UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
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
incorporation or organization)
(I.R.S. Employer
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 NO
x
As of February 2, 1998 there were 11,610,375 shares
of the Registrant's common stock outstanding.
NETOPIA, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets
At September 30, 1997 and December 31, 1997 3
Condensed Consolidated Statements of Operations
For the three months ended December 31, 1996 and 1997 4
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 1996 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
INDEX TO EXHIBITS 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, 1997 December 31, 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,444 $ 13,734
Short-term investments 27,192 27,568
Trade accounts receivable, net of allowances
of $1,127 and $1,154 at September 30, 1997
and December 31, 1997, respectively 8,332 6,888
Inventories, net 4,421 4,988
Deferred tax asset 1,463 1,463
Prepaid expenses and other current assets 790 588
----------- ----------
Total current assets 56,642 55,229
Furniture, fixtures, and equipment, net 2,321 2,111
Deferred tax assets, long-term 1,406 1,406
Deposits and other assets 632 804
------------ --------------
Total assets $ 61,001 $ 59,550
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,497 $ 4,029
Accrued compensation 1,237 1,417
Deferred revenue 874 860
Other current liabilities 55 15
-------------- --------
Total current liabilities 6,663 6,321
Other long-term liabilities 361 260
--------------- -------------
Total liabilities 7,024 6,581
-------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $0.001 par value, 5,000,000 shares
authorized; none outstanding __ __
Common stock: $0.001 par value, 25,000,000 shares
authorized; 11,492,762 and 11,522,921 shares issued
and outstanding at September 30, 1997 and December 31,
1997, respectively 12 12
Additional paid-in capital 50,568 50,610
Deferred compensation (54) (49)
Retained earnings 3,451 2,396
------------- ------------
Total stockholders' equity 53,977 52,969
------------- -----------
Total liabilities and stockholders' equity $ 61,001 $59,550
======== =======
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
Three Months Ended December 31,
___________________________
1996 1997
<S> <C> <C>
Revenues:
Internet/Intranet products $ 4,805 $ 5,463
LAN products 8,658 5,002
---------- ----------
Total revenues 13,463 10,465
Cost of revenues:
Internet/Intranet products 1,554 1,721
LAN products 5,310 3,243
--------- --------
Total cost of revenues 6,864 4,964
Gross profit 6,599 5,501
Operating expenses:
Research and development 2,167 2,253
Selling and marketing 3,801 4,565
General and administrative 837 880
---------- -------
Total operating expenses 6,805 7,698
---------- ----------
Operating loss (206) (2,197)
Other income, net 388 573
---------- ------------
Income (loss) before income taxes 182 (1,624)
Income tax provision (benefit) 64 (569)
---------- ------------
Net income (loss) $ 118 $ (1,055)
========= =========
Basic net income (loss) per common share $ 0.01 $ (0.09)
========= =========
Diluted net income (loss) per common and
common equivalent share $ 0.01 $ (0.09)
========= =========
Common shares used in the calculations of
basic net income (loss) per share 11,129 11,511
========= =========
Common and common equivalent shares used
in the calculations of diluted
net income (loss) per share 12,447 11,511
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended December 31,
____________________________
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 118 $ (1,055)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 474 415
Amortization of deferred compensation 4 5
Changes in assets and liabilities:
Trade accounts receivable, net 1,825 1,444
Inventories, net (475) (567)
Prepaid expenses, deposits and
other assets 40 34
Accounts payable and accrued
liabilities (1,285) (468)
Other liabilities 132 134
Deferred revenue (32) (111)
---------- ---------
Net cash provided by (used in)
operating activities 801 (169)
---------- -----------
Cash flows from investing activities:
Purchase of short-term investments (29,011) (13,566)
Proceeds from the sale of short-term
investments 25,044 13,190
Acquisition of furniture,
fixtures and equipment (331) (177)
Capitalization of software development ___ (30)
---------- -----------
Net cash used in investing activities (4,298) (583)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of
common stock, net 10 42
---------- -----------
Net cash provided by financing activities 10 42
---------- -----------
Net decrease in cash and cash equivalents (3,487) (710)
Cash and cash equivalents, beginning of period 19,910 14,444
---------- -----------
Cash and cash equivalents, end of period $ 16,423 $ 13,734
========= ========
Supplemental disclosures of cash flow information:
Interest paid $ 1 $ 1
========= ========
Income taxes paid $ 1 $ 5
========= ========
See accompanying notes to Condensed Consolidated Financial Statements.
NETOPIA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring
adjustments which in the opinion of management are necessary to
fairly present the Company's consolidated financial position, results of
operations, and cash flows for the periods presented. These consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements as included in the Company's Annual
Report on Form 10-K and other filings with the United States Securities
and Exchange Commission. The consolidated results of operations for
the period ended December 31, 1997 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the entire fiscal
year ending September 30, 1998.
2. Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition".
SOP 97-2 establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions entered into in
fiscal years beginning after December 15, 1997 and will require the
Company to modify certain aspects of its revenue recognition policies.
The Company does not expect the adoption of SOP 97-2 to have a material
impact on the Company's consolidated results of operations.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method. Net inventory consisted of the following
(in thousands, net):
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1997
<S> <C> <C>
Raw materials and work in process $ 1,966 $ 1,943
Finished goods 2,455 3,045
--------- ------------
$ 4,421 $ 4,988
======== ========
</TABLE>
<TABLE>
<CAPTION>
4. Furniture, Fixtures and Equipment, net (in thousands):
September 30, 1997 December 31, 1997
<S> <C> <C>
Furniture, fixtures and equipment $ 13,105 $ 13,282
Accumulated depreciation and amortization (10,784) (11,171)
----------- ------------
$ 2,321 $ 2,111
</TABLE>
5. Net Income Per Share
Basic net income (loss) per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is based on the weighted average number of
shares of common stock outstanding during the period and dilutive common
equivalent shares from options and warrants outstanding during the period.
No common equivalent shares are included for loss periods as they would
be anti-dilutive. Dilutive common equivalent shares consist of stock options
and stock warrants.
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS (LOSS)
(in thousands, except per share amounts)
Three Months Ended December 31,
____________________________
1996 1997
<S> <C> <C>
Computation of basic net income (loss) per
common share:
Net income (loss) $ 118 $ (1,055)
====== ========
Weighted average number of common
stock outstanding 11,129 11,511
====== ========
Basic net income (loss) per common share $ 0.01 $ (0.09)
====== ========
Computation of diluted net income (loss)
per common and common equivalent share:
Net income (loss) $ 118 $ (1,055)
====== ========
Weighted average number of common
stock outstanding 11,129 11,511
Number of common stock equivalents as a
result of stock options outstanding
using the treasury stock method 1,318 __
---------- ------------
Shares used in per share calculation 12,447 11,511
======== ========
Diluted net income (loss) per common and common
equivalent share $ 0.01 $ (0.09)
======== ========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included
in this document are based on information available to the Company
on the date hereof, and the Company assumes no obligation to update
any such forward-looking statement. 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 Securities and Exchange
Commission Filings.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 and 1997
Revenues. The Company's total revenues are derived from the sale of
Internet/Intranet connectivity and software products and Farallon LAN
connectivity products. Internet/Intranet product revenues include license
revenues for Timbuktu Pro software and Netopia Virtual Office software,
sales of the Netopia family of Internet connectivity products and fees for
related services. LAN products revenue is derived primarily from the sale
of Ethernet, EtherWave, Fast Ethernet and LocalTalk compatible products
which include the PhoneNET system of network connectivity products, of
which a substantial majority have been sold to Macintosh operating sytem
("Mac OS") customers. Revenue relating to the sale and licensing of hardware
and software products is recognized upon shipment of the products by the
Company and service revenue is recognized ratably over the term of the
contract. Certain of the Company's sales are made to customers under
agreements permitting limited rights of return for stock balancing or with
protection for future price decreases. Revenue is recorded net of an estimated
allowance for returns. Any product returns or price decreases in the future
that exceed the Company's allowances may materially adversely affect the
Company's business, operating results and financial condition.
The Company's total revenues decreased 22.3% from $13.5 million to $10.5
million for the three months ended December 31, 1996 and 1997, respectively.
Internet/Intranet products revenue increased 13.7% from $4.8 million to
$5.5 million for the three months ended December 31, 1996 and 1997,
respectively. The increase in Internet/Intranet revenue was primarily due
to increased sales of the Netopia family of Internet connectivity products
as well as increased sales of the Windows version of Timbuktu Pro
collaboration software. Netopia Internet connectivity products revenue
increased primarily due to increased sales of the "So-Smart" ISDN Netopia
routers and international shipments of the Netopia ISDN routers. partially
offset by decreased sales of Netopia ISDN routers in North America. LAN
products revenue decreased 42.2% from $8.7 million to $5.0 million for the
three months ended December 31, 1996 and 1997, respectively. The decrease
was primarily due to declining volume and average selling prices of Ethernet,
EtherWave and LocalTalk products, partially offset by increased sales of
Fast Ethernet switch products which were not yet shipping during the three
months ended December 31, 1996. The Company believes LAN products
revenue was adversely affected by declining sales of Macintosh computers
and Apple's loss of market share as well as by the reduction in the sales of
Macintosh clone computers due to the elimination of a number of Macintosh
cloning licenses issued by Apple and customer order deferrals in anticipation
of the U.S. federal government's E-Rate program. LAN products revenue
accounted for 64.3% and 47.8% of the Company's total revenues for the three
months ended December 31, 1996 and 1997, respectively. Internet/Intranet
products revenue accounted for 35.7% and 52.2% of the Company's total
revenues for the three months ended December 31, 1996 and 1997, respectively.
As the Company continues to focus on increasing its Internet/Intranet
business and as a result of variable average selling prices of the Company's
LAN products, declining sales of Mac OS computers and competitive factors, the
Company expects that LAN products revenue may decline further. As a result,
the Company's future operating results are dependent upon market acceptance
of its Internet/Intranet products and enhancements thereto. Historically, the
Company has been dependent upon sales of its LAN products, and to the extent
that continuing declines in revenues from LAN products is not offset by
increases
in revenue from other sources, such as sales of the Company's Internet/Intranet
products, then the Company's business, operating results and financial
condition
will be materially adversely affected. There can be no assurance that the
Company's
increasing focus on its Internet/Intranet products will offset the decline in
revenues from its LAN products. Should the Company's Internet/Intranet
products and enhancements not gain market acceptance, particularly in the
Windows market, the Company's business, operating results and financial
condition will by materially and adversely affected.
Netopia sells its Internet/Intranet and LAN products and related maintenance,
support and other services primarily through distributors, while certain
products are also sold directly through select Internet Service Providers ("I
SPs") and Value Added Resellers ("VARs") or directly by the Company to
corporate accounts and higher education institutions.Revenues from distributors
accounted for 54% and 52% of the Company's total revenues for the three
months ended December 31, 1996 and 1997, respectively. The Company's
three largest distributors accounted for 35% and 31% of the Company's total
revenues for the three months ended December 31, 1996 and 1997, respectively.
During the three months ended December 31, 1996 and 1997, revenue from
Ingram accounted for 20% and 17% of the Company's total revenues, respectively
and revenue from MicroWarehouse accounted for 10% and 9% of the Company's
total revenues, respectively. No other customers have accounted for 10% or more
of the Company's total revenues during the three months ended December 31, 1996
and 1997. The Company intends to continue to use its existing ISPs and VARs
to sell the Company's Internet/Intranet products, and to recruit additional ISPs
and VARs and pursue other marketing channels in the future. There can be no
assurance that the Company's current distributors will choose to or be able to
market the Company's products effectively, that economic conditions or industry
demand will not adversely affect these or other distributors, or that these
distributors will not devote greater resources to marketing products of other
companies. The loss of, or a significant reduction in revenue from, one of the
Company's distributors could have a material adverse effect on the Company's
business, operating results and financial condition.
International revenues accounted for 28% and 35% of the Company's total
revenues for the three months ended December 31, 1996 and 1997,
respectively and are derived primarily from Europe and the Pacific Rim.
Revenues from Europe accounted for 18% and 25% of total revenues for
the three months ended December 31, 1996 and 1997, respectively, and
revenues from the Pacific Rim account for 6% of total revenues for each
three month period ended December 31, 1996 and 1997. The Company's
international revenues are currently denominated in United States dollars,
and revenues generated by the Company's distributors currently are paid to
the Company in United States dollars. The results of the Company's
international operations may fluctuate from period to period based on
global economic factors including, but not limited to, the current economic
situation in Asia and Japan and movements in currency exchange rates.
Historically, movements in exchange rates have not materially affected the
Company's total revenues. However, there can be no assurance that
movements in currency exchange rates will not have a material adverse
effect on the Company's revenues in the future.
The Company expects that international revenues will continue to
represent a significant portion of its total revenues. Any significant
decline in international demand for the Company's products would
have a material adverse effect on the Company's business, operating
results and financial condition. The Company believes that in order
to increase sales opportunities and profitability it will be required to
expand its international operations. The Company has committed and
continues to commit significant management attention and financial
resources to developing international sales and support channels. There
can be no assurance that the Company will be able to maintain or increase
international market demand for its products. In addition, sales of the
Company's LAN products are dependent upon the international demand
for Apple products. To the extent that the Company is unable to maintain
or increase international demand for its products, or that international
demand for Apple products does not meet the Company's expectations,
the Company's international sales will be limited, and the Company's
business, operating results and financial condition would be materially
and adversely affected.
Gross Margin. The Company's gross margin for Internet/Intranet and
LAN products is affected by many factors, including pricing strategies,
royalties paid to third parties, standard cost changes, new versions of
existing products and product mix. The Company's total gross margin
increased from 49.0% to 52.6% for the three months ended December 31,
1996 and 1997, respectively. The Company's gross margin for Internet/
Intranet products increased from 67.7% to 68.5% for the three months
ended December 31, 1996 and 1997, respectively, primarily due to cost
reductions on both ISDN routers and shrinkwrap software as well as
increased sales of higher margin international ISDN routers, partially
offset by reduced average selling prices of its Netopia routers due to
price competition and increased proportion of revenue from Internet/Intranet
hardware products which carry a lower margin than the Company's software
products. The Company's gross margin for LAN products decreased from 38.7% to
35.2% for the three months ended December 31, 1996 and 1997,
respectively. The decrease was primarily due to declining average
selling prices as a result of increased price competition and a reduced
proportion of sales from higher margin Etherwave products, partially
offset by cost reductions and a higher proportion of sales from Fast
Ethernet products. The Company's gross margin has varied significantly
in the past and will likely vary significantly in the future depending
primarily on the mix of products sold by the Company and external
market factors including but not limited to price competition. The
Company's Internet/Intranet software products have a higher average
gross margin than the balance of the Company's products. Accordingly,
to the extent the product mix for any particular quarter includes a
substantial proportion of lower margin products, there will be a
material adverse effect on the Company's business, operating results
and financial condition.
Research and Development. Research and development expenses
increased 4.0% from $2.2 million to $2.3 million for the three months
ended December 31, 1996 and 1997, respectively. The increase was
primarily due to the localization of software products for Europe and
Japan. Research and development expenses represented 16.1% and
21.5% of total revenues for the three months ended December 31,
1996 and 1997, respectively. The Company believes that it will
continue to devote substantial resources to product development and
that future research and development expenses may increase in absolute
dollars. Historically, the Company has believed its process for developing
software is essentially completed concurrently with the establishment of
technological feasibility and no internal software costs have been
capitalized to date. During the three months ended December 31,
1997, $30,000 of product development costs incurred subsequent
to the delivery of a working model, under a development agreement
with a third party, have been capitalized. No software development
costs were capitalized during the three months ended December 31, 1996.
Selling and Marketing. Selling and marketing expenses increased 20.1%
from $3.8 million to $4.6 million for the three months ended December 31,
1996 and 1997, respectively. The increase was primarily due to
increased headcount and costs related to non-recurring organizational
changes, increased print and electronic advertising and trade show
costs related to the introduction of Netopia Virtual Office and other
Internet/Intranet products as well as costs incurred for the Corporate
name change. Such expenses represented 28.2% and 43.6% of total
revenues for the three months ended December 31, 1996 and 1997,
respectively. The Company believes that future selling and marketing
expenses may increase in absolute dollars primarily due to personnel
related expenses and increased advertising and promotional activities.
General and Administrative. General and administrative expenses
increased 5.2% from $837,000 to $880,000 for the three months
ended December 31, 1996 and 1997, respectively. Such expenses
represented 6.2% and 8.4% of total revenues for the three months
ended December 31, 1996 and 1997, respectively. The Company
believes that future general and administrative expenses may increase
in absolute dollars as the Company adds infrastructure, such
as expenses to maintain and support the Company's web related
activities and incurs additional costs related to being a public
company, such as expenses related to investor relations programs,
insurance and increased professional fees.
Other Income, net. Other income, net, primarily represents
interest earned by the Company on its cash, cash equivalents
and short-term investments.
Provision for Income Taxes. The effective tax rate was 35% for the
each of three months ended December 31, 1996 and 1997. This rate
differs from the statutory rate primarily due to state income taxes,
investment income from tax advantaged investments and the utilization
of research and tax credits.
In fiscal 1997, the Company believed that, based upon available
objective evidence, there was sufficient uncertainty regarding the
realizability of certain of its deferred tax assets to warrant a partial
valuation allowance, primarily related to the expected realizability
of its research credit carryforwards. The factors considered
included the relatively shorter product life cycles in the high
technology industry and the uncertainty of longer-term taxable
income estimates related thereto, and limits on the carryback
potential for realizing certain deferred tax assets. Management
believes that it is more likely than not that the Company will
realize the approximately $2.9 million in net deferred tax assets
as of December 31, 1997, but no assurances can be provided in
that regard. To the extent that the Company cannot achieve consistent
profitability in the near future or as a result of acquisition or divestiture
activity, the Company may be required to record a full valuation allowance
against its remaining net deferred tax assets. In the event the Company
records a full valuation allowance against its deferred tax assets, the
Company's operating results would be materially and adversely affected.
OTHER RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Company operates in a rapidly changing environment
that involves a number of risks, many of which are beyond the Company's
control. The following discussion highlights some of these risks. The
Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in this section and elsewhere in this
Report, and the risks discussed in the Company's other United States
Securities and Exchange Commission Filings.
Fluctuations in Quarterly Results; Future Operating Results
Uncertain. The Company's quarterly operating results have varied
significantly in the past and are likely to vary significantly in the
future. For example, the Company has recently experienced quarterly
losses and experienced a loss for fiscal 1997. The Company's
operating results depend on factors such as changes in networking
and communications technologies, price and product competition,
usage of the Internet and developments and changes in the Internet
market, the demand for the Company's products, product
enhancements and new product announcements by the Company
and its competitors, market acceptance of new products of the
Company or its competitors, the size and timing of distributor and
end user orders and purchasing cycles, customer order deferrals in
anticipation of enhancements to the Company's or competitors'
products, customer order deferrals for budgetary or other reasons
including but not limited to government programs such as E-Rate,
manufacturing delays, disruptions in sources of supply, product life
cycles, product quality problems, changes in the level of operating
expenses, the timing of research and development expenditures, the
level of the Company's international revenues. The Company's results
also depend on factors such as demand for Apple's products, customer
order deferrals in anticipation of new MacOS product offerings, the
elimination of a number of Macintosh cloning licenses issued by
Apple and potential limitations on the retail distribution of Apple
products. The Company's gross margins and operating results
depend on factors such as raw material costs, write-offs of obsolete
inventory, changes in pricing policies by the Company or its
competitors, including the grant of price protection terms and
discounts by the Company, changes in the mix of products sold by
the Company and the resulting change in total gross margin as well
as changes in the mix of channels through which the Company's
products are offered. Additionally, the Company's operating results
depend on general factors such as personnel changes, changes in
the Company's strategy, fluctuations in foreign currency exchange
rates, general economic conditions, both in the United States and
abroad, and economic conditions specific to the industries in which
the Company competes, among others. The Company's limited
Internet/Intranet operating history and the dynamic market
environment in which the Company competes makes the prediction
of future Internet/Intranet operating results difficult, if not impossible.
Sales orders are typically shipped shortly after receipt and,
consequently, order backlog at the beginning of any quarter has
in the past represented only a small portion of that quarter's
revenues. Accordingly, the Company's net revenues in any quarter
are substantially dependent on orders booked and shipped during that
quarter. Historically, the Company has often shipped and recognized a
significant portion of its revenues in the last weeks, or even days, of a
quarter. As a result, the magnitude of quarterly fluctuations may not
become evident until late in, or after the close of a particular quarter.
The Company typically experiences significant volumes of shipments
at the end of the quarter which may be exposed to delays caused by
shipping halts or other factors beyond the Company's control. In addition,
the Company recognizes revenue on products sold through distributors
upon shipment to the distributor. Although the Company maintains
reserves for projected returns and price decreases, there can be no
assurance that such reserves will be adequate. The Company's business
also has experienced seasonality in the past, largely due to customer
buying patterns such as budgeting cycles of educational institutions
that purchase the Company's products and the summer slow down in
most European markets. There can be no assurance that the Company's
operating results will not be affected by seasonality in the future or
that such seasonality will occur in a manner consistent with prior
periods.
The Company's expense levels are based in large part on
expectations as to future revenues and as a result are relatively fixed
in the short term. If revenues are below expectations in any given
quarter, net income or loss is likely to be disproportionately affected.
Due to all of the foregoing factors, and other factors discussed herein,
revenues and net income or loss for any future period are not predictable
with any significant degree of certainty. Accordingly, the Company
believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the
Company's business strategies will be successful or that the Company
will be able to return to or sustain profitability on a quarterly or
annual basis in the future. It is likely that in some future quarter the
Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially and adversely
affected.
Dependence on Internet/Intranet Products. The Company's
business is substantially dependent upon continued growth in the
sale of its Internet/Intranet products. Rapid growth in the use of
the Internet and Intranets is a recent phenomenon. There can be
no assurance that communication or commerce over the Internet
will become widespread. In addition, to the extent that the
Internet continues to experience significant growth in the number
of users and level of use, there can be no assurance that the
Internet infrastructure will continue to be able to support the
demands placed upon it by such potential growth, or will not
otherwise lose its utility due to delays in the development or
adoption of new standards and protocols required to handle
increased levels of activity, or due to increased government
regulation. Although the Company has experienced significant
percentage growth rates in Internet/Intranet revenues, the
Company does not believe prior percentage growth rates are
sustainable or indicative of future operating results for these products
and services. The Company's limited Internet/Intranet operating history
and the dynamic market environment in which the Company operates
makes the prediction of future Internet/Intranet operating results difficult,
if not impossible. There can be no assurance that the Company will
increase sales of its Internet/Intranet products, that the Company's
existing distribution channels are appropriate for the sale of its
Internet/Intranet products or that sales of such products will reach levels
significant enough to offset expected declines in sales, average selling prices
and gross margins of the Company's LAN products. Accordingly, the failure
of the Company's Internet/Intranet products to gain market acceptance or to
achieve significant sales would materially and adversely affect the
Company's business, operating results and financial condition. The
markets in which the Company competes currently are subject to
intense price competition and the Company expects additional price
and product competition as other established and emerging companies
enter these markets and new products and technologies are introduced.
Additionally, a number of competitors have substantially greater
financial, technical, sales, marketing and other resources than the
Company, as well as greater name recognition and a larger customer base.
These companies may therefore be able to respond more quickly to
new or emerging technologies and changes in customer requirements
or to devote greater resources to the development, promotion and sales
of its products. Increased competition may result in further price
reductions, reduced gross margins and loss of market share, any of
which could materially adversely affect the Company's business,
operating results and financial condition.
Dependence on LAN Products; Declining LAN Business.
Historically, the Company has derived a substantial portion of its revenue
from LAN products, which represented 64% and 48% of total revenues
for the three months ended December 31, 1996 and 1997, respectively.
These products have experienced variable average selling prices and gross
margins, and declining sales volumes. The Company anticipates that the
average selling prices and gross margins of its existing LAN products will
continue to decline. Accordingly, to the extent the revenue product mix for
any particular period includes a substantial proportion of LAN products, the
Company's total gross margin will be adversely affected. To date, the
Company has been able to partially reduce the decline in total gross margin
by reducing the manufacturing cost of products and by introducing new
products with higher margins. There can be no assurance that the Company
will achieve any such reductions in the future or that new products will
achieve market acceptance. Although the Company's Internet/Intranet
products currently carry a higher average gross margin than its LAN products,
the Company anticipates that competitive pressures in its Internet/Intranet
business may result in declining average selling prices and gross margins
in this business as well. Historically, a substantial majority of the Company's
LAN products revenue have been derived from sales of products designed for
Apple Mac OS and compatible computers. Net revenues and operating results
from the Company's LAN products fluctuated on a quarterly basis during
fiscal 1997. The Company expects that net revenues and operating results
from LAN products may decrease in the future as a result of declining sales
and average selling prices, Apple's incorporation of built-in Ethernet
connectivity into certain of its computers, declining sales of Mac OS
computers, elimination of a number of the Mac OS licenses issued by
Apple, Apple's loss of market share as well as competition in the LAN
products market. As a result of technical characteristics in the Mac OS
environment, Fast Ethernet products, in general, have not delivered
expected performance levels. If these technical characteristics are not
addressed in the future, then Fast Ethernet product sales in the Mac OS
market segment will be below the Company's expectations, and operating
results may be materially and adversely affected.
Dependence on Apple; Competition with Apple Products. The
Company believes that over 90% of its LAN products revenue are derived
from customers purchasing products for the Apple Mac OS environment.
Accordingly, the Company is substantially dependent on the market for
Mac OS computers and the development and sale of new Apple computers,
particularly sales of such computers into business environments. There
can be no assurance that competitive personal computers will not displace
the Mac OS products or reduce sales of Mac OS products. In addition,
sales of the Company's products in the past have been adversely affected
by the announcement by Apple of new products with the potential to
replace existing products. The inability of Apple to successfully develop,
manufacture, market or sell new products, and any decrease in the sales
or market acceptance of the Mac OS family of computers, would have a
material adverse effect on the Company's business, operating results and
financial condition. For example, during fiscal 1997 and the first quarter
of fiscal 1998, the Company believes revenues were adversely affected by
declining sales of Macintosh computers and Apple's loss of market share.
The Company relies on an informal working relationship with
Apple in connection with the Company's LAN product development efforts.
Although the Company and Apple have maintained a cooperative working
relationship since the Company's founding, Apple is under no obligation to
continue to share product information or otherwise cooperate with the
Company. In addition, there can be no assurance that Apple will continue
to work cooperatively with the Company in connection with the Company's
product development efforts. The absence of such cooperation in the future,
as a result of the continued restructuring in process at Apple, including but
not limited to the search for a new chief executive officer, or any other
factors,
could have a material adverse effect on the Company's business, operating
results and financial condition. Apple currently offers products that compete
directly with certain of the Company's products. The Company anticipates that
Apple will continue to incorporate additional connectivity technologies into
more
of its products in the future, which will adversely affect sales of the
Company's
LAN products. Since Apple has substantially greater financial,technical,sales,
marketing and other resources than the Company, as well as greater name
recognition and a significantly larger customer base, Apple may be able
to respond more quickly to new or emerging technologies and changes
in customer requirements or to devote greater resources to the development,
promotion and sales of its products. The Company believes that it is likely
that Apple will continue to sell separately or bundle with its computers
certain network connectivity products, such as 10Mbps and 100Mbps
adapters, similar to the Company's Ethernet and Fast Ethernet products.
Any such additional bundling or enhancement by Apple could have a
material adverse effect on the Company's business, operating results
and financial condition.
Due to all of the foregoing factors, the Company continues to
focus on the development of its Internet/Intranet business. As a result,
the Company's future operating results are dependent upon continued
and increasing market acceptance and penetration of its Internet/Intranet
products and enhancements thereto, particularly in the Windows market.
However, the Company's operating results will continue to be adversely
affected to the extent that declines in revenues from LAN products are not
offset by increases from other sources, such as revenues from the Company's
Internet/Intranet products. There can be no assurance that the Company's
increasing focus on its Internet/Intranet products will offset the decline in
revenues from its LAN products. Should the Company's Internet/Intranet
products and enhancements not gain market acceptance, particularly in the
Windows market, the Company's business, operating results and financial
condition will be materially and adversely affected.
Competition. The markets for the Company's products and
services are intensely competitive, highly fragmented and characterized
by rapidly changing technology, evolving industry standards, price
competition and frequent new product introductions. A number of
companies offer products that compete with one or more of the
Company's products. The Company's current and prospective competitors
include OEM product manufacturers of Internet access and remote LAN
access equipment, manufacturers of remote control and screen sharing
software and manufacturers of LAN client access and network systems
products. In the Internet access and remote LAN access equipment market,
the Company competes primarily with Ascend, Cisco, 3Com/U.S. Robotics,
Ramp Networks, Intel, Toshiba and several other companies. In the remote
control, screen sharing and collaboration software markets, the Company
competes primarily with Symantec, Microsoft, Tivoli (IBM), Lotus (IBM),
Stac Electronics, Netscape, Microcom (Compaq), Computer Associates,
Network Associates (formerly McAfee), Hot Office and several other companies.
In the LAN client access and network systems product market, the Company
competes primarily with Apple, Asante, Dayna (currently being acquired
by Intel), Global Village and several other companies. The Company has
experienced and expects to continue to experience increased competition
from current and potential competitors, many of whom have substantially
greater financial, technical, sales, marketing and other resources, as well
as greater name recognition and a larger customer base than the Company.
Accordingly, such competitors or future competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion
and sales of their products than the Company. In particular, established
companies in the personal computer industry may seek to expand their
product offerings by designing and selling products using competitive
technology that could render the Company's products obsolete or have
a material adverse effect on the Company's sales. For example, Microsoft
has available for free, via download on the Internet, communications
and collaboration software compatible with the Microsoft Internet
Explorer and has publicly stated that they are committed to integrating
Internet technology into existing products at no additional cost to customers.
This software product, which enables real-time communication within a
workgroup, as well as similar future product offerings from Microsoft,
could undermine the Company's ability to market its Timbuktu Pro and/
or Netopia Virtual Office collaboration software. In addition, Netscape
also offers software that enables dispersed work groups to collaborate in
the work environment. Accordingly, there can be no assurance that the
Company can continue to market its collaboration software, which would
have a material and adverse effect on the Company's business, operating
results and financial condition. In addition, several of the Company's
current competitors have introduced free and/or paid guaranteed service
and support programs that appear to be similar to the Company's Up &
Running, Guaranteed! program. As a result, there can be no assurance
that the Company can continue to charge a fee for this support program,
which could have a material and adverse effect upon the Company's
business, operating results and financial condition. The markets in
which the Company currently competes are subject to intense price
competition and the Company expects additional price and product
competition as other established and emerging companies enter these
markets and new products and technologies are introduced. Consolidations
in the networking environment continue to create companies with
substantially greater financial, technical, sales, marketing and other
resources than the Company, as well as greater name recognition and
a significantly larger customer base. These companies may be able to
respond more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion and sales of its products. Increased competition may result
in the loss of market share, further price reductions and reduced gross
margins, any of which could materially and adversely affect the Company's
business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors, or that competitive factors faced by the
Company will not have a material adverse effect on the Company's
business, operating results and financial condition.
Netopia believes that the principal competitive factors in its
markets are: (1) product feature, function and reliability, (2) customer
service and support, (3) price and performance, (4) ease of use, (5) brand
name recognition (6) strategic alliances, (7) size and scope of distribution
channels, (8) timeliness of new product introductions, (9) breadth of product
line and (10) size of installed customer base. While the Company believes,
in general, that it currently competes favorably with regard to these factors
there can be no assurance that the Company will be able to compete
successfully in the future, the failure of which would have a material
adverse effect on the Company's business, operating results and financial
condition.
New Product Development and Rapid Technological Change.
The personal computer industry is characterized by rapidly changing
technologies, evolving industry standards, frequent new product
introductions, short product life cycles and rapidly changing customer
requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's Netopia Internet
connectivity hardware products currently operate only over ISDN,
Fractional T1/T1, Fractional E1/E1 and Frame Relay telecommunication
service. As other communications technologies, such as 56K analog
modems, ATM, xDSL and communication over cable or wireless networks,
are developed or gain market acceptance, the Company will be required
to enhance its Internet connectivity products to support such technologies,
which will be costly and time consuming. If the Company is unable to
modify its products to support new Internet access technologies, or if
technologies supported by current products do not achieve widespread
customer acceptance as a result of the adoption of alternative technologies
or as a result of deemphasis of these technologies by communications
service providers, the Company's business, operating results and financial
condition would be materially adversely affected. In addition, the Company
has historically derived a substantial majority of its revenues from the sale
of Ethernet connectivity products. In the event that current Ethernet network
technology is modified or replaced and the Company is unable to modify its
products to support new Ethernet technologies or alternative technologies,
the Company's business, operating results and financial condition could
be materially adversely affected. The Company has in the past and may
in the future experience delays in new product development. There can
be no assurance that the Company will be successful in developing and
marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer
requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and
marketing of these products or product enhancements, or that its new
products and product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree
of market acceptance. Failure of the Company, for technological or
other reasons, to develop and introduce new products and product
enhancements in a timely and cost-effective manner would have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the future introduction or even announcement of
products by the Company or one or more of its competitors embodying
new technologies or changes in industry standards or customer requirements
could render the Company's then existing products obsolete or unmarketable.
There can be no assurance that the introduction or announcement of new
product offerings by the Company or one or more of its competitors will
not cause customers to defer purchase of existing Company products.
Such deferral of purchases could have a material adverse effect on the
Company's business, operating results and financial condition.
Complex products such as those offered by the Company may
contain undetected or unresolved defects when first introduced or as new
versions are released. There can be no assurance that, despite testing by
the Company, defects will not be found in new products or new versions
of products following commercial release, resulting in loss of market
share, delay in or loss of market acceptance or product recall. Any such
occurrence could have a material adverse effect upon the Company's
business, operating results and financial condition.
As of January 1, 1998, Netopia's research and development
staff consisted of 68 employees. Of these employees 60 were focused
primarily on Internet/Intranet product development and 8 were focused
primarily on LAN product development. The Company believes that its future
success will depend in large part upon its ability to attract and retain
highly-skilled engineering personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
attracting and retaining such personnel, the failure of which could have a
material adverse effect on the Company's business, operating results
and financial condition.
Management of Changing Business. The Company has shifted
its business strategy from providing only LAN products to reducing its reliance
on LAN products and focusing development and management efforts on its
Internet/Intranet business. This transition represents a significant
challenge for the Company and its administrative, operational and financial
resources and places increased demands on its systems and controls. The
Company's ability to manage the continuing development of its
Internet/Intranet business will require the Company to continue to change,
expand and improve its operational, management and financial systems and
controls and to modify its manufacturing capabilities.This transition has
resulted in a continuing increase in the level of responsibility
for both existing and new management personnel. The Company anticipates that
any growth in its Internet/Intranet business will require it to recruit and
hire a substantial number of new engineering, sales and marketing, customer
service,
administrative and managerial personnel. There can be no assurance that the
Company will be successful in hiring or retaining these personnel, if needed.
In addition, certain aspects of the Company's Internet/Intranet business
require
volume sales to achieve profitability. If the Company is unable to achieve
such
volumes or to manage the transition effectively, the Company's business,
operating results and financial condition will be materially and
adversely affected.
Dependence on Distributors. The Company relies primarily on
distributors for the sale of its Internet/Intranet and LAN products. Revenues
from distributors accounted for 54% and 52% of total for the three months
ended December 31, 1996 and 1997, respectively. A substantial amount of the
Company's revenues are generated from a limited number of these distributors.
The Company's three largest distributors accounted for 35% and 31% of total
revenues for the three months ended December 31, 1996 and 1997, respectively.
During the three months ended December 31, 1996 and 1997, revenue from
Ingram accounted for 20% and 17% of the Company's total revenues,
respectively and revenue from MicroWarehouse accounted for 10% and
9% of the Company's total revenues, respectively. No other customers have
accounted for 10% or more of the Company's total revenues during the three
months ended December 31, 1996 and 1997. The distribution of LAN
products such as those offered by the Company has been characterized by rapid
change, including industry consolidations, financial difficulties of
distributors
and the emergence of alternative distribution channels. There can be no
assurance that Ingram and MicroWarehouse will continue to serve as distributors
for the Company since the Company does not currently have a written agreement
regarding price or quantity commitments with these or other distributors which
operate on a purchase order basis. The Company's distributors generally offer
products of several different companies, including products that are
competitive with the Company's products. There can be no assurance that
future sales by the Company's distributors will continue at current levels,
that the Company will be able to retain its current distributors in the
future on terms which are acceptable to the Company, that the Company's
current distributors will choose to or be able to market the Company's
products effectively, that economic conditions or industry demand will not
adversely affect these or other distributors,that these distributors will not
devote greater resources to marketing products of other companies or that
internal staffing changes or other changes at the Company's distributors
will not disrupt historical purchasing or payment patterns. Accordingly,
the loss of, or a significant reduction in revenue from, one of the Company's
distributors, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company grants to its distributors limited rights to return
unsold inventories of the Company's products in exchange for new
purchases and provides price protection to its distributors. Although
the Company provides allowances for projected returns and price
decreases, any product returns or price decreases in the future that exceed
the Company's allowances will materially and adversely affect the
Company's business, operating results and financial condition. The
Company also provides end users with a lifetime warranty on certain
products and permits end users to return any product for its full purchase
price if the product does not perform as warranted. To date, the
Company has not encountered material warranty claims. Nevertheless,
if future warranty claims exceed the Company's reserves, the Company's
business, operating results and financial condition could be materially
and adversely affected. In addition, the Company attempts to further
limit its liability to end users through disclaimers of special, consequential
and indirect damages and similar provisions in its end user warranty.
However, no assurance can be given that such limitations of liability
will be legally enforceable.
International Operations. International revenues accounted for
28% and 35% of the Company's total revenues for the three months ended
December 31, 1996 and 1997, respectively and are derived primarily from
Europe and the Pacific Rim. 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's international business is subject to inherent risks,
including but not limited to the impact of possible and existing recessionary
environments in economies outside the United States, costs of localizing
products for foreign countries,longer receivable collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements,difficulties and costs of staffing and managing foreign operations,
potentially adverse tax consequences and political and economic instability.
In addition, the laws of certain foreign countries in which the Company's
products are or may be manufactured or sold, including various countries
in Asia including the People's Republic of China, may not protect the
Company's products or intellectual property rights to the same extent
as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. There
can be no assurance that the Company will be able to sustain or increase
international revenues, or that the foregoing factors will not have a
material adverse effect on the Company's future international revenues
and its business, operating results and financial condition. The Company
has a substantial portion of its products and components manufactured by
foreign suppliers. The Company's operating results are subject to the
risks inherent in international purchases, including, but not limited to,
various regulatory requirements, political and economic changes and
disruptions, transportation delays, export/import controls, tariff regulations,
higher freight rates and potentially adverse tax consequences. Duty, tariff
and freight costs can materially increase the cost of crucial components
for the Company's products.
Dependence on Strategic Alliances; Dependence on Contract
Manufacturers and Limited Source Suppliers. The Company relies on
a number of strategic relationships to help achieve market acceptance
of the Company's products and to leverage the Company's development,
sales and marketing resources. Although the Company views these
relationships as important factors in the development and marketing
of the Company's products and services, a majority of the Company's
agreements with its strategic partners or customers do not require future
minimum commitments to purchase the Company's products, are not
exclusive and generally may be terminated at the convenience of either
party. There can be no assurance that the Company's strategic partners
regard their relationship with the Company as strategic to their own
respective businesses and operations, that they will not reassess their
commitment to the Company or its products at any time in the future,
or that they will not develop and/or market their own competitive technology.
The Company does not manufacture any of the components
used in its products and performs only limited assembly on some products.
The Company relies on independent contractors to manufacture to
specification the Company's components, subassemblies, systems and
products. The Company also relies upon limited source suppliers for
a number of components used in the Company's products, including
certain key microprocessors and integrated circuits. There can be no
assurance that these independent contractors and suppliers will be able
to timely meet the Company's future requirements for manufactured
products, components and subassemblies. The Company generally purchases
limited source components pursuant to purchase orders and has no
guaranteed supply arrangements with these suppliers. In addition, the
availability of many of these components to the Company is dependent in
part on the Company's ability to provide its suppliers with accurate forecasts
of its future requirements. However, any extended interruption in the
supply of any of the key components currently obtained from a limited
source would disrupt its operations and have a material adverse effect
on the Company's business, operating results and financial condition.
In addition, the Company anticipates that it will be necessary to establish
additional strategic relationships in the future,in particular with additional
ISPs and VAR's however there can be no assurance that the Company will
be able to establish such alliances or that such alliances will result in
increased revenues.
Dependence on Proprietary Rights and Technology. The Company's
ability to compete is dependent in part on its proprietary rights and
technology.
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company generally enters
into confidentiality or license agreements with its employees, resellers,
distributors, customers and potential customers and limits access to the
distribution of its software, hardware designs, documentation and other
proprietary information, however in some instances the Company may
find it necessary to release its source code to certain parties, for example
the Company entered into a product development agreement pursuant
to which it released certain source code to a third party in the People's
Republic of China. There can be no assurance that the steps taken by
the Company in this regard will be adequate to prevent misappropriation
of its technology. The Company currently has ten issued United States
patents. There can be no assurance that the Company's patents will not
be invalidated, circumvented or challenged, that the rights granted
thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications, whether
or not being currently challenged by applicable governmental patent
examiners, will be issued with the scope of the claims sought by the
Company, if at all. Furthermore, there can be no assurance that others
will not develop technologies that are similar or superior to the Company's
technology or design around the patents owned by the Company. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy is expected to be a persistent problem.
In selling its software products, the Company relies primarily on ''shrink
wrap'' licenses that are not signed by licensees and, therefore, it is
possible that such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries where the
Company's products are or may be manufactured or sold, 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.
Litigation. From time to time, the Company has received claims
of infringement of other parties' proprietary rights. Although the
Company believes that all such claims received to date are without
merit or are immaterial, there can be no assurance that third parties
will not assert infringement or other claims in the future with respect
to the Company's current or future products or activities. The Company
expects that it will increasingly be subject to infringement claims as
the number of products and competitors in the Company's industry
segments grow and the functionality of products in different industry
segments overlap. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable
to the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the
Company to license the infringed or similar technology, the Company's
business, operating results and financial condition would be materially
and adversely affected.
From time to time, the Company may be involved in litigation
or administrative claims arising out of its operations in the normal course
of business. In the event of a successful claim against the Company, the
Company's business, operating results and financial condition would be
materially and adversely affected.
Risks Associated with Potential Acquisitions or Divestitures.
The Company may acquire or invest in companies, technologies or products
that complement the Company's business or its product offerings.
In addition, the Company continues to evaluate the performance of all
its products and product lines and may sell or discontinue current
technologies, products or products lines. Any acquisitions or divestiture
may result in potentially dilutive issuance of equity securities, the
write-off of software development costs or other assets, the amortization
of expenses related to goodwill and other intangible assets and/or the
incurrence of debt, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Acquisitions or divestiture would involve numerous additional risks
including difficulties in the assimilation or separation of operations,
services, products and personnel, the diversion of management's attention
from other business concerns, the disruption of the Company's business,
the entry into markets in which the Company has little or no direct prior
experience, the potential loss of key employees and the potential loss of
key distributor or supplier relationships. There can be no assurance that
the Company would be successful in overcoming these or any other
significant risks encountered.
Lengthy Sales Cycle and Lengthy Partnership Development. The
Company's Internet/Intranet software products are often licensed to customers
on a volume license basis for use on private wide area network (''WAN'')
Intranets involving thousands of nodes. These licenses often involve
significant license and maintenance fees. As a result, the license of the
Company's Internet/Intranet software products often involves a significant
commitment of management attention and resources by prospective
customers. Accordingly, the Company's sales process for these products is
often subject to delays associated with long approval processes that
typically accompany significant capital expenditures. For these and
other reasons, the sales cycle associated with the license of the Internet/
Intranet software products is often lengthy and subject to a number of
significant delays over which the Company has little or no control. There
can be no assurance that the Company will not experience these and
additional delays in the future on Internet/Intranet software or other
products.
The Company's Netopia products are often distributed through
partnerships with ISPs, internet content providers and on-line communities.
These partnerships often involve lengthy testing and certification studies
as well as detailed agreements. As a result, partnerships with ISPs,
internet content providers and on-line communities to distribute
Netopia products involve a significant commitment of management
attention and resources by prospective partners. Accordingly, the
Company's business development process for these distribution
channels is often subject to delays associated with long approval
processes that typically accompany significant partnership development
and capital expenditures. For these and other reasons, the business
development process associated with the partnerships are often lengthy
and subject to a number of significant delays over which the Company
has little or no control. There can be no assurance that the Company
will not experience these and additional delays in the future on
partnership development.
Tariff and Regulatory Matters. The Company is not currently
subject to direct regulation by any government agency, other than
regulations applicable to businesses generally. However, rates for
telecommunications services are governed by tariffs of licensed
carriers that are subject to regulatory approval. Future changes in
these tariffs could have a material adverse effect on the Company's
business, operating results and financial condition. For example, if
tariffs for public switched digital services increase in the future relative
to tariffs for private leased services, then the cost-effectiveness of the
Company's products would be reduced and its business, operating
results and financial condition would be materially and adversely
affected. In addition, the Company's telecommunications products
must meet standards and receive certification for connection to public
telecommunications networks prior to their sale. In the United States,
such products must comply with Part 15(a) (industrial equipment),
Part 15(b) (residential equipment) and Part 68 (analog and ISDN lines)
of the Federal Communications Commission regulations. The Company's
telecommunications products also must be certified by certain domestic
telecommunications carriers. In foreign countries, such products are
subject to a wide variety of governmental review and certification
requirements. While certain foreign countries and the European
Economic Community regulate the importation and certification of
the Company's products, most foreign customers typically require
that the Company's products receive certification from their country's
primary telecommunication carriers. Any future inability to obtain on
a timely basis or retain domestic regulatory approvals and certification
or foreign regulatory approvals, including safety and telecommunications,
could have a material adverse effect on the Company's business, operating
results and financial condition.
Dependence on Key Personnel. The Company's business and
prospects depend to a significant degree upon the continuing contributions
of its key management, sales, marketing, product development and
administrative personnel. The Company does not have employment
contracts with its key personnel and does not maintain any key person
life insurance policies. The loss of key management or technical
personnel could materially adversely affect the Company's business,
operating results and financial condition. The Company believes that
its prospects depend in large part upon its ability to attract and retain
highly-skilled engineering, managerial, sales and marketing, and
administrative personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. Failure to attract and retain
key personnel could have a material adverse effect on the Company's
business, operating results and financial condition.
Volatility of Stock Price. The market price of the shares of
the Company's Common Stock is highly volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the
Company's results of operations, announcements of technological
innovations, introduction of new products by the Company or its
competitors, developments with respect to patents, copyrights or
proprietary rights, conditions and trends in the networking and
other technology industries, changes in or failure by the Company
to meet securities analysts' expectations, general market conditions
and other factors. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In the past, following
periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought
against that company. There can be no assurance that such litigation
will not occur in the future with respect to the Company. Such litigation
could result in substantial costs and a diversion of management's attention
and resources, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
California Headquarters . The Company's corporate headquarters
and a large portion of its research and development facilities as well as other
critical business operations are located in California, near major earthquake
faults. The Company's business, financial condition and operating results
could be materially adversely affected in the event of a major earthquake.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through
cash flow from operations, the private sale of equity securities and
the Initial Public Offering ("IPO") of the Company's Common Stock.
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 December 31, 1997, the Company had cash, cash equivalents and
short-term investments representing 69% of total assets.
The Company used cash from operating activities of $169,000
for the three months ended December 31, 1997. The cash used from
operations was primarily due to the net loss of $1.1 million and an increase
of $567,000 in inventories, partially offset by the collection of accounts
receivable of $1.4 million. Netopia Internet connectivity products and
Fast Ethernet products represented 23% and 16% of total gross inventory
as of September 30, 1997, respectively, and represented 20% and 14%
of total gross inventory as of December 31, 1997, respectively.
The Company's investing activities have consisted primarily
of purchases of short-term investments and capital equipment.
Expenditures for capital equipment totaled $177,000 for the three
months ended December 31, 1997, representing acquisitions of
computer equipment used predominantly in product development.
The Company expects that its capital expenditures will increase in
future periods to support new product development and production.
The Company's principal commitments consist primarily of leases
on its headquarters facilities and certain operating equipment.
The Company believes that its existing cash, cash
equivalents and short-term investments will be adequate to meet its
cash needs for working capital and capital expenditures for at least
the next 12 months. Thereafter, if cash generated from operations
is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or convertible debt
securities or obtain additional credit facilities. The sale of additional
equity or convertible debt securities could result in additional dilution
to the Company's stockholders. A portion of the Company's cash may
be used to acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies. From time
to time, in the ordinary course of business, the Company evaluates
potential acquisitions of such businesses, products or technologies.
The Company has no agreements or commitments, and is not currently
engaged in any negotiations with respect to any such transaction.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed an 8-K on November 17, 1997
announcing a corporate name change from Farallon Communications, Inc.
to Netopia, Inc. and corresponding NASDAQ ticker symbol change from
"FRLN" to "NTPA."
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: February 13, 1998
NETOPIA, INC.
(Registrant)
By: /s/ James A. Clark
James A. Clark
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit Description
27.1 Financial Data Schedule
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