
representation, warranty, or covenant.
8.2 Indemnification of Purchaser.
(a) Seller and each of the Members hereby agrees, severally and not jointly, to
indemnify and hold harmless Purchaser and Netopia (and, insofar as such
indemnification is sought pursuant to a single proceeding with Purchaser and/or
Netopia, their respective officers and directors) against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments or causes of
action, assessments, costs and expenses, including, without limitation,
interest, penalties, attorneys' fees, any and all expenses incurred in
investigating, preparing, or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Purchaser Damages"), asserted
against, resulting from, imposed upon, or incurred or suffered by Purchaser
and/or Netopia (or, insofar as such indemnification is sought pursuant to a
single proceeding with Purchaser and/or Netopia, their respective officers and
directors) directly or indirectly:
(i) as a result of or arising from any inaccuracy in or breach or nonfulfillment
of any of the representations, warranties, covenants, or agreements made by
Seller or the Members in this Agreement; or
(ii) except as specifically set forth on Schedule 2.1, without giving effect to
any of the disclosures set forth in this Agreement, any accompanying Schedule,
Exhibit, Certificate or the Disclosure Letter, any Purchaser Damages arising
from the operation of the Business prior to the Closing, or arising out of
Seller's status as employer of current or former employees or consultants of
Seller, or as a result of failure to comply with the requirements of the "bulk
sales" laws of any jurisdiction applicable to the sale of the Assets to
Purchaser.
<PAGE>
All of the claims described in Section 8.2(a)(i) and Section 8.2(a)(ii) shall be
referred to as "Purchaser Indemnifiable Claims." (b) With respect to the payment
of such Purchaser Damages owed by Seller or the Members to Purchaser and/or
Netopia or their officers or directors, Seller and the Members agree that
Purchaser shall be entitled to offset as payment for such Purchaser Damages all
or any portion of the Earnout.
(c) Purchaser's rights to indemnity and to offset hereunder are in addition to,
and not in lieu of, any other rights, claims, or remedies that Purchaser may
have at law or in equity arising out of any breach by Seller or the Members of
any representation, warranty, covenant or agreement set forth in this Agreement
or the Related Agreements.
8.3 Indemnification of Seller and the Members.
(a) Purchaser and Netopia jointly and severally hereby agree to indemnify and
hold harmless Seller and the Members against any and all losses, liabilities,
damages, demands, claims, suits, actions, judgments or causes of action,
assessments, costs and expenses, including, without limitation, interest,
penalties, attorneys' fees, any and all expenses incurred in investigating,
preparing, or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, the "Seller Damages" or the "Member Damages"),
asserted against, resulting from, imposed upon, or incurred or suffered by
Seller or the Members directly or indirectly, as a result of or arising from any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants, or agreements made by Purchaser or Netopia in this
Agreement (all of which shall be referred to as "Member Indemnifiable Claims").
(Purchaser Indemnifiable Claims and Member Indemnifiable Claims are sometimes
referred to herein as "Indemnifiable Claims;" Purchaser Damages and Member
Damages and Seller Damages are sometimes referred to herein as "Damages.")
(b) Seller's and the Members' rights to indemnity hereunder are in addition to,
and not in lieu of, any other rights, claims, or remedies that Seller or the
Members may have at law or in equity arising out of any breach by Purchaser or
Netopia of any representation, warranty, covenant or agreement set forth in this
Agreement or the Related Agreements.
8.4 Procedure for Indemnification With Respect to Third-Party Claims.
(a) If Purchaser or Netopia or their respective officers or directors or Seller
or any of the Members determines to seek indemnification under this Article 8
with respect to Indemnifiable Claims (the party seeking such indemnification is
hereinafter referred to as the "Indemnified Party" and the party against whom
such indemnification is sought is hereinafter referred to as the "Indemnifying
Party") resulting from the assertion of liability by third parties, the
Indemnified Party shall give written notice to the Indemnifying Party within
thirty (30) days of the Indemnified Party becoming aware of any such
Indemnifiable Claim or of facts upon which any such Indemnifiable Claim will be
based; the notice shall set forth such material information with respect thereto
as is then reasonably available to the Indemnified Party. In case any such
liability is asserted against the Indemnified Party, and the Indemnified Party
notifies the Indemnifying Party thereof, the Indemnifying Party will be
entitled, if it so elects by written notice delivered to the Indemnified Party
within twenty (20) days after receiving the Indemnified Party's notice, to
assume the defense thereof with counsel satisfactory to the Indemnified Party.
Notwithstanding the foregoing, (i) the Indemnified Party shall also have the
right to employ its own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of the Indemnified Party unless the
Indemnified Party shall reasonably determine that there is a conflict of
interest between the Indemnified Party and the Indemnifying Party with respect
to such Indemnifiable Claim, in which case the fees and expenses of such counsel
will be borne by the Indemnifying Party, (ii) the Indemnified Party shall not
have any obligation to give any notice of any assertion of liability by a third
party unless such assertion is in writing, and (iii) the rights of the
Indemnified Party to be indemnified hereunder in respect of Indemnifiable Claims
resulting from the assertion of liability by third parties shall not be
adversely affected by its failure to give notice pursuant to the foregoing
unless, and, if so, only to the extent that, the Indemnifying Party is
materially prejudiced thereby. With respect to any assertion of liability by a
third party that results in an Indemnifiable Claim, the parties hereto shall
make available to each other all relevant information in their possession
material to any such assertion.
<PAGE>
(b) In the event that the Indemnifying Party, within twenty (20) days after
receipt of the aforesaid notice of an Indemnifiable Claim, fails to assume the
defense of the Indemnified Party against such Indemnifiable Claim, the
Indemnified Party shall notify the Indemnifying Party of such failure, whereupon
the Indemnifying Party shall have ten (10) additional days to assume the defense
of the Indemnifiable Claim, after the expiration of which the Indemnified Party
shall have the right to undertake the defense, compromise, or settlement of such
action on behalf of and for the account and risk of the Indemnifying Party.
(c) Notwithstanding anything in this Section 8.4 to the contrary, (i) if there
is a reasonable probability that an Indemnifiable Claim may materially and
adversely affect the Indemnified Party, the Indemnified Party shall have the
right to participate, at its own cost and expense, in such defense, compromise,
or settlement and the Indemnifying Party shall not, without the Indemnified
Party's written consent (which consent shall not be unreasonably withheld),
settle or compromise any Indemnifiable Claim or consent to entry of any judgment
in respect thereof unless such settlement, compromise, or consent includes as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Party a release from all liability in respect of such Indemnifiable
Claim.
8.5 Procedure For Indemnification With Respect to Non-Third Party Claims. In the
event that the Indemnified Party asserts the existence of a claim giving rise to
Damages (but excluding claims resulting from the assertion of liability by third
parties), it shall give written notice to the Indemnifying Party. Such written
notice shall state that it is being given pursuant to this Section 8.5, specify
with particularity the nature and amount of the claim asserted, accompanied by
any written materials supporting such claim, and indicate the date on which such
assertion shall be deemed accepted and the amount of the claim deemed a valid
claim (such date to be established in accordance with the next sentence). If the
Indemnifying Party, within sixty (60) days after the mailing of notice by the
Indemnified Party, shall not give written notice to the Indemnified Party
announcing its intent to contest such assertion of the Indemnified Party, then
such assertion shall be deemed accepted and the amount of claim shall be deemed
a valid claim. In the event, however, that the Indemnifying Party contests the
assertion of a claim by giving such written notice to the Indemnified Party
within said period, then the parties shall act in good faith to reach agreement
regarding such claim.
<PAGE>
Threshold Determination of and Limitations on Indemnification.
Notwithstanding anything in this Article 8 to the contrary, Seller and the
Members shall not be under any obligations of indemnity with respect to
Purchaser or Netopia or their respective officers or directors, and Purchaser
and Netopia shall not be under any obligations to Seller and the Members until
such time as Purchaser or Netopia or their respective officers or directors, on
the one hand, or Seller and the Members, on the other hand, shall have incurred
Purchaser Damages or Seller Damages or Member Damages, as the case may be, in
the aggregate in excess of $25,000, for which Purchaser or Netopia or their
respective officers or directors, or Seller or the Members, respectively, would
have been entitled to be indemnified against but for the provisions of this
Section 8.6; and upon reaching the $25,000 threshold set forth above, an
Indemnified Party shall be entitled to recover the full amount of such Damages,
including such $25,000 threshold. Notwithstanding anything in this Agreement to
the contrary, (i) the Members (as a group) shall not be liable for more than six
million dollars ($6,000,000), plus any portion to the Earnout by Purchaser to
Seller (after taking into account any portion of the Earnout used to offset
Purchaser Damages) less any amounts of Purchaser Damages paid by Seller, and
(ii) no individual Member shall be required to indemnify Purchaser or Netopia or
their respective officers or directors, for any amount of Purchaser Damages in
excess of such Member's Pro Rata Share of the amount of Purchaser Damages set
forth in the immediately preceding clause (i). Each Member's "Pro Rata Share"
shall be the percentages set forth opposite such Member's name on Schedule
5.1(d).
8.6 Escrow Fund. As security for the indemnity provided for in this Article 8,
One Hundred Sixty-Three Thousand Eight Hundred Twenty-Three (163,823) shares
shall be deposited by Purchaser in an escrow account with the Escrow Agent as of
the Closing, such deposit to constitute an escrow fund (the "Escrow Fund") to be
governed by the terms set forth in this Agreement, the Member's Agreements and
the provisions of the Escrow Agreement. Upon compliance with, and subject to the
provisions of this Agreement, the Member's Agreements, and the Escrow Agreement,
Purchaser and Netopia and their respective officers and directors shall be
entitled to obtain indemnity from the Escrow Fund for Damages covered by the
indemnity provided for in those agreements. Subject to the provisions of Article
6, all Shares held in the Escrow Fund at the expiry of 12 months from the
Closing shall be released to Seller free of encumbrance or restriction.
<PAGE>
8.7 Resolution of Disputed Claims. In case Seller or the Members' Representative
or Purchaser or Netopia shall object in writing to any claim or claims for
Purchaser Damages or Seller Damages, Seller and the Members' Representative and
Purchaser and Netopia shall attempt in good faith for twenty (20) days to agree
upon the rights of the respective parties with respect to each of such claims.
If the Seller and the Members' Representative and Purchaser and Netopia should
so agree, a memorandum setting forth such agreement shall be prepared and signed
by both parties. If no such agreement can be reached after good faith
negotiation, either Purchaser or Netopia or Seller or the Members'
Representative may, by written notice to the other, demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration in accordance with Section
10.16 herein.
ARTICLE 9
MEMBERS' REPRESENTATIVE
9.1 Duties and Powers. Mr. Mark Hendricks shall be constituted and appointed as
agent ("Members' Representative") for and on behalf of the Members to give and
receive notices and communications with respect to any disputes or matters
related to indemnification involving the Members, to authorize delivery to
Purchaser of the Shares or other property from the Escrow Fund in satisfaction
of claims by Purchaser or Netopia or their respective officers or directors, to
object to such deliveries, to agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Members' Representative for the
accomplishment of the foregoing. Such agency may be changed by a majority of the
Members from time to time upon not less than ten (10) days' prior written notice
to Purchaser. The Shareholder's Agent may resign upon ten (10) days' notice to
the parties to this Agreement. No bond shall be required of the Members'
Representative. Notices or communications to or from the Members' Representative
shall constitute notice to or from each of the Members.
<PAGE>
9.2 Limit on Liability. The Members' Representative shall not be liable for any
act done or omitted hereunder as Members' Representative while acting in good
faith and in the exercise of reasonable judgment, and any act done or omitted
pursuant to the advice of counsel shall be conclusive evidence of such good
faith. The Members shall severally indemnify the Members' Representative and
hold him harmless against any loss, liability or expense incurred without gross
negligence or bad faith on the part of the Members' Representative and arising
out of or in connection with the acceptance or administration of his duties
hereunder.
9.3 Use of Escrow Funds; Power of Attorney. By virtue of the execution of this
Agreement the Members have, without any further act by any such Members,
consented to: (A) the use of the Escrow Fund as collateral for damages arising
from the Members' indemnity obligations contained herein, (B) the appointment of
the Representative as their representative for purposes of this Agreement and as
attorney-in-fact and agents for all such Members and the taking by such Members'
Representative of any and all actions and the making of any decisions required
or permitted to be taken by it under this Agreement and the Escrow Agreement,
and (C) all of the other terms, conditions and limitations in this Agreement and
the Escrow Agreement. Accordingly, the Members' Representative has, subject to
the terms of this Agreement and the Escrow Agreement, authority and power to act
on behalf of the Members with respect to this Agreement and the Escrow
Agreement, and the disposition, settlement or other handling of all claims,
rights or obligations arising hereunder and thereunder. The Members will be
bound by all actions taken by the Members' Representative in compliance with
this Agreement and the Escrow Agreement, and the Escrow Agent and Purchaser
shall be entitled to rely on any action or decision of the Members'
Representative in accordance herewith.
<PAGE>
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in writing
and shall be deemed given (a) on the same day if delivered personally, (b) three
(3) business days after being mailed by registered or certified mail (return
receipt requested), or (c) on the same day if sent by facsimile, confirmation
received, to the parties at the following addresses and facsimile numbers (or at
such other address or number for a party as shall be specified by like notice):
If to Purchaser, to:
Netopia, Inc.
2470 Mariner Square Loop
Alameda, CA 94501
Attention: James Clark
Telephone No.: 510-814-5120
Facsimile No.: 510-814-5021
with copy (which shall not constitute notice) to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Steven M. Spurlock, Esq.
Telephone No.: (650) 321-2400
Facsimile No.: (650) 321-2800
If to Seller or the Members:
Serus, LLC
c/o Christian Hendricks Law Office
550 North Brand Blvd.
Suite 1960
Glendale, CA 91203-1900
Attention: Mark C. Hendricks
Telephone No.: 818-243-4000
Facsimile No.: 818-243-4290
with copies (which shall not constitute notice) to:
Studeo Inc.
3507 North University Avenue
3rd Floor
Provo, Utah 84604
Attention: David B. Allen
Telephone No.: 801-373-5599
Facsimile No.: 801-373-0502
<PAGE>
10.2 Entire Agreement. This Agreement, the exhibits and schedules hereto, and
the documents referred to herein embody the entire agreement and understanding
of the parties hereto with respect to the subject matter hereof, and supersede
all prior and contemporaneous agreements and understandings, oral or written,
relative to said subject matter including the letter of intent dated November
27, 1998, as amended by letter agreement dated December 11, 1998.
10.3 Binding Effect; Assignment. This Agreement and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
Seller, its successors and permitted assigns, the Members, their successors and
permitted assigns, and Purchaser and its successors and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be transferred or assigned (by operation of law or otherwise) by
either of the parties hereto without the prior written consent of the other
party; provided, however, that Purchaser may, without such written consent,
assign its rights in connection with a merger of Purchaser with or into another
entity, a sale of all or substantially all of Purchaser's assets, or a
reorganization involving Purchaser.
10.4 Captions. The Article and Section headings of this Agreement are inserted
for convenience only and shall not constitute a part of this Agreement in
construing or interpreting any provision hereof.
10.5 Expenses of Acquisition. Seller and the Members shall pay in full all fees
and expenses incurred by Seller and the Members in connection with this
Agreement, and the transactions contemplated hereby. The Purchaser shall pay all
fees and expenses incurred by Purchaser in connection with this Agreement, and
the transactions contemplated hereby.
10.6 Waiver; Consent. This Agreement may not be changed, amended, terminated,
augmented, rescinded, or discharged (other than by performance), in whole or in
part, except by a writing executed by the parties hereto, and no waiver of any
of the provisions or conditions of this Agreement or any of the rights of a
party hereto shall be effective or binding unless such waiver shall be in
writing and signed by the party claimed to have given or consented thereto.
Except to the extent that a party hereto may have otherwise agreed in writing,
no waiver by that party of any condition of this Agreement or breach by the
other party of any of its obligations or representations hereunder or thereunder
shall be deemed to be a waiver of any other condition or subsequent or prior
breach of the same or any other obligation or representation by the other party,
nor shall any forbearance by the first party to seek a remedy for any
noncompliance or breach by the other party be deemed to be a waiver by the first
party of its rights and remedies with respect to such noncompliance or breach.
10.7 Third-Party Beneficiaries. Except as otherwise expressly provided for in
this Agreement, nothing herein, expressed or implied, is intended or shall be
construed to confer upon or give to any person, firm, corporation, or legal
entity, other than the parties hereto, any rights, remedies, or other benefits
under or by reason of this Agreement.
10.8 Counterparts. This Agreement may be executed simultaneously in multiple
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument. A facsimile signature may
be in lieu of an original signature provided that original signatures are
thereafter promptly delivered on demand.
<PAGE>
10.9 Gender. Whenever the context requires, words used in the singular shall be
construed to mean or include the plural and vice versa, and pronouns of any
gender shall be deemed to include and designate the masculine, feminine, or
neuter gender.
10.10 Severability. If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
10.11 Remedies of Purchaser. Seller and the Members agree that the Assets are
unique and not otherwise readily available to Purchaser. Accordingly, Seller and
the Members acknowledge that, in addition to all other remedies to which
Purchaser is entitled, Purchaser shall have the right to enforce the terms of
this Agreement by a decree of specific performance, provided Purchaser is not in
material default hereunder.
10.12 Governing Law. This Agreement shall in all respects be construed in
accordance with and governed by the laws of the State of California, as applied
to contracts entered into and to be performed solely within the state, solely
between residents of the state.
10.13 Intentionally Omitted.
10.14 Attorney's Fees. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement or to protect the rights obtained
hereunder the prevailing party shall be entitled to its reasonable attorneys'
fees, costs, and disbursements in addition to any other relief to which it may
be entitled.
10.15 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
<PAGE>
10.16 Arbitration. If the parties are unable to resolve any dispute arising in
connection with this Agreement and its exhibits, or the transactions
contemplated herein and therein, within twenty (20) days, either Purchaser or
Seller may, by written notice to the other, demand arbitration of the matter
(subject to the limitations contained in Section 8.7). Within fifteen (15) days
after such written notice is sent, Purchaser and Seller shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator.
The decision of the arbitrators as to the validity and amount of any claim shall
be binding and conclusive upon the parties to this Agreement. Judgment upon any
award rendered by the arbitrators may be entered in any court having
jurisdiction. Any such arbitration shall be held in Salt Lake City, Utah under
the expedited rules then in effect of the American Arbitration Association. Each
party to an arbitration shall pay its own expenses and half of the fees of each
arbitrator and the administrative fee of the American Arbitration Association.
[The Remainder of this Page is Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above written.
NETOPIA, INC.
By: /s/ James A. Clark
Address: 2470 Mariner Square Loop
Alameda, CA 94501
PURCHASER:
SERUS ACQUISTION CORPORATION
By: /s/ James A. Clark
Address: 2470 Mariner Square Loop
Alameda, CA 94501
SELLER:
SERUS, LLC
By: /s/ Mark C. Hendricks
Name: Mark Hendricks
Title: Managing Director
Address: Christian Hendricks Law Office
550 North Brand Blvd.
Suite 1960
Glendale, CA 91203-1900
MEMBERS:
/s/ Shayne McQuade
Address:
/s/ Mark Hendricks
Address:
/s/ Jody Rookstool
Address:
/s/ Scott Iverson
Address:
/s/ Todd Shepherd
Address:
Studeo, Inc.
Address:
EXHIBIT 10.7(b)
BILL OF SALE AND ASSIGNMENT
This Bill of Sale and Assignment is made as of December 16,
1998, by Serus LLC, a Utah limited liability company (the "Seller") in favor of
Serus Acquisition Corporation, a Delaware corporation (the "Purchaser").
WITNESSETH
WHEREAS, pursuant to and in connection with that certain Asset
Purchase Agreement dated December 17, 1998, by and between Purchaser and Seller
(the "Asset Purchase Agreement"), Seller has agreed to assign, transfer, set
over and convey to Purchaser each and all of the assets described therein for
good and valuable consideration received by Seller from Purchaser (capitalized
terms not otherwise defined in this Bill of Sale and Assignment have the meaning
given them in the Asset Purchase Agreement);
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties hereby agree as follows:
1. Upon the terms and subject to the conditions set forth in the Asset Purchase
Agreement, at the Closing, Seller hereby conveys, sells, transfers, assigns and
delivers to Purchaser, and Purchaser hereby purchases from Seller, all right,
title and interest of Seller at the Closing in and to the assets, properties,
and rights of the Seller of every kind, nature and description, personal,
tangible and intangible, known or unknown, wherever located, including, without
limiting the generality of the foregoing (but excluding the "Excluded Assets,"
as such term is defined in Section 1.2 of the Asset Purchase Agreement):
a. All interests in machinery, equipment, copiers, computers, furniture,
fixtures, supplies, other tangible personal property and fixed assets and all
proprietary rights relating thereto;
b. All lease deposits, prepaid expenses, prepaid property taxes and all other
current assets;
c. All claims and rights under all agreements, contracts, contract rights,
licenses, evidences of indebtedness, purchase and sale orders, quotations and
other executory commitments (but, except as provided in Section 2.1, of the
Asset Purchase Agreement excluding any liabilities associated therewith);
d. All franchises, licenses, permits, consents, authorizations and approvals of
any federal, state or local regulatory, administrative or other governmental
agency or body;
e. All Intellectual Property;
f. Originals of all sales invoices, revenue registers and accounts receivable
records, and originals of all warranties on all supplies and equipment, files,
papers and all other records of Seller, that relate to the Business;
<PAGE>
g. All rights under express or implied warranties from suppliers of Seller
and/or the Business to the extent assignable;
h. All causes of action, judgments and claims or demands of whatever kind or
description of Seller, or that arise out of or relate to the Business;
i. All rights and interests of Seller to the proceeds of insurance claims
arising from damage to the Assets prior to Closing;
j. All employee and customer lists and records of Seller;
k. All interests in the lease of office space including all leasehold
improvements thereto, and all related rights; and
l. All goodwill of the Business.
2. Seller hereby constitutes and appoints Purchaser, its successors and
permitted assigns, the true and lawful attorney of Seller with full power of
substitution, in the name of Purchaser, or the name of Seller, on behalf of and
for the benefit of Purchaser, to collect the items being transferred to
Purchaser as provided herein, to endorse, without recourse, checks, notes and
other instruments in respect of such items in the name of Seller, to institute
and prosecute, in the name of Seller or otherwise, all proceedings that
Purchaser may deem proper in order to collect, assert, or enforce any claim,
right or title of any kind in or to the Assets as provided herein, to defend and
compromise any and all actions, suits or proceedings in respect of any of the
Assets and to do all such acts and things in relation thereto as Purchaser may
deem advisable. Seller agrees that the foregoing powers are coupled with an
interest and shall be irrevocable by Seller directly or indirectly in any manner
or for any reason. Seller further agrees that Purchaser shall retain for its own
account any amounts collected pursuant to the foregoing powers, and Seller shall
pay to Purchaser, if and when received, any amounts that shall be received by
Seller on or after the date hereof in respect of the Assets as provided herein.
Purchaser agrees, subject to the exclusions and limitations contained herein and
in the Asset Purchase Agreement, to perform, pay or discharge the Assumed
Liabilities (as defined in the Asset Purchase Agreement).
3. Seller will from time to time, at Purchaser request and without further cost
or expense to Purchaser, execute and deliver to Purchaser such other instruments
of transfer and take such other actions as Purchaser may reasonably request so
as more effectively to transfer the Assets to Purchaser free of mortgages, deeds
of trust, liens, encumbrances, security interests and claims.
4. Notwithstanding anything contained in this Bill of Sale and Assignment to the
contrary, nothing in this Bill of Sale and Assignment will constitute a transfer
or an attempted transfer of any contracts or permits that are not capable of
being transferred without the consent, approval, novation or waiver of a third
person or entity (including, without limitation, a governmental agency), or any
contracts or permits the transfer or attempted transfer of which would
constitute a breach of such contract or permit or violation of any law.
<PAGE>
5. This Bill of Sale and Assignment will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, but will not be assignable or delegable by any party without the prior
written consent of the other party; provided, however, that nothing in this Bill
of Sale and Assignment is intended to limit Purchaser's ability to assign or to
transfer any of the Assets following the date hereof.
6. This Bill of Sale and Assignment and the legal relations among the parties
hereto will be governed by and construed in accordance with the laws of the
State of California.
7. This Bill of Sale and Assignment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Bill of
Sale and Assignment as of the day and year above first written.
SELLER:
SERUS LLC,
a Utah limited liability company
By: /s/ Mark C. Hendricks
PURCHASER:
SERUS ACQUISITION CORPORATION,
a Delaware corporation
By: /s/ James A. Clark
EXHIBIT 10.7(c)
ESCROW AGREEMENT
This Escrow Agreement (the "Agreement") is entered into as of December
16, 1998, by and among Netopia, Inc., a Delaware corporation ("Netopia"), Serus
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Netopia
("Purchaser"), Serus, LLC, a Utah limited liability company ("Seller"), and the
Escrow Agent named herein. Terms not defined in this Agreement shall have the
meaning given to them in the Asset Purchase Agreement (defined below).
A. Netopia, Purchaser, and Seller have entered into an Asset Purchase Agreement,
dated as of December 16, 1998 (the "Asset Purchase Agreement") pursuant to which
Purchaser will acquire substantially all of the assets, properties, and rights
of Seller for a cash sum of $3,000,000 (the "Cash") and Four Hundred Nine
Thousand Five Hundred Fifty Six shares of Netopia Common Stock (the "Shares"),
and other consideration. The Asset Purchase Agreement provides that One Hundred
Sixty Three Thousand Eight Hundred Twenty Three (163,823) Shares shall be placed
in an escrow (the "Escrow Amount") to secure contingent obligations to Purchaser
in respect of certain indemnification rights arising as a result of certain
breaches of the representations, warranties, covenants, or agreements under the
Asset Purchase Agreement on the terms and conditions set forth herein and
therein.
B. The parties hereto desire to establish the terms and conditions pursuant to
which the Escrow Amount will be deposited, held in, and disbursed from the
Escrow Fund.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Escrow.
(a) Escrow of Escrow Amount. The Escrow Amount will be held in escrow by Greater
Bay Trust Company (the "Escrow Agent"), located at 400 Emerson Street, Palo
Alto, California 94301, as collateral for obligations of the Seller under
Article 8 of the Asset Purchase Agreement, until such Escrow Amount is to be
released pursuant to the terms of this Agreement. The Escrow Agent agrees to
accept delivery of the Escrow Amount and to hold such Escrow Amount in escrow
subject to the terms and conditions of this Agreement.
(b) Claims Under Indemnity Obligations. The parties agree that the Escrow Amount
will be held as security for the obligations of Seller under Article 8 of the
Asset Purchase Agreement. Promptly after the receipt by Purchaser of notice or
discovery of any claim giving rise to rights of indemnification under Article
8 of the Asset Purchase Agreement, Purchaser will give the Escrow Agent prompt
written notice of such claim in accordance with Section 11 hereof and to Seller
in accordance with Section 6 hereof. Failure of Purchaser to furnish written
notice in a prompt manner to the Escrow Agent of a claim shall not release
Seller from its indemnification obligations, except to the extent that Seller
is prejudiced by such failure, provided that no claim shall be honored as to
which written notice is delivered after the Termination Date(as defined herein).
<PAGE>
(c) Protection of Escrow Amount. The Escrow Agent shall hold and safeguard
the Escrow Amount during the Escrow Period, in accordance with the terms of this
Agreement and not as the property of Purchaser or Seller, and shall hold and
dispose of the Escrow Amount only in accordance with the terms hereof.
2. Deposit of Escrow Amount.
(a) Delivery of Escrow Amount. At the Effective Time, the Escrow Amount will be
delivered by Purchaser to the Escrow Agent by courier from the Company's
transfer agent.
(b) Distribution to Seller. Within five (5) business days following December
16, 1999, (the "Termination Date"), the Escrow Agent shall deliver to the Seller
all of the Escrow Amount in excess of the aggregate amount of all unresolved
claims for Purchaser Damages as specified in Officer's Certificates delivered
to the Escrow Agent on or before the Termination Date pursuant to Section 3.
After the Termination Date, as soon as any such claim is resolved, the Escrow
Agent shall promptly deliver to the Seller that portion of the Escrow Amount
that exceeds the amount of the remaining unresolved claims. After the
Termination Date, as soon as all such claims have been resolved, the Escrow
Agent shall promptly deliver to the Seller any portion of the Escrow Amount not
required to satisfy such claims.
(c) Ownership of Shares; Voting Rights. Seller shall have all indicia of owner-
ship of the Shares while they areheld in escrow, including, without limitation,
the right to vote the Shares and receive distributions thereon and the
obligations to pay all taxes, assessments, and charges with respect thereto, but
excluding the right to sell any of the Shares or transfer any rights or
interests in the Shares; provided that any distribution, other than cash and
taxable stock dividends (which dividends shall be paid to the Seller), on or
with respect to the Shares and any other shares or securities into which such
Shares may be changed or for which they may be exchanged pursuant to corporate
action of Netopia affecting holders of Netopia Common Stock generally shall be
delivered to and held by the Escrow Agent and treated as included within the
term Shares and shall be subject to the provisions of this Agreement.
3. Claims.
(a) Upon receipt by the Escrow Agent on or before the Termination Date of a
certificate signed by the chief financial or chief executive officer of
Purchaser (an "Officer's Certificate");
(i) stating that Purchaser has incurred Purchaser Damages (as defined in
the "Asset Purchase Agreement") with respect to which Purchaser is
entitled to indemnification pursuant to the Asset Purchase Agreement,
and stating the amount of Purchaser Damages with respect to which
Purchaser is entitled to indemnification; and
(ii) specifying in reasonable detail the individual items of Purchaser
Damages included in the amount so stated, the date each such item was
incurred, paid or properly accrued, and the specific nature of the
breach to which such item is related, the Escrow Agent shall, subject
to the provisions of Section 4, deliver to Purchaser the amount
necessary to indemnify Purchaser for the amount specified in the
Officer's Certificate. For purposes of this Section 3 and Section 2,
the value of the Shares on the date of any payment shall be the
average of the closing prices of Netopia's Common Stock on the Nasdaq
National Market over the 30 trading day period ending two trading days
prior to the date of payment.
<PAGE>
4.Claims.
(a) Objections to Claims. At the time of delivery of any Officer's Certificate
to the Escrow Agent, a duplicate copy of such Officer's Certificate shall be
delivered to Seller, and for a period of thirty (30) days after such delivery
to the Escrow Agent, the Escrow Agent shall make no delivery of Shares or other
property pursuant to Section 3 unless the Escrow Agent shall have received
written authorization from the Seller to make such delivery. After the
expiration of such thirty (30) day period, the Escrow Agent shall make delivery
of the Shares or other property which constitute the Escrow Amount in accordance
with Section 3, provided that no such payment or delivery may be made if the
Seller shall object in a written statement to the claim made in the Officer's
Certificate, and such statement shall have been delivered to the Escrow Agent
and to Purchaser prior to the expiration of such thirty (30) day period.
(b) Resolution of Claims. All claims for indemnification by Purchaser shall be
resolved in accordance with the Asset Purchase Agreement. Upon the resolution
of any claim, a memorandum setting forth the resolution of the claim shall be
prepared and signed by both parties and shall be furnished to the Escrow Agent.
The Escrow Agent shall be entitled to rely on any such memorandum and shall
distribute all or a portion of the Escrow Amount in accordance with the terms
thereof and this Agreement.
5. No Encumbrance. No interest in the Escrow Amount or any beneficial interest
therein may be pledged, sold, assigned or transferred, other than by operation
of law, by any party hereto or be taken or reached by any legal or equitable
process in satisfaction of any debt or other liability of any party hereto,
prior to the delivery to the Seller of payments by the Escrow Agent.
6. Limitation of the Escrow Agent's Liability.
(a) The Escrow Agent shall be obligated only for the performance of such duties
as are specifically set forth in this Agreement and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed to be genuine and to have been signed or presented by the proper party
or parties. The Escrow Agent shall not be liable or responsible for any act done
or omitted hereunder as Escrow Agent while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel knowledgeable as to such matters shall be conclusive
evidence of such good faith.
(b) The Escrow Agent is hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person, excepting
the instructions specified herein and orders or process of courts of law, and is
hereby expressly authorized to comply with and obey orders, judgments or decrees
of any court. In case the Escrow Agent obeys or complies with any such order,
judgment or decree of any court, the Escrow Agent shall not be liable to any of
the parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
<PAGE>
(c) The Escrow Agent shall not be liable in any respect on account of any claim
made that the parties hereto (except with respect to the Escrow Agent) that this
Agreement was not properly executed and delivered by such party or that any
documents or papers required under this Agreement have not been properly
delivered.
(d) The Escrow Agent shall not be liable for the outlawing of any rights under
any statute of limitations with respect to this Agreement or any documents
deposited with the Escrow Agent.
(e) The Escrow Agent is hereby expressly authorized to engage legal counsel as
it may deem necessary or advisable.
(f) In the event conflicting demands are made or notices are served upon the
Escrow Agent with respect to the Escrow Amount, the Escrow Agent will have the
absolute right, at the Escrow Agent's election, to do any or all of the
following: (i) resign so a successor can be appointed pursuant to Section 8
hereof or (ii) file a suit in interpleader and obtain an order from a court of
competent jurisdiction requiring the parties to interplead and litigate in such
court their several claims and rights among themselves. In the event such
interpleader suit is brought, the Escrow Agent will thereby be fully released
and discharged from all further obligations imposed upon it under this
Agreement, and Purchaser will pay the Escrow Agent (subject to reimbursement
from the Seller pursuant to Section 9 hereof) all costs, expenses and reasonable
attorney's fees expended or incurred by the Escrow Agent pursuant to the
exercise of the Escrow Agent's rights under this Section 8 (such costs, fees and
expenses will be treated as extraordinary fees and expenses for the purposes of
Section 9 hereof).
7. Expenses of Escrow Agent. All fees and expenses of Escrow Agent
incurred in the ordinary course of performing its responsibilities hereunder
shall be paid by Purchaser upon receipt of a written invoice by the Escrow
Agent. Any extraordinary fees and expenses, including without limitation any
reasonable fees or expenses incurred by the Escrow Agent in connection with a
dispute over the distribution of the Escrow Amount or the validity of a claim or
claims by Purchaser made in an Officer's Certificate, shall be paid 50% by
Purchaser and 50% by the Seller . The Escrow Agent shall deliver a written
invoice of such fees to Purchaser and the Seller.
10. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder (except to
the extent of actions, if any, of the Escrow Agent not taken in good faith or in
the exercise of reasonable judgment) by delivering its written resignation to
the parties to this Agreement, specifying not less than sixty (60) days prior
written notice of such a date when such resignation will take effect. Purchaser
will designate a successor Escrow Agent prior to the expiration of such sixty
(60) day period by giving written notice to the Escrow Agent and the Seller.
Purchaser may appoint a successor Escrow Agent without the consent of the Seller
<PAGE>
so long as such successor is a bank with assets of at least $50 million and two
(2) days notice of such appointment is provided to the Seller, and Purchaser may
appoint any other successor Escrow Agent with the consent of the Seller, which
will not be unreasonably withheld. The Escrow Agent will promptly transfer the
Escrow Amount to such designated successor. In the event no successor Escrow
Agent is appointed as described in this Section 10, the Escrow Agent may apply
to a court of competent jurisdiction for the appointment of a successor Escrow
Agent. Any Successor Escrow Agent shall be bound and abide by the terms and
conditions of this Escrow Agreement.
11. Notices. Any notice provided for or permitted under this Agreement
will be treated as having been given when (i) delivered personally with written
verification of receipt, (ii) sent by confirmed telecopy, (iii) sent by
commercial overnight courier with written verification of receipt, or (iv)
mailed postage prepaid by certified or registered mail, return receipt
requested, to the party to be notified, at the address set forth below, or at
such other place of which the other party has been notified in accordance with
the provisions of this Section 11. Such notice will be treated as having been
received upon actual receipt
If to Purchaser, to:
Netopia, Inc.
2470 Mariner Square Loop
Alameda, CA 94501
Attention: James Clark
Telephone No.: 510-814-5120
Facsimile No.: 510-814-5021
with copy (which shall not constitute notice) to:
Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Attention: Steven M. Spurlock, Esq.
Telephone No.: (650) 321-2400
Facsimile No.: (650) 321-2800
If to Seller or the Members:
Serus, LLC
c/o Christian Hendricks Law Office
550 North Brand Blvd.
Suite 1960
Glendale, CA 91203-1900
Attention: Mark C. Hendricks
Telephone No.: 818-243-4000
Facsimile No.: 818-243-4290
<PAGE>
with copies (which shall not constitute notice) to:
Studeo Inc.
3507 North University Avenue
3rd Floor
Provo, Utah 84604
Attention: David B. Allen
Telephone No.: 801-373-5599
Facsimile No.: 801-373-0502
If to Escrow Agent:
Greater Bay Trust Company
400 Emerson Street
Palo Alto, California 94301
Attention: Anna Paiva
Telecopy: (650) 473-1326
12. Seller Covenant to Perpetuate During the Term of this Escrow
Agreement. Seller agrees not to dissolve or otherwise cease to exist as a legal
entity during the pendency of this Escrow Agreement.
13. General.
(a) Governing Law. It is the intention of the parties hereto that the internal
laws of the State of California (without regard to its choice of law principles)
shall govern the validity of this Agreement, the construction of its terms and
the interpretation and enforcement of the rights and duties of the parties
hereto.
(b) Binding upon Successors and Assigns. Subject to, and unless otherwise
provided in, this Agreement, each and all of the covenants, terms, provisions,
and agreements contained herein shall be binding upon, and inure to the benefit
of, the permitted successors, executors, heirs, representatives, administrators
and assigns of the parties hereto.
(c) Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be an original as against any party whose signature appears
thereon and all of which together shall constitute one and the same instrument.
This Agreement shall become binding when one or more counterparts hereof,
individually or taken together, shall bear the signatures of all of the parties
reflected hereon as signatories.
<PAGE>
(d) Entire Agreement. Except as set forth in the Asset Purchase Agreement, this
Agreement, the documents referenced in this Agreement and the exhibits to such
documents constitute the entire understanding and agreement of the parties
hereto with respect to the subject matter hereof and thereof and supersede all
prior and contemporaneous agreements or understandings, inducements or
conditions, express or implied, written or oral, between the parties with
respect hereto and thereto. The express terms hereof control and supersede an
course of performance or usage of the trade inconsistent with any of the terms
hereof.
(e) Conflicts. In the event of any conflict or inconsistency between the
terms of this Agreement and the terms of the Asset Purchase Agreement, the terms
of this Agreement shall control.
(f) Waivers. No waiver by any party hereto of any condition or of any breach of
any provision of this Agreement will be effective unless in writing. No waiver
by any party of any such condition or breach, in any one instance, will be
deemed to be a further or continuing waiver of any such condition or breach or a
waiver of any other condition or breach of any other provision contained
herein.
(g) Amendment. This Agreement may be amended with the written consent of
Purchaser, the Escrow Agent and the Seller, provided that if the Escrow Agent
does not agree to an amendment agreed upon by Purchaser and the Seller,
Purchaser will appoint a successor Escrow Agent in accordance with Section
10 above.
(h)
Additional Agreements; Reasonable Efforts. Each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
ESCROW AGENT:
By: /s/ Anna Paiva
Name: Anna Paiva
Title: Escrow Agent
PURCHASER:
By: /s/ James A. Clark
Name: James A. Clark
Title: V.P. and CFO
SELLER:
By: /s/ Mark C. Hendricks
Name: Mark C. Hendricks
Title: Managing Director
EXHIBIT 10.7(d)
NON-COMPETITION AGREEMENT
This Non-Competition Agreement is entered into by and among
Netopia, Inc. ("Netopia"), Serus Acquisition Corp., a Delaware corporation and
wholly owned subsidiary of Netopia ("Subsidiary") and Shayne McQuade ("Member")
as of December 16, 1998.
RECITALS
A. Pursuant to that certain Asset Purchase Agreement (the
"Asset Purchase Agreement") dated as of December 16, 1998 by and among Netopia,
Subsidiary, and Serus LLC, a Utah limited liability company ("Serus"),
Subsidiary will acquire substantially all of the assets, properties, and rights
of Serus (the "Acquisition");
B. Member owns a substantial interest in Serus (whether
through outstanding membership interests or options to purchase membership
interests), and as a participant in the LLC has gained substantial knowledge and
expertise in connection with Serus' products, organization and customers;
C. Netopia, Subsidiary and Member acknowledge that it would be detrimental to
Subsidiary and Netopia if Member were to compete with Subsidiary or Netopia in
any part of the Business (as defined below) following the Acquisition;
D. It is a condition to the obligation of Netopia to
consummate the Acquisition that certain Members of Serus, including Member,
enter into this Agreement; and
E. As inducement to Netopia to consummate the Acquisition, and
in consideration of the amounts paid to Serus under the Asset Purchase
Agreement, Member desires to agree with Netopia as further provided herein;
NOW, THEREFORE, intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
Non-Competition
1.1 Non-Competition.
(a) The parties understand and agree that this Agreement is entered into in
connection with the Acquisition. The parties further understand and agree that
Member is a participating and key Member of Serus and that the Acquisition is
contingent upon Member entering into this Agreement. In addition, the parties
understand that prior to the Acquisition, Serus was engaged in the Business in
each of the fifty states of the United States (together with its territories and
possessions and the District of Columbia). The parties further understand that
Netopia is currently engaged in business in each of the fifty states of the
United States. The United States and the regions set forth above shall hereafter
be referred to as the "Geographic Scope of the Business.") Member further
acknowledges that Subsidiary and Netopia following the Acquisition will continue
conducting such business in all parts of the Geographic Scope of the Business.
The parties expressly acknowledge and agree that the non-competition provisions
contained in this Agreement are permissible and enforceable pursuant to the
provisions of applicable law.
<PAGE>
(b) For purposes of this Agreement, the "Restricted Period" shall be one (1)
year from the date of this Agreement. During the Restricted Period, Member shall
not either as an individual or as an employee, agent, consultant, advisor,
independent contractor, general partner, officer or director, shareholder or
investor of any person, firm, corporation, partnership or other entity without
the prior written consent of the Chief Executive Officer of Netopia:
(i) Enter into or engage in the business of developing, marketing or
selling browser based web site editor products;
(ii) Solicit customers or business patronage which results in competition
with Subsidiary or Netopia in the business of developing, marketing or
selling browser based web site editor products; or
(iii) Promote or assist, financially or otherwise, any person, firm,
association, corporation, or other entity engaged in developing,
marketing or selling browser based web site editor products; or
(iv) Solicit employees of Subsidiary or Netopia engaged in the business of
developing, marketing or selling browser based web site editor products
to leave the employ of Subsidiary or Netopia.
Notwithstanding the foregoing, Member may own, directly or
indirectly, solely as an investment, up to one percent (1%) of any class of
"publicly traded securities" of any person or entity which owns a competitive
Business. For the purposes of this Paragraph 1.1, the term "publicly traded
securities" shall mean securities that are traded on a national securities
exchange or listed on the National Association of Securities Dealers Automated
Quotation System.
Further, notwithstanding the foregoing, Member will not be
prohibited from competing with Netopia or Subsidiary in the Geographic Scope of
the Business, if Netopia or Subsidiary or any of their successors, or any entity
deriving title to its good will or shares, ceases to carry on a like Business
therein.
1.2 Arbitration; Consent to Personal Jurisdiction.
(a) Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled in Oakland, California, by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The decision of the arbitrator shall be final and binding on the
parties, and judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. The parties hereby agree that the
arbitrator shall be empowered to enter an equitable decree mandating specific
enforcement of the terms of this Agreement. Subsidiary (or Netopia if then
employing Member) and Member shall share equally all fees and expenses of the
arbitrator; provided, however, that Subsidiary (or Netopia if then employing
<PAGE>
Member) or Member, as the case may be, shall bear all fees and expenses of the
arbitrator and all of the legal fees and out-of-pocket expenses of the other
party if the arbitrator determines that the claim or position of Subsidiary (or
Netopia if then employing Member) or Member, as the case may be, was without
reasonable foundation. Member hereby consents to personal jurisdiction of the
state and federal courts located in the State of California for any action or
proceeding arising from or relating to this Agreement or relating to any
arbitration in which the parties are participants.
(b) MEMBER HAS READ AND UNDERSTANDS THIS SECTION 1.2, WHICH DISCUSSES
ARBITRATION. MEMBER UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, MEMBER AGREES TO
SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS
AGREMEENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR
TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE
CONSTITUTES A WAIVER OF MEMBER'S RIGHT TO A JURY TRIAL AND RELATES TO THE
RESOLUTION OF ALL DISPUTES RELATING TO THIS AGREEMENT.
1.3 Savings Clause. If any restriction set forth in Section 1.1 above is held to
be unreasonable or unenforceable, then Member agrees, and hereby submits, to the
reduction and limitation of such prohibition to such area or period or business
as shall be deemed reasonable.
ARTICLE II
Miscellaneous
2.1 Successors, Assigns. This Agreement shall be binding upon and shall inure to
the benefit of Netopia and its successors and assigns. This Agreement shall be
binding upon Member and shall inure to his benefit and to the benefit of his
heirs, executors, administrators, and legal representatives, but shall not be
assignable by Member.
2.2 Entire Agreement. This Agreement constitutes the entire agreement among
Netopia, Subsidiary and Member relating to the matters herein provided for. This
Agreement supersedes and replaces any prior verbal or written agreements between
the parties. This Agreement may be amended or altered only in a writing signed
by the Chief Executive Officer of Netopia and Member.
2.3 Applicable Law; Severability. This Agreement shall be construed and
interpreted in accordance with the laws of the State of California without
regard to conflicts of laws and principles. Each provision of this Agreement is
severable from the others, and if any provision hereof shall be to any extent
unenforceable it and the other provisions hereof shall continue to be
enforceable to the full extent allowable, as if such offending provision had not
been a part of this Agreement.
2.4 Proprietary Information Agreement. Member shall execute Netopia's
Proprietary Information and Inventions Agreement prior to becoming an employee
of Netopia or Subsidiary.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date first written above.
SERUS ACQUISITION CORP. NETOPIA, INC.
By: /s/ James A. Clark By: /s/ James A. Clark
Its: Secretary Its: V.P. and CFO
MEMBER
Name:
EXHIBIT 10.7(e)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of December 16,
1998 (the "Closing Date") is by and among Netopia, Inc., a Delaware corporation
(the "Company"), Serus, LLC, a Utah limited liability company ("Serus") and the
other signatories hereto (the "Members").
RECITALS
WHEREAS, the Company has entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement"), dated as of the date hereof, by and
among the Company, Serus Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of the Company, and Serus, pursuant to which the Company
is acquiring certain assets from Serus in return for a combination of cash and
shares of the Company's Common Stock, par value $.001 (the "Common Stock"), as
consideration therefor; and
WHEREAS, the Company deems it desirable for the Company to
grant certain registration rights to Serus in order to induce Serus to accept as
partial consideration the Common Stock pursuant to the terms of the Asset
Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Definitions
As used in this Agreement:
(a) "Commission" means the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(b) "Holder" or "Holders" means Serus and the
Members, or any person or persons who shall, pursuant to Section 8 or Section 14
hereof, become parties hereto. For purposes of this Agreement, a Person will
be deemed to be a Holder of Registrable Shares whenever such Person has the then
existing right to acquire or receive such Registrable Shares (by exercise,
conversion or otherwise), whether or not such acquisition has actually been
effected.
(c) "Person" means a natural person, a partner-
ship, a corporation, a limited liability company, an association, a joint stock
company, a trust, a joint venture, an unincorporatedorganization or a govern-
mental entity or any department, agency or political subdivision thereof.
(d) "Registrable Shares" means at any time (i)
the Common Stock issued to Serus under the Asset Purchase Agreement or otherwise
acquired by a Holder, and (ii) any securities of the Company issued or issuable
with respect to any securities referred to in clause (i) above, upon any
stock split, stock dividend, recapitalization or similar event, excluding
shares that have been sold (A) to or through a broker, dealer or underwriter in
a public distribution or a public securities transaction, or (B) pursuant to
Rule 144 promulgated under the Securities Act (or any similar successor
provision thereto).
<PAGE>
(e) "Registration Expenses" has the meaning
ascribed to it in Section 5 of this Agreement.
(f) "Securities Act" means the Securities Act of
1933, as amended, or any similar federal statute, and the rules and regulations
of the Commission thereunder, all as the same shall be in effect from time to
time.
(g) "Securities Exchange Act" means the Securities
Exchange Act of 1934, as amended, or any similar federal statute, and the rules
and regulations of the Commission thereunder, all as the same shall be in effect
from time to time.
2. Piggyback Registrations
(a) Notice of Registration to Holders. If at any
time or from time to time the Company shall determine to register any of its
equity securities, either for its own account or the account of a security
holder or group of security holders, other than (i) a registration relating
solely to employee benefit plans on Form S-8 (or any substitute or successor
form), or (ii) a registration relating solely to a Commission Rule 145
transaction on Form S-4 (or any substitute or successor form), the Company will:
(i) promptly give to the Holders written
notice thereof, which notice shall be given not less than 30 days prior to the
date the registration statement is to be filed; and
(ii) include in such registration (and any
related qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within 15 days after receipt of such written
notice from the Company, by any of the Holders.
(b) Priority on Primary Registrations. If a
registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
(i) creates a risk that the price per share in such registration will be
materially and adversely affected or (ii) exceeds the number which reasonably
can be sold in such offering, the Company will include in such registration (x)
first, the securities the Company proposes to sell, (y) second, the Registrable
Shares the Holders requested to be included in such registration plus shares
held by other parties entitled to similar rights to registration ("Other
Holders"), which in the opinion of the underwriters can be sold, pro rata,
among the Holders of such Registrable Shares and Other Holders, on the basis of
the number of Registrable Shares requested to be included in such registration
by each such Holder and Other Holder.
<PAGE>
(c) Priority on Secondary Registrations. If a registration is an
underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration (i) creates a risk that the price per share in such registration
will be materially and adversely affected or (ii) exceeds the number which can
reasonably be sold in such offering, the Company will include in such
registration (x) first, the securities requested to be included therein by the
holder or group of holders requesting such registration (the "Demand Holders"),
which in such opinion of such underwriters can be sold, pro rata, among the
Demand Holders, on the basis of the number of Demand Holders shares requested to
be included in such registration by each such Demand Holder, (y) second, the
securities requested to be included therein by the Holders of Registrable
Shares", which in such opinion of such underwriters can be sold, pro rata, among
the Holders of Registrable Shares, on the basis of the number of Registrable
Shares requested to be included in such registration by each such Holder, and
(z) third, the shares requested to be included by Other Holders who have
requested to be included in such registration.
(d) Withdrawal. Any selling Holder shall have the right to withdraw its
request for inclusion of its Registrable Shares in any registration pursuant to
this Section 2 by giving written notice to the Company of its request to
withdraw no later than five days before such registration statement becomes
effective.
(e) Registration Rights of Other Security Holders of the Company. The
Company may not grant registration rights to any holder of equity securities of
the Company which is inconsistent with the rights granted to the Holders of the
Registrable Shares in this Agreement or more favorable to such security holder
than those granted to Serus and the Members pursuant to this Agreement.
3. Holdback Agreements
(a) The Holders agree not to effect any public sale or distribution of
equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the 15 days prior to and
the 120-day period beginning on the effective date of any underwritten
registration (except as part of such underwritten registration), unless the
underwriters managing the registered public offering otherwise agree. The
Company agrees (i) not to effect any public sale or distribution of its equity
securities, or any securities convertible into or exchangeable or exercisable
for such securities, during the seven days prior to and during the 120-day
beginning on the effective date of any underwritten registration (except as part
of such underwritten registration or pursuant to registrations on Form S-8 or
any substitute or successor form), unless the underwriters managing the
registered public offering otherwise agree, and (ii) use commercially reasonable
efforts to cause each holders of at least 5% (on a fully-diluted basis) of its
equity securities (other than equity securities acquired in a public trading
market), or any securities convertible into, or exchangeable or exercisable for,
such securities, purchased from the Company at any time (other than in a
registered public offering) to agree not to effect any public sale or
distribution of any such securities during such period (except as part of such
underwritten registration, of otherwise permitted), unless the underwriters
managing the registered public offering otherwise agree.
<PAGE>
4. Registration Procedures
Whenever the Holders are entitled to include their Registrable Shares in a
registered offering of the Company's shares, the Company will:
(a) furnish to each seller of Registrable Shares and the underwriters of
the securities being registered such number of copies of such registration
statement (including any documents incorporated by reference therein and all
exhibits thereto), each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus)
and such other documents as such seller or underwriters may reasonably request
in order to facilitate the disposition of the Registrable Shares owned by such
seller or the sale of such securities by such underwriters;
(b) use commercially reasonable efforts to register or qualify such
Registrable Shares under such other securities or blue sky laws of such
jurisdictions as any Holder reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such Holders
to consummate the disposition in such jurisdictions of the Registrable Shares
owned by the Holders; provided, however, that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph or (ii) consent to
general service of process in any such jurisdiction;
(c) cause all such Registrable Shares to be listed or authorized for
quotation on each securities exchange or automated quotation system on which
similar securities issued by the Company are then listed or quoted;
(d) provide a transfer agent and registrar for all such Registrable Shares
not later than the effective date of such registration statement;
(e) promptly notify each Holder of such Registrable Shares, after it shall
receive notice thereof, of the time when such registration statement has become
effective, or a supplement to any prospectus forming a part of such registration
statement has been filed;
(f) promptly notify each seller of such Registrable Shares of any request
by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
(g) prepare and promptly file with the Commission, and promptly notify each
Holder of such Registrable Shares of the filing of, such amendment or supplement
to such registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
<PAGE>
(h) promptly advise each Holder of such Registrable Shares, immediately
after it shall receive notice or obtain knowledge thereof, of the issuance of
any stop order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any proceeding for
such purpose and promptly use its best efforts to prevent the issuance of any
stop order or to obtain its withdrawal if such stop order should be issued;
(i) otherwise use commercially reasonable efforts to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement in accordance with the
intended method of disposition.
(j) Each Holder of Registrable Shares that sells such Registrable Shares
pursuant to a registration under this Agreement agrees, in connection with that
registration, as follows:
(i) Such Holder shall cooperate as with the Company, when reasonably
requested by the Company, in connection with the preparation of the registration
statement, and for so long as the Company is obligated to file and keep
effective the registration statement, shall provide to the Company, in writing,
for use in the registration statement, the information regarding such Holder and
its plan of distribution of the Registrable Shares reasonably required by the
Company to maintain the effectiveness of the Registration Statement.
(ii) During such time as such Holder may be engaged in a distribution of
the Registrable Shares, such seller shall comply with Rule 102 and Rule 104 of
Regulation M promulgated under the Securities Exchange Act and pursuant thereto
it shall, among other things, cease distribution of such Registrable Shares
pursuant to such registration statement upon receipt of written notice from the
Company that the prospectus covering the Registrable Shares contains any untrue
statement of a material fact or omits a material fact required to be stated
therein or necessary to make the statements therein not misleading.
5. Registration Expenses
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including, without limitation, all registration and filing
fees, fees of transfer agents and registrars, fees and expenses of compliance
with securities or blue sky laws (including, without limitation, reasonable fees
and disbursements of one counsel for the underwriters in connection with blue
sky qualification), fees of the National Association of Securities Dealers,
Inc., printing expenses, travel and other road show expenses, messenger and
delivery expenses, fees and disbursements of counsel for the Company and its
independent certified public accountants, underwriters (excluding discounts and
commissions attributable to the Registrable Shares included in such
registration) and other Persons retained by the Company (all such expenses being
herein called
<PAGE>
"Registration Expenses") will be borne by the Company. In addition, the Company
will pay its internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual or special audit or quarterly review, the expense of
any liability insurance obtained by the Company and the expenses and fees for
listing or authorizing for quotation the securities to be registered on each
securities exchange on which any shares of common stock are then listed or
quoted.
(b) In connection with each registration effected pursuant to this
Agreement, the Company will reimburse the Holders of Registrable Shares covered
by such registration for the reasonable fees and disbursements of one counsel
for the Holders, chosen by the Holders of a majority of such Registrable Shares.
6. Indemnification
(a) The Company agrees to indemnify, to the fullest extent permitted by
law, each Holder of Registrable Shares, its officers and directors and each
Person who controls each seller (within the meaning of the Securities Act or the
Securities Exchange Act) against all losses, claims, damages, liabilities and
expenses (including, without limitation, attorneys' fees, except as limited by
paragraph 6(c)) caused by any untrue or alleged untrue statement of a material
fact contained in any registration statement, prospectus or preliminary
prospectus, or any amendment thereof or supplement thereto, or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as the same are
caused by or contained in any information furnished in writing to the Company by
such Holder expressly for use therein. The Company shall enter into an
underwriting agreement in customary form containing such provisions for
indemnification and contribution as shall be reasonably requested by the
underwriters. The reimbursements required by this paragraph 6(a) will be made by
periodic payments during the course of the investigation or defense, as and when
bills are received or expenses incurred.
(b) In connection with any registration statement in which a Holder of
Registrable Shares is participating, each such Holder agrees to indemnify the
Company, its directors and executive officers and each Person who controls the
Company (within the meaning of the Securities Act) against any losses, claims,
damages, liabilities and expenses (including, without limitation, attorneys'
fees except as limited by paragraph 6(c)) resulting from any untrue statement of
a material fact contained in the registration statement, prospectus or
preliminary prospectus, or any amendment thereof or supplement thereto, or any
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in any information furnished in writing by
such Holder; provided that the obligation to indemnify will be in proportion to,
and such liability will be limited to, the amount received by such Holder from
the sale of Registrable Shares pursuant to such registration statement.
<PAGE>
(c) Any Person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification (provided that the failure to give such notice shall not
limit the rights of such Person, except to the extent such failure to give
notice shall materially prejudice the rights of the indemnifying party), and
(ii) unless in such indemnified party's reasonable judgment (with written advice
of counsel), a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party will not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment (with written advice of counsel)
of any indemnified party, a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) Each party hereto agrees that if, for any reason, the indemnification
provisions contemplated by Section 6(a) or Section 6(b) are unavailable to, or
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages, liabilities or expenses (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (or actions in respect thereof), in such
proportion as is appropriate, to reflect the relative fault of the indemnifying
party and the indemnified party, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by such
indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation (even if the Holders or any underwriters or all of them were
treated as one entity for such purpose), or by any other method of allocation
which does not take account of the equitable considerations referred to in this
Section 6(d), unless such allocation is called for after consideration of such
equitable considerations. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such indemnified party in connection
with investigating or, except as provided in Section 6(c), defending any such
action or claim. Notwithstanding the provisions of this Section 6(d), the
Holders shall not be required to contribute an amount greater than the dollar
amount of the proceeds received by such Holders with respect to the sale of any
Registrable Shares. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations, in this Section 6(d), to
contribute, shall be several in proportion to the amount of Registrable Shares
registered by them, and not joint.
<PAGE>
(e) The indemnification and contribution provided for under this Agreement
will remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or controlling
Person of such indemnified party, and will survive, for such indemnified party
and such officers, directors or controlling Persons of such indemnified party,
the transfer of securities. The Company also agrees to make such provisions as
are reasonably requested by any indemnified party for contribution to such party
in the event the Company's indemnification is unavailable for any reason.
7. Compliance with Rule 144
(a) The Company shall (i) make and keep public information available, as
those terms are understood and defined in Rule 144 of the Securities Act, (ii)
file with the Commission in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act, and (iii)
at the request of any Holder who proposes to sell securities in compliance with
Rule 144, forthwith furnish to such Holder a written statement of compliance
with the reporting requirements of the Commission, as set forth in Rule 144 as
such rule may be amended from time to time, and make available to the public and
such Holders such information as will enable the Holders to make sales pursuant
to Rule 144.
(b) The Holders may sell any Registrable Shares, if such sale or sales do
not violate the restrictions Rule 144 places on sales of "restricted securities"
(as defined under Rule 144).
(c) At the expiration of 12 months from the Closing Date, there will be no
contractual restrictions on any sale or sales, by any Holder, of any Registrable
Shares; provided, however, that the Company will take all reasonable affirmative
actions to ensure the Registrable Shares are no longer "restricted securities"
(as defined under Rule 144), including (i) making available adequate current
public information with respect to the Company, as issuer of the securities, as
required by Rule 144(c), and (ii) all other actions which the Company is
required to perform to ensure the Registrable Shares no longer qualify as
restricted securities.
(d) At the expiration of 24 months from the Closing Date, and upon demand
of any Holder, the Company shall effect a removal of the legend on each stock
certificate held by the Holder which identifies the security represented thereby
as a "restricted security" (as defined under Rule 144).
8. Transfers by Holders
Any Holder may transfer the registration rights it holds pursuant to this
Agreement to any other Person who after such transfer holds at least 35,000
shares, or if less than 35,000 shares, then all shares held by a Holder;
provided, however, that such transfer will be permitted only if the transferee
or transferees agree(s) to comply with, and otherwise be bound by, all the terms
and conditions this Agreement.
<PAGE>
9. Participation in Underwritten Registrations
(a) No Person may participate in any registration hereunder which is
underwritten unless such Person (a) agrees to sell such Person's securities on
the basis provided in any underwriting arrangements approved by the Person or
Persons entitled hereunder to approve such arrangements, and (b) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements.
(b) No Person may participate in any registration hereunder if such
Person's Registrable Shares could then be sold in any three-month period without
registration in accordance with Rule 144, and in such case, such Person shall
not be bound by any of the terms or obligations of this Agreement.
10. Representations and Warranties of Serus and the Members
(a) Investment Representations and Warranties. As of the Closing Date,
Serus and the Members hereby jointly and severally represent and warrant to the
Company that:
(i) The Registrable Shares issued under the Asset Purchase Agreement are
being acquired for the Serus's own account for investment purposes only, and not
as a nominee or agent, and not with a view to the resale or distribution of all
or any part of such Registrable Shares. Serus does not have any contract,
undertaking, agreement or arrangement with any Person to sell, transfer or grant
a participating interest, in the Registrable Shares issued pursuant to the Asset
Purchase Agreement.
(ii) Serus has been furnished with, and has had access to, such information
as it considers necessary or appropriate for deciding whether to invest in the
Company, and Serus has had an opportunity to ask questions and receive answers
from the Company and its representatives regarding the terms and conditions of
issuance of the Registrable Shares pursuant to the Asset Purchase Agreement.
(iii) Serus and the Members can bear the economic risk of the investment in
the Registrable Shares issued under the Asset Purchase Agreement and have such
knowledge and experience in financial or business matters as to be capable of
evaluating the merits and risks of such investment in the Company.
(b) Restricted Securities. The Registrable Shares issued under the Asset
Purchase Agreement have not been registered under the Securities Act on the
ground that the sale provided for in the Asset Purchase Agreement is exempt from
the registration requirements of the Securities Act, and the Company's reliance
on such exemption is predicated, in part, on the representations and warranties
in Section 10(a) above. Serus and the Members hereby confirm that Serus and the
Members have been informed that the Registrable Shares issued under the Asset
Purchase Agreement such Shares are "restricted securities" (as defined in Rule
144) and may not be offered and sold unless such Shares are first registered
under the Securities Act or unless an exemption from registration under the
Securities Act is available. Accordingly, Serus and the Members hereby
acknowledge that the Registrable Shares issued under the Asset Purchase
Agreement may not be transferred except in compliance with applicable securities
laws and regulations.
<PAGE>
(c) Restrictive Legends. Subject to Section 7(c), the stock certificates
for the Registrable Shares issued under the Asset Purchase Agreement on the
Closing Date shall be endorsed with any restrictive legend required by state law
and the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND
MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE
RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF AN EXEMPTION FROM
SUCH REGISTRATION OR QUALIFICATION IS AVAILABLE.
11. Adjustments Affecting Registrable Shares
The Company will not take any action, or permit any change to occur, with
respect to its securities, which would adversely affect the ability of the
Holders of the Registrable Shares to include such Holder's Registrable Shares in
a registration undertaken pursuant to this Agreement, or which would adversely
affect the marketability of such Registrable Shares in any such registration.
12. Remedies
Any Person having rights under any provision of this Agreement will be
entitled to enforce such rights specifically, to recover damages caused by
reason of any breach of any provision of this Agreement, and to exercise all
other rights granted by law.
13. Amendments and Waivers
Except as otherwise expressly provided herein, the provisions of this
Agreement may be amended or waived at any time only by the written agreement of
the Company and the Holders of 50% of the Registrable Shares, provided that any
such amendment or waiver shall apply equally to all Holders of Registrable
Shares, except to the extent a Holder of Registrable Shares, adversely affected
by unequal treatment, otherwise consents. Any waiver, permit, consent or
approval of any kind or character, on the part of any such Holders, of any
provision or condition of this Agreement, must be made in writing and shall be
effective only to the extent specifically set forth in writing.
<PAGE>
14. Successors and Assigns
All covenants (other than those in Section 10, which are made only as of
the Closing Date) and agreements contained in this Agreement by or on behalf of
any of the parties hereto (including, without limitation, any Holder) will bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Holder) whether so expressed or not.
In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for the benefit of the Holders of
Registrable Shares are also for the benefit of, and enforceable by, any
subsequent Holder of Registrable Shares who agrees to be bound by this
Agreement.
15. Final Agreement
This Agreement constitutes the final agreement of the parties concerning
the matters referred to herein, and supersedes all prior agreements and
understandings.
16. Severability
Whenever possible, each provision of this Agreement will be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by, or invalid under,
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this Agreement.
17. Descriptive Heading
The descriptive headings of this Agreement are inserted for convenience of
reference only and do not constitute a part of, and shall not be utilized in
interpreting, this Agreement.
18. Notices
Any notices required or permitted to be sent hereunder shall be delivered
personally, or mailed by certified mail, return receipt requested, or delivered
by overnight courier service to the addresses below, the addresses on the
signature page hereto or such other addresses as shall be given by notice
delivered hereunder, and shall be deemed to have been given upon delivery, if
delivered personally, three business days after mailing, if mailed, or one
business day after delivery to the courier, if delivered by overnight courier
service:
If to the Holders of Registrable Shares, to the addresses set forth on the
stock record books of the Company;
with a copy to:
Christian Hendricks Law Office
550 North Brand Blvd., Suite 1960
Glendale, CA 91203-1900
Attention: Mark C. Hendricks
Tel: (818) 243-4000
Fax: (818) 243-4290
<PAGE>
19. Governing law
The validity, meaning and effect of this agreement shall be determined in
accordance with the laws of the State of California applicable to contracts made
and to be performed in that state, without regard to principles of conflicts of
laws.
20. Counterparts
This Agreement may be executed in any number of counterparts, each of which
when so executed and delivered shall be deemed an original, and such
counterparts together shall constitute one instrument. Each party shall receive
a duplicate original of the counterpart copy or copies executed by it and the
Company.
21. Attorneys Fees
In the event of any action or suit, based upon, or arising out of, any
actual or alleged breach by any party, of any representation, warranty or
agreement in this Agreement, the prevailing party shall be entitled to recover
its reasonable attorneys' fees and expenses of such action or suit from the
other party, in addition to any other relief ordered by the court.
[The Remainder of this Page is Blank.]
<PAGE>
This Registration Agreement was executed on the date first set
forth above.
NETOPIA, INC.
By:/s/ James A. Clark
Name: James A. Clark
Title: V.P. and CFO
SERUS LLC
By: /s/ Mark C. Hendricks
Name: Mark C. Hendricks
Title: Managing Director
STUDEO, INC.
By: /s/ Todd Shepherd
Name: Todd Shepherd
Title: Director of Strategy
Address:
SHAYNE MCQUADE
/s/ Shayne McQuade
Address:
MARK HENDRICKS
/s/ Mark Hendricks
Address:
JODY ROOKSTOOL
/s/ Jody Rookstool
Address:
SCOTT IVERSON
/s/ Scott Iverson
Address:
TODD SHEPHERD
/s/ Todd Shepherd
Address:
EXHIBIT 23.1
REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Netopia, Inc. and subsidiary:
The audits referred to in our report dated November 4, 1998, except as to Note
9, which is as of December 17, 1998, included the related financial
statement schedule as of September 30, 1998, and for each of the years in the
three-year period ended September 30, 1998, included in the annual report on
Form 10-K of Netopia, Inc. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to incorporation by reference in the registration statement (No.
333-61845) on Form S-8 of Netopia, Inc. and subsidiary of our report dated
November 4, 1998, except as to Note 9, which is as of December 17, 1998,
relating to the consolidated balance sheets of Netopia, Inc. and subsidiary as
of September 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1998, and related schedule, which report
appears in the September 30, 1998 annual report on Form 10-K of Netopia, Inc.
San Francisco, California
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 19,244
<SECURITIES> 22,851
<RECEIVABLES> 6,630
<ALLOWANCES> 617
<INVENTORY> 1,591
<CURRENT-ASSETS> 49,383
<PP&E> 2,068
<DEPRECIATION> 9,872
<TOTAL-ASSETS> 56,292
<CURRENT-LIABILITIES> 11,231
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 44,789
<TOTAL-LIABILITY-AND-EQUITY> 56,292
<SALES> 24,836
<TOTAL-REVENUES> 24,836
<CGS> 7,955
<TOTAL-COSTS> 7,955
<OTHER-EXPENSES> 24,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,222)
<INCOME-PRETAX> (5,882)
<INCOME-TAX> 2,155
<INCOME-CONTINUING> (8,037)
<DISCONTINUED> (2,496)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,533)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
