<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): October 13, 1999
--------------------
NETOPIA, INC.
-------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-28450 94-3033136
- ------------------------------ ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2470 Mariner Square Loop, Alameda, California 94501
- ---------------------------------------------- ------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (510) 814-5100
----------------
Same
- -------------------------------------------------------------------------------
(Former name or Former Address, if Changed Since Last Report
<PAGE>
On October 28, 1999, Netopia, Inc. (Netopia or the Company) filed a
Report on Form 8-K to report the completion of its acquisition of StarNet
Technologies, Inc. (StarNet) on October 13, 1999. Netopia indicated that it
would file the financial information required by Item 7 of Form 8-K no later
than the date required by this item. Netopia is filing this Amendment No. 1 to
provide this financial information. In addition, Netopia is filing under Item 5
of this Form 8-K, its audited financial statements for the fiscal year ended
September 30, 1999.
Item 5(a). Registrants' Audited Consolidated Financial Statements
The following consolidated financial statements of Netopia, Inc. are
filed as part of this Report on Form 8-K.
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page
<S> <C>
Report of KPMG LLP, Independent Auditors....................................................... 2
Consolidated Balance Sheets as of September 30, 1999 and 1998.................................. 3
Consolidated Statements of Operations for the Years Ended September 30, 1999, 1998 and 1997.... 4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1999, 1998
and 1997..................................................................................... 5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997.... 6
Notes to Consolidated Financial Statements..................................................... 7
Schedule II - Valuation and Qualifying Accounts................................................ 26
</TABLE>
1
<PAGE>
Independent Auditors' Report
The Board of Directors
Netopia, Inc. and subsidiaries:
We have audited the consolidated financial statements of Netopia, Inc. and
subsidiaries (the Company) as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 subsidiaries as of September 30, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related 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
herein.
KPMG LLP
San Francisco, California
October 29, 1999
2
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
------------- -------------
(in thousands, except for
share and per share amounts)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................. $ 61,381 $19,244
Short-term investments..................................................... 8,102 22,851
Trade accounts receivable less allowance for doubtful accounts and returns
of $796 and $617, respectively............................................ 9,852 4,358
Royalties receivable....................................................... 361 410
Note receivable............................................................ 966 --
Inventories, net........................................................... 3,681 1,591
Prepaid expenses and other current assets.................................. 1,397 929
------------- -------------
Total current assets...................................................... 85,740 49,383
Note receivable............................................................. -- 900
Royalties receivable........................................................ 377 1,372
Furniture, fixtures and equipment, net...................................... 2,403 2,068
Intangible assets, net...................................................... 2,362 --
Deposits and other assets................................................... 5,087 2,569
------------- -------------
$ 95,969 $56,292
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................................... $ 5,258 $ 5,440
Accrued compensation....................................................... 2,170 1,217
Accrued liabilities........................................................ 1,564 3,468
Deferred revenue........................................................... 1,343 807
Other current liabilities.................................................. 11 299
------------- -------------
Total current liabilities................................................. 10,346 11,231
Long-term liabilities....................................................... 544 260
------------- -------------
Total liabilities......................................................... 10,890 11,491
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;
15,519,198 and 11,953,908 shares issued and outstanding at
September 30, 1999 and 1998, respectively................................ 15 12
Additional paid-in capital................................................. 99,978 51,871
Accumulated deficit...................................................... (14,942) (7,082)
Accumulated other comprehensive income................................... 28 --
------------- -------------
Total stockholders' equity............................................... 85,079 44,801
------------- -------------
$ 95,969 $56,292
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal years ended September 30,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(in thousands, except for per share amounts)
<S> <C> <C> <C>
Revenues:
Internet connectivity products.............................. $24,460 $ 10,885 $ 8,134
Web platform licenses and services.......................... 19,691 13,951 12,036
-------------- -------------- --------------
44,151 24,836 20,170
Cost of revenues:
Internet connectivity products.............................. 15,597 7,064 5,258
Web platform licenses and services.......................... 646 891 1,138
-------------- -------------- --------------
16,243 7,955 6,396
-------------- -------------- --------------
Gross profit.................................................... 27,908 16,881 13,774
Operating expenses:
Research and development....................................... 9,211 7,201 7,177
Selling and marketing.......................................... 20,221 14,404 11,288
General and administrative..................................... 3,654 3,380 2,945
Acquired in-process research and development................ 4,205 -- --
Amortization of goodwill and other intangible assets........ 543 -- --
-------------- -------------- --------------
Total operating expenses....................................... 37,834 24,985 21,410
-------------- -------------- --------------
Operating loss.............................................. (9,926) (8,104) (7,636)
Other income, net............................................... 2,066 2,222 1,869
-------------- -------------- --------------
Loss from continuing operations before income taxes............ (7,860) (5,882) (5,767)
Income tax provision (benefit).................................. -- 2,155 (2,217)
-------------- -------------- --------------
Loss from continuing operations............................ (7,860) (8,037) (3,550)
Discontinued operations:
Income from discontinued operations, net of taxes.............. -- 602 3,021
Loss on sale of discontinued operations, net of taxes.......... -- (3,098) --
-------------- -------------- --------------
Net loss.................................................... $(7,860) $(10,533) $ (529)
============== ============== ==============
Comprehensive loss:
Net loss....................................................... $(7,860) $(10,533) $ (529)
Other comprehensive income..................................... 28 -- --
-------------- -------------- --------------
Total comprehensive loss.................................... $(7,832) $(10,533) $ (529)
============== ============== ==============
Per share data, continuing operations:
Basic and diluted loss per share............................... $(0.60) $(0.69) $(0.31)
============== ============== ==============
Common shares used in the per share calculations............... 13,092 11,687 11,335
============== ============== ==============
Per share data, net loss:
Basic and diluted net loss per share........................... $(0.60) $(0.90) $(0.05)
============== ============== ==============
Common shares used in the per share calculations............... 13,092 11,687 11,335
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred other Retained Total
--------------------- paid-in compen- comprehensive earnings stockholders'
Shares Amount capital sation income (deficit) equity
---------------------------------------------------------------------------------------
(in thousands except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
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
---------------------------------------------------------------------------------------
Exercise of stock options 626,013 1 2,834 -- -- -- 2,835
Acceleration and extension of stock options -- -- 176 -- -- -- 176
Issuance of common stock under
secondary offering 2,330,000 2 41,315 -- -- -- 41,317
Net unrealized investment gain -- -- -- -- 28 -- 28
Issuance of common shares for
acquisition 409,556 -- 2,811 -- -- -- 2,811
Issuance of common stock under
Employee Stock Purchase Plan 199,721 -- 855 -- -- -- 855
Issuance of non-employee
stock options -- -- 116 -- -- -- 116
Net loss -- -- -- -- -- (7,860) (7,860)
---------------------------------------------------------------------------------------
Balances, September 30, 1999 15,519,198 $15 $99,978 $ -- $28 $(14,942) $ 85,079
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal years ended September 30,
-----------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Cash flows from operating activities: (in thousands)
<S> <C> <C> <C>
Net loss................................................................. $ (7,860) $(10,533) $ (529)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 2,990 995 1,812
Deferred income taxes................................................. -- 2,869 (673)
Amortization of deferred compensation................................. -- 24 27
Noncash compensation for services..................................... 292 -- 60
Charge for in-process research and development........................ 4,205 -- --
Changes in allowance for doubtful accounts and returns on
accounts receivable................................................. 179 (40) (201)
Changes in operating assets and liabilities, net of effects of
acquisition:
Trade accounts receivable........................................... (5,673) 1,549 3,041
Inventories......................................................... (2,090) (618) 1,874
Prepaid expenses and other current assets........................... (470) (443) 667
Deposits and other assets........................................... 637 (127) 49
Accounts payable and accrued liabilities............................ (1,133) 5,310 (1,508)
Deferred revenue.................................................... 627 (67) 87
Other liabilities................................................... (94) 155 185
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities............... (8,390) (926) 4,891
----------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment......................... (1,625) (711) (1,111)
Acquisition of trademark license...................................... -- (1,000) --
Capitalization of software development costs.......................... (656) (237) (350)
Proceeds from sale of discontinued operations......................... -- 2,000 --
Acquisition of long term investment................................... (1,000) -- --
Acquisition of technology............................................. (4,298) -- --
Purchase of intangibles............................................... (1,650) -- --
Purchase of short-term investments.................................... (19,472) (47,706) (35,900)
Proceeds from the sale of short-term investments...................... 34,221 52,047 25,943
----------------- ----------------- -----------------
Net cash provided by (used in) investing activities............... 5,520 4,393 (11,418)
----------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net....................... 45,007 1,333 1,061
----------------- ----------------- -----------------
Net cash provided by financing activities......................... 45,007 1,333 1,061
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents..................... 42,137 4,800 (5,466)
Cash and cash equivalents, beginning of year............................. 19,244 14,444 19,910
----------------- ----------------- -----------------
Cash and cash equivalents, end of year................................... $ 61,381 $ 19,244 $ 14,444
================= ================= =================
Supplemental disclosures of cash flow activities:
Income taxes paid..................................................... $ -- $ 193 $ 289
================= ================= =================
Supplemental disclosures of noncash investing and financing activities:
Issuance of common stock for acquisition of intangible assets......... $ 2,811 $ -- $ --
================= ================= =================
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 $ --
================= ================= =================
Warrant received from sale of discontinued
operations........................................................... $ -- $ 189 $ --
================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Netopia, Inc. provides Internet and electronic commerce infrastructure that
enables small and medium size businesses to easily and cost effectively connect
to the Internet, establish and enhance their presence, and conduct business and
electronic commerce on the Web. We offer high-speed, multi-user, plug-and-play
Internet connectivity products and Web platforms for creating and hosting Web
sites, creating and hosting electronic commerce stores, and conducting real-time
Internet communications.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries located in France, Germany and the
Netherlands. 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 is 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, 1999 and 1998, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
U.S. Treasury Securities and obligations of
U.S. Government agencies......................................... $ 996 $10,554
Corporate debt..................................................... 3,015 3,997
Commercial paper................................................... 49,822 21,567
------------ -----------
$53,833 $36,118
============ ===========
</TABLE>
The available-for-sale securities as of September 30, 1999 were all due in
one year or less. As of September 30, 1999, the Company had an unrealized gain
on short-term investments of approximately $28,000.
Expected maturities may differ from contractual maturities because issuers
of the securities may have the right to prepay obligations without penalties.
7
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Maintenance and service revenues are recognized over the
period in which services are provided. 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.
In October 1997, the Accounting Standards Executive Committee (AcSec) of
the American Institute of Certified Public Accountants issued Statement of
Position (SOP) No. 97-2, Software Revenue Recognition. The Company adopted SOP
97-2 for software transactions entered into beginning October 1, 1998. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements (i.e., 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. Adoption of SOP 97-2 did not have a
material impact on the Company's results of operations.
In December 1998, AcSec issued SOP 98-9, Software Revenue Recognition, With
Respect to Certain Transactions, which requires recognition of revenue using the
"residual method" in a multiple-element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method," the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect a material change to its accounting for revenues as a result of the
provisions of SOP 98-9.
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
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.
8
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed 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, Including Intangible Assets
The Company evaluates long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net 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 exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of carrying
values or fair values, less costs of disposal.
Intangible assets consist of items related to our business combinations.
Goodwill is amortized over a four-year period. Acquired technology is being
amortized over its estimated useful life of approximately three years.
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 begins when the
products are available for general release to customers, and is computed on a
product-by-product basis as the greater of: (i) the ratio of current gross
revenue for a product to the total of current and anticipated future gross
revenues for the product; or (ii) the straight-line method over the remaining
estimated economic life of the product, which is generally two years. All other
research and development expenditures are charged to research and development
expense in the period incurred. During fiscal 1999, 1998 and 1997, $656,000,
$237,000 and $350,000, 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
$1.7 million, $1.3 million and $1.0 million for fiscal 1999, 1998 and 1997,
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
9
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Per Share Calculations
Basic net income (loss) per share (EPS) 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 options and warrants.
Potentially dilutive common shares have been excluded from the computation
of diluted EPS for fiscal 1999, 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. Potentially dilutive common shares which were excluded from the
computation of diluted
EPS consisted of options to purchase common stock totaling 4,040,520 in
fiscal 1999, 3,520,899 in fiscal 1998 and 2,867,200 in fiscal 1997, and 60,000
warrants in fiscal years 1999, 1998 and 1997.
Recent Accounting Pronouncements
In March 1998, AcSec 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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Hedging Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments (including derivative instruments embedded in other
contracts) and for hedging activities. SFAS No. 133, as
10
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
(2) Acquisitions
On December 17, 1998, the Company closed a transaction to purchase
substantially all of the assets and assume certain liabilities and the existing
operations of Serus LLC ("Serus"), a Utah limited liability company. Serus is
developing a java-based web site editing software product which would allow web
site owners to modify and edit the appearance of their web site through their
web browser with minimal knowledge of Hypertext Markup Language ("HTML"). 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. In
accordance with the Serus Asset Purchase Agreement, Netopia acquired
substantially all of the assets and assumed certain liabilities of Serus and its
existing operations which included 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 paid 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 Serus Purchase Agreement. The excess purchase price
over the net book value acquired was $6.0 million, of which, based upon the
Company's estimates prepared in conjunction with a third party valuation
consultant, $3.9 million was allocated to acquired in-process research and
development and $2.1 million was allocated to intangible assets. The amounts
allocated to intangible assets include assembled workforces of $100,000 and
goodwill of $2.0 million. The Company used the income approach to appraise the
value of the business and projects acquired. Such method takes into
consideration the stage of completion of the project and estimates related to
expected future revenues, expenses and cash flows which are then discounted back
to present day amounts. Based upon these estimates, material net cash flows from
the acquired business are expected to occur during the calendar year 2001. These
cash flows were discounted using a discount rate of 44.0%. Based upon the
expenses incurred and the development time invested in the product prior to the
acquisition and the estimated expenses and development time to complete the
product, the Company determined the product to be approximately 85% complete at
the time of acquisition. On November 15, 1999, the Company launched the product
and is marketing the product under the Net Jane product brand name. Since the
acquisition date, the Company expended approximately $664,000 to complete
development of the product. The $1.0 million earnout opportunity described above
shall be accounted for when it is deemed probable that the earnout will be
earned. The Company will amortize goodwill related to the Serus transaction over
the next four years. For the fiscal year ended September 30, 1999, goodwill
amortization related to the Serus transaction was $398,000.
On December 31, 1998, the Company closed a transaction to purchase from
Network Associates' substantially all of the assets and assume certain
liabilities related to the netOctopus systems management software
("netOctopus"). The netOctopus software is a suite of administration tools under
development that allows for simultaneous system support of multiple users across
MacOS computer networks. Upon completion of the development of the Windows
versions of the netOctopus software products, Netopia intends to market the
products both independently and along with its Timbuktu Pro software. In
accordance with the netOctopus Purchase Agreement, Netopia acquired
substantially all of the assets and assumed certain liabilities related to the
netOctopus software and its existing operations which included in-process
research and development. The maximum aggregate purchase price of the netOctopus
transaction was $1.1 million of cash paid on the closing date of the
transaction. In addition, there is a $300,000 earnout opportunity based upon
certain criteria as set forth in the netOctopus Purchase Agreement. The excess
purchase price over the net book value acquired was $1.1 million, of which,
based
11
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
upon the Company's estimates prepared in conjunction with a third party
valuation consultant, $400,000 was allocated to acquired in-process research and
development and $753,000 was allocated to intangible assets. The amounts
allocated to intangible assets include assembled workforces of $60,000,
developed technology of $540,000 and goodwill of $100,000. The Company used the
income approach to appraise the value of the business and projects acquired.
Such method takes into consideration the stage of completion of the project and
estimates related to expected future revenues, expenses and cash flows which are
then discounted back to present day amounts. Based upon these estimates,
material net cash flows from the acquired business are expected to occur during
the calendar year 2000. These cash flows were discounted using a discount rate
of 25.0%. Based upon the expenses incurred and the development time invested in
the product prior to the acquisition and the estimated expenses and development
time to complete the product, the Company determined the product to be
approximately 70% complete at the time of acquisition. In fiscal 1999, the
Company completed the development of the Windows versions of the product. From
the acquisition date, the Company expended approximately $287,000 to complete
development of the product. The Company is amortizing the goodwill related to
the netOctopus transaction over the next four years. During the fiscal year
ended September 30, 1999, goodwill amortization related to the netOctopus
transaction was $145,000.
The Company has not presented pro-forma financial statements giving effect
to the aforementioned acquisitions as the pro forma results would not materially
differ from the financial statements presented herein for the fiscal year ended
September 30, 1999.
(3) Discontinued Operations
On August 5, 1998, the Company sold its Farallon Local Area Networking
(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:
12
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Royalty Rate on
If Farallon Annual Total Farallon
Revenues are: Revenue Equals
--------------------------- -------------------
(in thousands)
<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, were not
recorded to the extent that total consideration on the transaction exceeded 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 and $32.0 million in fiscal 1998 and 1997,
respectively. The income from discontinued operations of $602,000 and $3.0
million in fiscal 1998 and 1997, 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, $1.2
million and $2.5 million is included in accrued liabilities at September 30,
1999 and 1998, respectively.
The following approximates the accrued liabilities of the LAN Division
which are included in the consolidated balance sheets as of September 30, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Facility costs.................................................. $1,164 $1,700
Employee related costs.......................................... -- 300
Service fees.................................................... 4 500
----------- -----------
$1,168 $2,500
=========== ===========
</TABLE>
13
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents the earnings per share data on an after tax basis
for the discontinued operations:
<TABLE>
<CAPTION>
Fiscal years ended September 30,
---------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Per share data, discontinued operations:
Basic income per share......................................... $ -- $ 0.05 $ 0.27
=============== ============== ===============
Diluted income per share....................................... $ -- $ 0.05 $ 0.24
=============== ============== ===============
Common shares used in the calculations of basic income
per share.................................................... -- 11,687 11,335
=============== ============== ===============
Common and common equivalent shares used in the
calculations of diluted income per share..................... -- 12,830 12,350
=============== ============== ===============
Basic and diluted per share loss on sale....................... $ -- $ (0.27) $ --
=============== ============== ===============
Common shares used in the per share calculation................ -- 11,687 --
=============== ============== ===============
</TABLE>
(4) Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials and work in process............................................ $1,699 $1,080
Finished goods............................................................... 1,982 511
------------ ------------
$3,681 $1,591
------------ ------------
</TABLE>
(5) Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Office equipment............................................................. $ 2,684 $ 2,457
Furniture and fixtures....................................................... 1,637 1,186
Computers.................................................................... 8,675 7,757
Leasehold improvements....................................................... 569 540
------------ -----------
13,565 11,940
Accumulated depreciation and amortization.................................... (11,162) (9,872)
------------ -----------
$ 2,403 $ 2,068
============ ===========
</TABLE>
14
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Income Taxes
Total income tax expense (benefit) for the years ended September 30, 1999,
1998 and 1997 is allocated as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1999 1998 1997
-------------- ----------- -----------
<S> <C> <C> <C>
Continuing operations............................................. $ -- $2,155 $(2,217)
Discontinued operations........................................... -- 385 1,932
-------------- ----------- -----------
$ -- $2,540 $ (285)
============== =========== ===========
</TABLE>
Income tax expense (benefit) related to continuing operations consisted of
the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1999 1998 1997
-------------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ -- $ (596) $(1,753)
State............................................................ -- (118) (6)
-------------- ----------- -----------
-- (714) (1,759)
Deferred:
Federal.......................................................... -- 2,191 (378)
State............................................................ -- 678 (295)
-------------- ----------- -----------
-- 2,869 (673)
Charge in lieu of taxes attributable to employer
stock option plans............................................... -- -- 215
-------------- ----------- ------------
Total.......................................................... $ -- $2,155 $(2,217)
============== =========== ===========
</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
loss as a result of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Computed ''expected'' tax (benefit) of 34%........................ $(2,672) $(2,000) $(1,960)
Change in valuation allowance for deferred tax
assets........................................................... 2,772 5,459 512
Tax exempt interest income........................................ -- -- (163)
Research credits.................................................. (100) (770) (172)
State tax and other, net.......................................... -- (534) (434)
-------------- ----------- -----------
$ -- $ 2,155 $(2,217)
============= =========== ===========
</TABLE>
15
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax asset:
Reserves and accruals not currently deductible............................. $ 1,373 $ 1,010
Deferred rent.............................................................. 119 119
Research and other credits................................................. 1,882 1,782
Tangible and intangible assets............................................. 279 349
Net operating losses....................................................... 5,713 2,377
State tax and other, net................................................... -- 957
------------- -------------
Total deferred assets................................................... 9,366 6,594
Less valuation allowance................................................... (9,366) (6,594)
------------- -------------
Net deferred tax assets................................................. $ -- $ --
============= =============
</TABLE>
The net change in the total valuation allowance for the years ended
September 30, 1999 and 1998 was increases of $2,772,000 and $6,082,000,
respectively.
At September 30, 1999 and 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, 1999, the Company had net operating loss carryforwards of
approximately $12.0 million for federal tax purposes and $6.0 million for state
tax purposes. If not earlier utilized, the federal net operating loss
carryforwards will expire in 2019 and the state net operating loss carryforwards
will expire in 2004. At September 30, 1999, the Company had research credit
carryforwards of approximately $1.5 million for federal tax purposes and
$382,000 for state tax purposes. If not earlier utilized, the federal research
credit carryforwards will expire in years 2009 through 2019. 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.
(7) 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.
16
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock
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. 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.
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 estimated fair value of the warrants issued.
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. As of September 30, 1999 the 1996 Plan
share reserve of 4,170,714 shares is comprised of (i) 4,040,520 shares subject
to outstanding options and (ii) 130,194 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 initial public offering at the initial
offering price. These options were granted to three non-employee Board of
Director members, of which two currently remain on the Company's Board of
Directors. 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 after
December 31, 1996 will become exercisable in five successive and equal annual
installments over the non-employee Board member's period of continued service as
a Board member, beginning one year from the grant date of the option.
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.
17
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the first quarter of fiscal 1999 in connection with the sale of the LAN
Division to Gores, the Company provided a 90-day extension of the exercise
period for all LAN Division employees with outstanding stock options priced at
$4.00 or higher in the Company. This resulted in a total compensation charge of
$33,000. Also in the first quarter of fiscal 1999 in connection with the sale of
the LAN Division to Gores, the Company provided for an accelerated vesting
period to certain employees of the LAN Division for their outstanding stock
options in the Company. This resulted in a total compensation charge of
approximately $143,000.
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. There are currently no options remaining on the
converted shares. 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.
The following table summarizes activity under the 1996 Plan (and its
predecessor):
<TABLE>
<CAPTION>
Incentive Stock Options
--------------------------------------
Weighted
Shares Under Average
Options Exercise Price
----------------- -----------------
<S> <C> <C>
Outstanding as of September 30, 1996....................... 1,601,305 $ 3.64
Options granted............................................ 1,787,365 5.36
Options exercised.......................................... (194,535) 1.17
Options cancelled.......................................... (326,935) 8.53
----------------- -----------------
Outstanding as of September 30, 1997....................... 2,867,200 4.32
Options granted............................................ 1,409,425 5.51
Options exercised.......................................... (312,090) 2.40
Options cancelled.......................................... (443,636) 4.80
----------------- -----------------
Outstanding as of September 30, 1998....................... 3,520,899 4.90
Options granted............................................ 1,413,900 11.87
Options exercised.......................................... (626,013) 4.55
Options cancelled.......................................... (268,266) 6.89
----------------- -----------------
Outstanding as of September 30, 1999....................... 4,040,520 7.26
================= =================
Exercisable................................................ 1,596,496 $ 4.59
================= =================
</TABLE>
18
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Number of Weighted- Number
outstanding average Weighted- exercisable Weighted-
shares as of remaining average as of average
September contractual exercise September exercise
Range of exercise prices 30, 1999 life (years) price 30, 1999 price
- ----------------------------- -------------- ------------- ------------ -------------- ------------
<C> <S><C> <C> <C> <C> <C>
$ 1.00 228,777 1.85 $ 1.00 228,777 $ 1.00
1.20 178,940 4.68 1.20 171,374 1.20
1.60 - 4.00 237,990 6.38 2.91 174,395 2.72
4.25 - 4.50 258,918 7.91 4.38 109,180 4.38
4.63 - 5.19 269,189 8.68 4.73 76,868 4.71
5.25 - 5.63 633,903 8.06 5.35 264,638 5.33
5.69 545,982 8.53 5.69 178,206 5.69
5.75 - 6.75 759,500 8.35 6.58 271,823 6.43
6.81 - 11.25 331,921 8.84 8.79 77,096 8.64
14.88 - 36.00 595,400 9.52 19.14 44,139 16.89
-------------- ------------- ------------- -------------- ------------
$ 1.00 - 36.00 4,040,520 7.89 $ 7.26 1,596,496 $ 4.59
============== ============= ============ ============== ============
</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 450,000 shares have been approved
for issuance under the Purchase Plan. Employees may purchase shares of common
stock at a price per share that is 85% of the lesser of the fair market value as
of the beginning or the end of the semi-annual option period.
Shares issued under the Purchase Plan totaled 199,721 in fiscal 1999,
153,157 in fiscal 1998 and 178,236 in fiscal 1997. As of September 30, 1999,
531,114 shares have been issued under the Purchase Plan and 218,886 shares were
reserved for future issuances under the plan.
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 No. 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):
19
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) -- as reported........................... $ (7,860) $(10,533) $ (529)
Net income (loss) -- pro forma............................. (12,143) (13,384) (1,109)
Basic and diluted net loss per
share -- as reported..................................... (0.60) (0.90) (0.05)
Basic and diluted net loss per
share -- pro forma....................................... $ (0.93) $ (1.15) $ (0.10)
</TABLE>
The effect on net loss and net 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 loss for the future years
because pro forma net loss reflects compensation costs only for stock options
granted in fiscal 1999, 1998 and 1997. The weighted average fair value of
employee stock options granted during fiscal 1999, 1998 and 1997 was $8.08,
$3.48 and $3.05 respectively.
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>
Years ended September 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Expected volatility......................................... 95% 84% 70%
Risk-free interest rate..................................... 4.59% 4.25% 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
for all years presented.
(8) Commitments and Contingencies
Leases
The Company conducts its operations in leased facilities and with equipment
under operating lease agreements expiring at various dates through 2004.
20
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
2000................................................................... $1,383
2001................................................................... 1,298
2002................................................................... 1,258
2003................................................................... 138
2004................................................................... 28
thereafter............................................................. --
-----------
Total minimum lease payments....................................... $4,105
===========
</TABLE>
Total rental expense for all operating leases amounted to approximately
$1,115,000, $1,244,000 and $1,157,000 for the years ended September 30, 1999,
1998 and 1997, 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.
(9) Geographic, Segment and Significant Customer Information
The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, during fiscal year 1999. SFAS
No. 131 establishes standards for the reporting by public business enterprises
of information about operating segments, products and services, geographic
areas, and major customers. The methodology for determining what information is
reported is based on the organization of operating segments and the related
information that the Chief Operating Decision Maker (CODM) uses for operational
decisions and financial performance assessments. The Company's Chief Executive
Officer (CEO) is considered its CODM. For purposes of making operating decisions
and assessing financial performance, the CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information for
revenues and gross margins by product group as well as revenues by geographic
region and by customer. Currently, operating expenses and assets are not
disaggregated by product group for purposes of making operating decisions and
assessing performance.
21
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company generates revenue from three groups of products and services.
Disaggregated financial information regarding the Company's three operating
segments is as follows:
<TABLE>
<CAPTION>
-------------------------------------
WEB PLATFORM LICENSES
------------------ ------------------------------------- ------------------
INTERNET
CONNECTIVITY WEB SITE TIMBUKTU
PRODUCTS PRODUCTS PRODUCTS TOTAL PRODUCTS
----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
1999
Revenues............................................ $24,460 $3,826 $15,865 $44,151
Cost of revenues.................................... 15,597 13 633 16,243
---------------- ----------------- ----------------- ---------------
Gross profit..................................... 8,863 3,813 15,232 27,908
37,834
Unallocated operating expenses -------------------
Operating loss................................... (9,926)
Other income, net................................... 2,066
-------------------
Loss before income taxes......................... (7,860)
Income tax provision (benefit)...................... --
------------------
Net loss......................................... $(7,860)
===================
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
WEB PLATFORM LICENSES
------------------ ------------------------------------- -------------------
INTERNET
CONNECTIVITY WEB SITE TIMBUKTU
PRODUCTS PRODUCTS PRODUCTS TOTAL PRODUCTS
----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
1998
Revenues............................................ $10,885 $691 $13,260 $ 24,836
Cost of revenues.................................... 7,064 16 875 7,955
----------------- ----------------- ----------------- ------------------
Gross profit..................................... 3,821 675 12,385 16,881
Unallocated operating expenses 24,985
------------------
Operating loss................................... (8,104)
Other income, net................................... 2,222
------------------
Loss from continuing operations before income taxes. (5,882)
Income tax provision................................ 2,155
------------------
Loss from continuing operations.................. $(8,037)
==================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
WEB PLATFORM LICENSES
---------------- ----------------------------------------- --------------
INTERNET
CONNECTIVITY WEB SITE
PRODUCTS PRODUCTS TIMBUKTU PRODUCTS TOTAL PRODUCTS
----------------- ----------------- --------------------- --------------
<S> <C> <C> <C> <C>
1997
Revenues........................................... $8,134 $290 $11,746 $ 20,170
Cost of revenues................................... 5,258 15 1,123 6,396
----------------- ----------------- --------------------- --------------
Gross profit........................................ 2,876 275 10,623 13,774
Unallocated operating expenses 21,410
--------------
Operating loss................................... (7,636)
Other income, net................................... 1,869
--------------
Loss from continuing operations before income taxes. (5,767)
Income tax provision................................ (2,217)
--------------
Loss from continuing operations.................. $(3,550)
==============
</TABLE>
22
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company sells its products and provides services worldwide through a
direct sales force, independent distributors, and value-added resellers. It
currently operates in five regions, United States, Europe, Asia/Pacific, Canada,
and Latin America. Revenues outside of the United States are primarily export
sales denominated in United States dollars. Disaggregated financial information
regarding the Company's products and services and revenues by geographic region
is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States..................................................... $31,945 $16,670 $14,637
Europe............................................................ 9,820 6,215 3,929
Asia/Pacific...................................................... 1,066 1,175 1,018
Canada............................................................ 1,222 706 542
Latin America..................................................... 98 70 44
----------- ----------- -----------
Total revenues.................................................. $44,151 $24,836 $20,170
=========== =========== ===========
</TABLE>
The Company has no material operating assets outside the United States.
During the years ended September 30, 1999, 1998 and 1997, one customer
accounted for greater than 10% of total revenues and total accounts receivable.
No other customers have accounted for 10% or more of the Company's total revenue
or total accounts receivable for the last three fiscal years. Significant
customer information is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------- --------------------------------------------------
Percent of total revenue Percent of total accounts receivable
--------------------------------------------------- --------------------------------------------------
1999 1998 1997 1999 1998 1997
---------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer A 10% 12% 14% 12% 13% 23%
<CAPTION>
-------------------------------------------------- ----------------------------------------------------
Percent of total revenue from internet Percent of total revenue from web
connectivity products platform licenses
-------------------------------------------------- ----------------------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer A 61% 50% 52% 39% 50% 48%
</TABLE>
(10) Subsequent Event
On October 13, 1999, the Company acquired StarNet Technologies, Inc.,
("StarNet"), a California corporation in a merger transaction in which StarNet
merged into a newly formed, wholly owned, subsidiary. StarNet has been
developing a voice channel technology architecture that allows the transmission
of up to eight voice lines over a digital subscriber line along with the
simultaneous transmission of standard data packets. The Company intends to
integrate StarNet's technology into its Internet connectivity product
development and begin offering voice and data integrated access devices. Any
delay in the completion of the development of the products would cause the
Company to incur additional unplanned development expenses as well as the loss
or deferral of customer purchases, either of which could adversely affect the
Company's business.
The Company will account for the transaction under the purchase method.
The aggregate consideration constituting the purchase price is approximately
$27.5 million at closing (which includes
23
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1.0 million of the potential earnout payments discussed below), and may
increase by up to an additional $4.9 million depending on the actual amount of
potential earnout payments. The aggregate consideration includes:
. $8.4 million in cash paid on the closing date of the transaction;
. 447,852 shares of the Company's common stock issued on the closing date;
. A series of potential cash earnout payments aggregating up to approximately
$5.9 million at various times after the closing date if certain technical and
revenue milestones are achieved. These earnout opportunities will be included
in the purchase price for accounting purposes when it is deemed probable that
the earnout will be earned. At the acquisition date, the Company has deemed
probable and recorded approximately $1.0 million in earnout payments;
. The substitution of stock options to purchase the Company's common stock in
replacement of the StarNet options held by StarNet's former employees, who
joined the Company after the closing, valued at approximately $1.4 million
using the following assumptions for valuation purposes: volatility of 101%,
expected life of 4 years, interest rate of 4.9%, and no dividends; and,
. Transaction costs of approximately $800,000 which include legal fees,
accounting fees, fees paid for an independent fairness opinion, and fees for
other related professional services.
Approximately 30,673 shares of common stock will be held in escrow for a
period of time after the closing to satisfy StarNet's indemnification
obligations under the definitive acquisition agreements.
The issuance of shares in the merger was not registered under the
Securities Act of 1933, as amended, in reliance upon the Securities Act's
exemption from the registration requirements for nonpublic offerings, and resale
of the shares is restricted under the Securities Act. The Company has agreed to
file a registration statement on Form S-3 registering the resale of the shares.
Resale of the shares under the registration statement will be subject to certain
customary restrictions.
The acquisition will be accounted for as a purchase and will result in
goodwill and other intangible assets of approximately $22.0 million which will
amortized over three to four years and a charge for acquired in process research
and development of $5.7 million which will be recorded in the first fiscal
quarter of 2000.
The Company used the income approach to appraise the value of the business
and projects acquired. Such method takes into consideration the stage of
completion of the project and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day amounts.
Based upon these estimates, material net cash flows from the acquired business
are expected to occur during the calendar year 2000. These cash flows were
discounted using a weighted average discount rate of 20%. Based upon the
expenses incurred and the development time invested in the products prior to the
acquisition and the estimated expenses and development time to complete the
products, the Company determined the products to be approximately 73% complete
at the time of acquisition.
The funds used to pay the cash portion of the purchase price were derived
from the Company's existing working capital.
24
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All of StarNet's former full time employees became employees of the
Company. Each of StarNet's founders, and certain other key employees, entered
into non-competition agreements in connection with the acquisition.
25
<PAGE>
Item 5(b). Financial Statement Schedule
Schedule - Valuation and Qualifying Accounts (in thousands)
<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance at
beginning of to costs and end of
Description period expenses Deductions Other (a) period
- ---------------------------------------- --------------------- ------------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Fiscal year ended September 30, 1999... $ 400 $ 534 $355 $ -- $ 579
Fiscal year ended September 30, 1998... 566 96 31 231 400
Fiscal year ended September 30, 1997... 659 21 114 -- 566
Allowance for returns:
Fiscal year ended September 30, 1999... $ 217 $ -- $ -- $ -- $ 217
Fiscal year ended September 30, 1998... 561 105 210 239 217
Fiscal year ended September 30, 1997... 669 200 308 -- 561
Valuation allowance for deferred
tax assets:
Fiscal year ended September 30, 1999... $6,594 $2,772 $ $ $9,366
Fiscal year ended September 30, 1998... 512 6,082 -- -- 6,594
Fiscal year ended September 30, 1997... -- 512 -- -- 512
</TABLE>
- ---------------------------------
(a) Amounts transferred with sale of LAN Division
26
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements of StarNet Technologies, Inc. are filed as part
of this Report on Form 8-K.
<TABLE>
<CAPTION>
Index to Financial Statements Page
<S> <C>
Report of KPMG LLP, Independent Auditors....................................................... 28
Balance Sheets as of September 30, 1999 and 1998............................................... 29
Statements of Operations for the Years Ended September 30, 1999 and 1998....................... 30
Statements of Stockholders' Equity (Deficit) for the Years Ended September 30, 1999 and 1998... 31
Statements of Cash Flows for the Years Ended September 30, 1999 and 1998....................... 32
Notes to Financial Statements.................................................................. 33
</TABLE>
27
<PAGE>
Independent Auditors' Report
The Board of Directors
StarNet Technologies, Inc.:
We have audited the accompanying balance sheets of StarNet Technologies,
Inc. as of September 30, 1999 and 1998 and the related statements of operations,
stockholders' (deficit) equity, and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of StarNet Technologies, Inc.
as of September 30, 1999 and 1998 and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
San Francisco, California
November 12, 1999
28
<PAGE>
STARNET TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
----------------------------------
Assets 1999 1998
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,206 $ 51,743
Trade accounts receivable, less allowance for doubtful accounts
of $8,651 in 1999 and $0 in 1998, respectively 78,230 84,104
Related party receivables 10,092 2,736
Inventories, less provision for obsolete inventory of $59,132 in
1999 259,082 --
Prepaid expenses and other current assets 37,084 35,417
--------------- ---------------
Total assets $ 416,694 $ 174,000
=============== ===============
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable $ 290,418 $ 110,609
Accrued liabilities 40,013 31,282
Related party payable 57,009 --
Deferred revenue 247,000 --
Other current liabilities 128,104 2,345
--------------- ---------------
Total liabilities 762,544 144,236
--------------- ---------------
Stockholders' (deficit) equity:
Series A convertible preferred stock; 6,000,000 shares authorized,
issued and outstanding; aggregate liquidation preference of
$1,200,000 1,200,000 1,200,000
Series B convertible preferred stock; 1,892,970 shares authorized in
1999; 1,691,324 issued and outstanding; aggregate liquidation
preference of $1,268,493 in 1999 1,268,493 --
Common stock; 17,107,030 and 14,000,000 shares authorized in
1999 and 1998, respectively; 4,750,000 shares issued and
outstanding 47,500 47,500
Additional paid-in capital 101,548 1,083
Promissory notes receivable (43,500) (43,500)
Accumulated deficit (2,919,891) (1,175,319)
--------------- ---------------
Total stockholders' (deficit) equity (345,850) 29,764
--------------- ---------------
$ 416,694 $ 174,000
=============== ===============
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
STARNET TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Years Ended
September 30,
-------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Revenues:
Sales $ 539,114 $ 12,261
Sales and other revenue from related parties 240,505 1,000
License and product customization 300,190 235,802
---------------- -----------------
Total revenues 1,079,809 249,063
Operating expenses:
Cost of revenues 824,138 7,583
Marketing, general and administrative 656,763 492,156
Research and development 1,360,684 1,013,302
---------------- -----------------
Total operating expenses 2,841,585 1,513,041
Operating loss (1,761,776) (1,263,978)
Other income, net 18,004 45,214
---------------- -----------------
Net loss before income taxes $(1,743,772) $(1,218,764)
Tax expense 800 800
Net loss $(1,744,572) $(1,219,564)
=========== ===========
</TABLE>
See accompanying notes to financial statements
30
<PAGE>
STARNET TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Preferred stock, Preferred stock,
Series A convertible Series B convertible Common stock
-----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1997 6,000,000 $1,200,000 -- $ -- 4,850,000 $48,500
Repurchase of common stock -- -- -- -- (100,000) (1,000)
Compensation expense for options
granted to non-employees -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balances, September 30, 1998 6,000,000 1,200,000 -- -- 4,750,000 47,500
==========================================================================================
Issuance of preferred stock, Series B -- -- 1,000,000 750,000 -- --
Conversion of related party bridge loan
to preferred stock -- -- 666,667 500,000 -- --
Preferred stock issued to settle
interest payable -- -- 24,657 18,493 -- --
Compensation expense for options
granted to non-employees -- -- -- -- -- --
Issuance of stock warrants -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balances, September 30, 1999 6,000,000 $1,200,000 1,691,324 $1,268,493 4,750,000 $47,500
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Promissory Accumulated Total stockholders'
paid-in notes earnings (deficit)
capital receivable (deficit) equity
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, September 30, 1997 $ -- $(43,500) $ 44,245 $ 1,249,245
Repurchase of common stock -- -- -- (1,000)
Compensation expense for options
granted to non-employees 1,083 -- -- 1,083
Net loss -- -- (1,219,564) (1,219,564)
----------------------------------------------------------------
Balances, September 30, 1998 1,083 (43,500) (1,175,319) 29,764
================================================================
Issuance of preferred stock, Series B -- -- -- 750,000
Conversion of related party bridge loan
to preferred stock -- -- -- 500,000
Preferred stock issued to settle
interest payable -- -- -- 18,493
Compensation expense for options
granted to non-employees 98,465 -- -- 98,465
Issuance of stock warrants 2,000 -- -- 2,000
Net loss -- -- (1,744,572) (1,744,572)
----------------------------------------------------------------
Balances, September 30, 1999 $101,548 $(43,500) $(2,919,891) $ (345,850)
================================================================
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
STARNET TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended
September 30,
-------------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,744,572) $(1,219,564)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation from stock options and warrants 100,465 1,083
Interest expense settled with preferred stock 18,493 --
Changes in operating assets and liabilities:
Trade accounts receivable, net 5,874 (35,104)
Related party receivables (7,356) (2,736)
Inventories (259,082) --
Prepaid expenses and other current assets (1,667) (35,417)
Accounts payable 179,809 96,833
Accrued liabilities 8,731 31,282
Related party payables 57,009 --
Deferred revenue 247,000 --
Other current liabilities 125,759 (12,923)
------------------- --------------------
Net cash used in operating activities (1,269,537) (1,176,546)
------------------- --------------------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock 750,000 --
Proceeds from related party bridge loan 500,000 --
Repurchase of common stock -- (1,000)
------------------- --------------------
Net cash provided by (used in) financing activities 1,250,000 (1,000)
------------------- --------------------
Net decrease in cash and cash equivalents (19,537) (1,177,546)
Cash and cash equivalents, beginning of year 51,743 1,229,289
------------------- --------------------
Cash and cash equivalents, end of year $ 32,206 $ 51,743
=================== ====================
Supplemental disclosures of cash flow activities:
Income taxes paid $ 800 $ 800
=================== ====================
Noncash investing and financing activities:
Conversion of related party bridge loan to preferred stock $ 500,000 $ --
Issuance of preferred stock to settle interest payable $ 18,493 $ --
=================== ====================
</TABLE>
See accompanying notes to financial statements
32
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business and Summary of Significant Accounting Policies
(a) Nature of Business
StarNet Technologies, Inc. (the Company) was incorporated in the state of
California in January 1996 to develop and market business communication products
using Internet access devices. The operations of the Company include product
customization services relating to this sector.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(c) Revenue Recognition
Revenue from product sales is recognized upon shipment provided that a
purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the fee is fixed and determinable
and collectibility is deemed probable. If uncertainties regarding customer
acceptance exist, revenue is recognized when such uncertainties are resolved.
Product customization revenue is recognized when services are completed, as the
duration of the projects is typically three to six months.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the weighted-average method. Inventories consisted of raw materials as of
September 30, 1999.
(e) Prepaid Expenses and Other Assets
Prepaid expenses and other assets include capitalized license fees. License
fees are amortized on a straight-line basis over their estimated lives which
range from one to two years.
(f) Property and Equipment
The Company capitalizes property and equipment that have an acquisition
cost of $5,000 or greater. During the years ended September 30, 1999 and 1998,
the Company did not capitalize any property and equipment.
(g) 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.
33
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(h) Stock-Based Compensation
The Company has elected to continue to use the intrinsic value-based method
as allowed under APB Opinion No. 25, Accounting for Stock Issued to Employees,
to account for all of its stock-based employee compensation plans. Pursuant to
Statement of Accounting Standards (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.
(i) Comprehensive Loss
On October 1, 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards of
comprehensive income (loss) and its components in a full set of financial
statements. The Company's comprehensive loss consists of net loss. SFAS No. 130
requires only additional disclosures in the financial statements; it does not
affect the Company's financial position or results of operations.
(j) Financial Instruments and Concentrations of Credit Risks
The carrying value of the Company's financial instruments, including cash
and cash equivalents and accounts receivable approximates fair market value due
to their short-term nature. Financial instruments that subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable.
Credit risk is concentrated in North America. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company has had immaterial write-
offs of accounts receivable to date. Based on its ongoing credit evaluations,
the Company has adequately reserved for doubtful accounts as of the date of each
balance sheet presented herein.
(k) Segment Information
On October 1, 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS No.
131 establishes annual and interim reporting standards for operating segments of
a company. SFAS No. 131 requires disclosures of selected segment-related
financial information and descriptive information about products, major
customers and geographic areas. The Company has one operating segment because it
is not organized by multiple segments for purposes of making operating decisions
or assessing performance. The chief operating decision maker is the Chief
Executive Officer (CEO). The CEO evaluates performance, makes operating
decisions and allocates resources based on financial data consistent with the
presentation in the accompanying financial statements. All of the Company's
long-lived assets are located in the United States.
34
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(l) Use of Estimates
The preparation of the 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 financial
statements and the recorded amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments (including derivative instruments
embedded in other contracts) and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
In March 1998, AcSec 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) Income Taxes
Income tax expense for the years ended September 30, 1999 and 1998 was
$800, the minimum California state income tax. Income tax expense differs from
the amounts computed by applying the statutory income tax rate of 34% to pretax
loss as a result of net operating losses not benefited.
The Company has gross deferred tax assets of approximately $1,040,000 and
$480,000 as of September 30, 1999 and 1998, respectively, consisting primarily
of its net operating loss carryforwards. The deferred tax assets were fully
offset by a valuation allowance. The change in the valuation allowance was
$560,000 for September 30, 1999.
As of September 30, 1999, the Company had net operating loss carryforwards
of approximately $2.6 million for federal and state tax purposes. If not earlier
utilized, the federal net operating loss carryforwards will expire beginning
2011 through 2019 and the state net operating loss carryforwards will expire in
2004. The Company's future ability to utilize the net operating loss
carryforwards may be subject to limitations in the event of ownership changes as
defined in the Internal Revenue Code of 1986.
35
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(3) Stockholders' Equity and Stock Option Plan
(a) Convertible Preferred Stock
The Series A and B preferred stock have no par value. The holders of shares
of Series A preferred stock are entitled to receive dividends at a rate of $0.01
per share per annum. The holders of shares of Series B preferred stock are
entitled to receive dividends in preference to holders of common stock at an
annual rate of $0.0375. Such dividends shall be payable only when and if
declared by the Board of Directors and shall be noncumulative. No dividends are
payable on any common stock of the Company during any fiscal year of the Company
until dividends in the amounts of $0.01 per share and $0.0375 per share on the
Series A and Series B preferred stock, respectively, have been paid or declared
and set apart during the fiscal year. No dividends have been declared to date.
In the event of liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A and Series B preferred
stock are entitled to receive, prior and in preference to any distribution of
the assets or surplus funds of the Company to the holders of common stock, the
amount of $0.20 per share plus declared but unpaid dividends on each share of
Series A preferred stock and the amount of $0.75 per share plus all declared but
unpaid dividends on each share of Series B preferred stock. All assets remaining
after payment of liabilities, subject to prior distribution rights of Series A
preferred stock and Series B preferred stock, are distributed among the holders
of the Series A and Series B preferred stock and common stock pro rata based on
the number of shares held by each (assuming conversion of all Series A and B
preferred stock).
Each share of preferred stock is convertible into common stock at the
option of the holder, at any time, on a one-for-one basis, subject to certain
adjustments for antidilution. Each share of preferred stock will automatically
convert into one share of common stock, subject to certain adjustments for
antidilution, upon the earlier of (1) the vote of the majority of the preferred
stock shareholders; or (2) the closing of an underwritten public offering with a
per share price in excess of $2.00, subject to certain adjustments for
antidilution, and with gross proceeds in excess of $7,500,000. The holders of
preferred stock have voting rights on an "as if converted" basis.
(b) Common Stock
In 1997, the Company issued 4,750,000 shares of common stock to the
founders for $47,500. The Company has promissory notes receivable from certain
common stockholders in consideration for shares of the Company's common stock
issued to the stockholders. The interest rate is 6.9% per annum on the unpaid
balance of the principal sum. Principal sum and interest are due and payable on
August 25, 2001. The related shares of common stock are pledged as security for
the notes.
36
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(c) Preferred Stock Warrants
Warrants to purchase 200,000 shares of Series B preferred stock were issued
in fiscal 1999 in connection with the financing of a bridge loan. The warrants
will terminate upon the earliest to occur of the following (a) October 6, 2000,
(b) the sale, conveyance, disposal of substantially all of the Company's
property business or the Company's merger or (c) the closing of a Company
commitment underwritten public offering pursuant to a registration statement
under the Securities Act. The exercise price of the warrants is $0.75 per share
and the fair value of the warrants was $2,000, which was recognized as interest
expense in fiscal 1999. The fair value of the warrants was estimated on the date
of grant using the Black-Scholes pricing model with the following assumptions:
risk-free rate of 5.0%; expected life of 2 years; expected volatility of 60%;
and no dividends.
(d) Stock Option Plan
The Company has reserved 5,717,500 shares of common stock under its 1997
Stock Plan (the 1997 Plan), amended February 1998 and June 1999, providing for
the issuance of incentive or non-statutory options for common stock shares to
directors, employees, and non-employee consultants. Options are granted at the
discretion of the Board of Directors.
Under the terms of the 1997 Plan, incentive stock options may be granted at
an exercise price not less than 100% of the estimated 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, 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 100% of the fair market
value. Incentive stock options may be granted only to employees.
Options granted under the terms of the 1997 Plan generally vest over a
period of 24 or 48 months. During fiscal 1999, the Company accelerated the
vesting for 25,000 options granted to the Board of Directors and to two
consultants resulting in a total compensation expense of approximately $43,000.
The Company recorded compensation expense of $98,465 and $1,083 in fiscal
1999 and 1998, respectively, for options granted to non-employee consultants
where the performance commitment had been reached. Compensation expense was
charged to operating expense. The fair value of the options to non-employees was
estimated using the Black-Scholes option-pricing model with the following
assumptions: risk-free rate of 5.0%; expected life of 3 years; expected
volatility of 60%; and no dividends.
37
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes activity under the 1997 Plan:
<TABLE>
<CAPTION>
Options outstanding
------------------------------------
Weighted
Options average
available for Number of exercise
grant shares price
--------------- --------------- ---------------
<S> <C> <C> <C>
Balances as of September 30, 1997 5,717,500 -- $ --
Options granted (1,085,000) 1,085,000 0.04
Options exercised -- -- --
Options cancelled -- -- --
--------------- --------------- ---------------
Balances as of September 30, 1998 4,632,500 1,085,000 0.04
Options granted (680,000) 680,000 0.10
Options exercised -- -- --
Options cancelled 5,000 (5,000) 0.10
--------------- --------------- ---------------
Balances as of September 30, 1999 3,957,500 1,760,000 $ 0.06
--------------- =============== ===============
Exercisable 951,769 $ 0.07
=============== ===============
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------------------------- ---------------------------------------
Number of Weighted-average Number
outstanding remaining exercisable as Weighted-average
Range of shares as of contractual Weighted-average of September exercise
exercise prices September 30, 1999 life (years) exercisable price 30, 1999 price
- -------------------- -------------------- ------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 0.03 910,000 8.49 $ 0.03 467,811 $ 0.03
0.10 850,000 9.37 0.10 483,958 0.10
---------------- ------------------ ------------------ ------------------ -------------------- --------------
$ 0.03 to 0.10 1,760,000 8.92 $ 0.06 951,769 $ 0.07
=============== ================== ================== ================== ==================== ==============
</TABLE>
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 requirements of
SFAS No. 123, Accounting for Stock Based Compensation. In accordance with the
provisions of SFAS 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans.
38
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
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 loss would have been the
pro forma amounts indicated in the table below (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Net loss:
As reported $ (1,744,572) (1,219,564)
=================== ===================
Pro forma $ (1,749,986) (1,221,044)
=================== ===================
</TABLE>
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
using the minimum value method on the date of grant or share purchase using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Expected volatility 0% 0%
Risk-free interest rate 5.00% 4.25%
Expected dividend yield 0% 0%
Expected lives 3 years 3 years
</TABLE>
(4) Related Party Transactions
The Company has entered into a number of related party transactions with
stockholders and affiliates. The following schedule summarizes the transactions
for the years ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Product sales $ 239,505 --
Other revenue 1,000 1,000
Expenses 77,444 18,613
Accounts receivable 10,092 2,736
Accounts payable 57,009 --
</TABLE>
The Company rents office space from one stockholder. The office space is
under a noncancelable operating lease that expires in December 31, 2002.
39
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
The Company has promissory notes receivable of $43,500 from certain common
stockholders in consideration for shares of the Company's common stock issued to
the stockholders. The interest rate is 6.29% and the Company accrued interest
income of $2,736 in fiscal 1999 and 1998. Related party receivable of $5,472 is
due from these common stockholders at September 30, 1999 relating to interest
earned in 1999 and 1998. The related shares of common stock are pledged as
security for the notes.
In October 1998, one preferred stockholder provided the Company with a
bridge loan of $500,000. The Company accrued interest expense of $18,493 in
fiscal 1999. The bridge loan and the interest were converted into 691,324 shares
of Series B preferred stock on March 5, 1999.
(5) Commitments and Contingencies
(a) Leases
The Company conducts its operations in leased facilities and with equipment
under operating lease agreements expiring at various dates through 2000 and
2001.
The following is a schedule of future minimum rental payments required
under these leases that have initial or remaining noncancelable lease terms in
excess of one year:
Year ending:
2000 $ 22,464
2001 12,168
$ 34,632
===================
Total rental expense for all operating leases amounted to approximately
$70,000 and $15,000 for the years ended September 30, 1999 and 1998,
respectively.
The Company has entered into a sublease. Future minimum rentals to be
received under the noncancelable sublease are $2,700.
(6) Segment Information
The Company operates in one operating segment. The Company markets its
products from its operations in the United States. International export sales
are primarily to customers in Asia. These sales are not significant. Significant
customer information is as follows:
<TABLE>
<CAPTION>
Percent of total accounts
Percent of total revenue receivable
------------------------------------ ------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A 22% 96% -- 93%
Customer B 28% -- 19% --
Customer C 17% -- -- --
</TABLE>
40
<PAGE>
STARNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(7) Subsequent Event
On October 13, 1999, the Company was acquired by Netopia, Inc. (Netopia) in
a merger transaction in which the Company merged into a newly formed, wholly
owned, subsidiary of Netopia. Netopia intends to integrate StarNet's technology
into its Internet connectivity product development and begin offering voice and
data integrated access devices.
The aggregate consideration constituting the purchase price is
approximately $27.5 million at closing (which includes $1.0 million of the
potential earnout payments discussed below), and may increase by up to an
additional $4.9 million depending on the actual amount of potential earnout
payments. The aggregate consideration includes:
. $8.4 million in cash paid on the closing date of the transaction;
. 447,852 shares of Netopia's common stock issued on the closing date;
. A series of potential cash earnout payments aggregating up to approximately
$5.9 million at various times after the closing date if certain technical and
revenue milestones are achieved.
. The substitution of stock options to purchase Netopia's common stock in
replacement of the Company's options held by the Company's former employees,
who joined Netopia after the closing valued at approximately $1.4 million;
and,
. Transaction costs of approximately $800,000 which include legal fees,
accounting fees, fees paid for an independent fairness opinion, and fees for
other related professional services.
Approximately 30,673 shares of common stock will be held in escrow for a
period of time after the closing to satisfy the Company's indemnification
obligations under the definitive acquisition agreements.
The issuance of shares in the merger was not registered under the
Securities Act of 1933, as amended, in reliance upon the Securities Act's
exemption from the registration requirements for nonpublic offerings, and resale
of the shares is restricted under the Securities Act. Netopia has agreed to
file a registration statement on Form S-3 registering the resale of the shares.
Resale of the shares under the registration statement will be subject to certain
customary restrictions.
All of the Company's former full time employees became employees of
Netopia. Each of the Company's founders, and certain other key employees,
entered into non-competition agreements in connection with the acquisition.
41
<PAGE>
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed consolidated balance sheet at
September 30, 1999 and the unaudited pro forma condensed consolidated statement
of operations data for the fiscal year ended September 30, 1999, filed as
exhibits to this Form 8-K, show the estimated financial impact of our purchase
on October 13, 1999 of StarNet Technologies, Inc., (StarNet) on our consolidated
financial statements. The pro forma condensed consolidated balance sheet at
September 30, 1999 shows the consolidated effect of the StarNet purchase on our
financial statements assuming the transaction took place on September 30, 1999.
The pro forma condensed consolidated statement of operations data for the fiscal
year ended September 30, 1999 shows the effect of the StarNet purchase on our
consolidated financial statements assuming the purchase took place on October 1,
1998.
The unaudited pro forma condensed consolidated financial statements are
based on our historical consolidated financial statements and on StarNet's
historical financial statements with certain adjustments and assumptions that
are presented in the following notes.
We have prepared the unaudited pro forma condensed financial data for
informational purposes only and they are not necessarily indicative of how our
balance sheet and operating results would have been presented had the
transaction as set forth in the Agreement and Plan of Reorganization, dated
September 28, 1999 (the "Agreement"), between us and StarNet, been completed on
the assumed dates, nor are they necessarily indicative of the presentation of
our consolidated balance sheet and consolidated statement of operations for any
future period.
42
<PAGE>
(c) Exhibits.
Exhibit
Number Description
------ -----------
99.1(a) Unaudited - Pro Forma Condensed Consolidated Balance Sheet at
September 30, 1999
99.1(b) Unaudited - Pro Forma Condensed Consolidated Statement of
Operations for the Fiscal Year Ended September 30, 1999
43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NETOPIA, INC.
Date: December 27, 1999 By: /s/ James A. Clark
--------------------------------------------
James A. Clark
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
44
<PAGE>
EXHIBIT 99.1(a)
<TABLE>
<CAPTION>
PRO FORMA
NETOPIA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 1999
(in thousands, except for per share amounts)
(unaudited)
Company StarNet Pro Forma Pro Forma
Historical Historical Adjustments Balances
----------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................. $ 61,381 $32 $ (8,400)(a) $ 53,013
Short-term investments..................................................... 8,102 -- -- 8,102
Trade accounts receivable, less allowance for doubtful accounts ........... 9,852 78 -- 9,930
Royalties and other receivables............................................ 361 10 -- 371
Note receivable............................................................ 966 -- -- 966
Inventories, net........................................................... 3,681 260 -- 3,941
Prepaid expenses and other current assets.................................. 1,397 37 -- 1,434
------------- ------------- ---------- ---------
Total Current Assets...................................................... 85,740 417 (8,400) 77,757
Royalties receivable........................................................ 377 -- -- 377
Furniture, fixtures and equipment, net...................................... 2,403 -- -- 2,403
Intangible assets, net and other assets..................................... 2,362 -- 21,950(b) 24,312
Deposits and other assets................................................... 5,087 -- -- 5,087
------------- ------------ ---------- ---------
Total Assets.............................................................. $ 95,969 $ 417 $13,550 $109,936
============= ============ =========== =========
Liabilities and Stockholders' Equity
Accounts payable........................................................... $ 5,258 $ 291 $ -- $ 5,549
Accrued compensation....................................................... 2,170 40 -- 2,210
Accrued liabilities........................................................ 1,564 57 -- 1,621
Deferred revenue........................................................... 1,343 247 -- 1,590
Other current liabilities.................................................. 11 128 1,800(c) 1,939
------------- ------------- ------------ ----------
Total current liabilities................................................. 10,346 763 1,800 12,909
Long-term liabilities....................................................... 544 -- -- 544
------------- ------------- ------------ ----------
Total liabilities......................................................... 10,890 763 1,800 13,453
Stockholders' Equity Deficit
Preferred stock............................................................ -- 2,468 (2,468)(d) --
Common stock .............................................................. 15 48 (48)(e) 15
Additional paid-in capital................................................. 99,978 102 17,220 (f) 117,300
Accumulated other comprehensive income..................................... 28 -- -- 28
Promissory notes........................................................... -- (44) 44 (g) --
Accumulated deficit........................................................ (14,942) (2,920) (2,998)(h) (20,860)
------------- ------------- ------------- ---------
Total stockholders' equity (deficit)...................................... 85,079 (346) 11,750 96,483
$ 95,969 $ 417 $13,550 $109,936
============= ============= ============= ========
</TABLE>
<PAGE>
a) This amount represents the cash portion of the total consideration paid.
b) This amount represents the following:
. $4.8 million of allocated purchase price to goodwill. Goodwill will be
amortized quarterly over a 4 year period beginning in the first quarter of
fiscal 2000; plus
. $17.2 million of allocated purchase price to other intangible assets which
includes acquired technology, in-place workforce and non-competition
agreements that each of StarNet's founders and other key employees entered
into in connection with the acquisition. The $17.2 million represents the
proceeds allocated to intangible assets of $17,078 over the ($96,000) NBV of
Starnet
c) This amount represents the following:
. Accrued transaction cost liabilities of approximately $800,000 which include
legal fees, accounting fees, fees paid for an independent fairness opinion,
and fees for other related professional services; plus,
. Probable earnout payments in fiscal 2000 of $1.0 million. We will pay a
series of potential cash earnout payments aggregating up to approximately
$5.9 million at various times after the closing date if certain technical and
revenue milestones are achieved.
d) This amount represents the elimination of StarNet's preferred stock balance
upon consolidation.
e) This amount represents the following:
. 447,852 shares of Netopia common stock issued on the closing date at a par
value of $0.001/share; less,
. $48,000 of StarNet's common stock eliminated on consolidation
f) This amount represents the following:
. The $15.96 million total value of Netopia common stock issued in connection
with the transaction; plus,
. Additional purchase cost of $1.4 million relating to the substitution of
stock options to purchase our common stock in replacement of the StarNet
vested options held by StarNet's former employee, who joined Netopia after
the closing; less,
. The $448 par value of our common stock; less,
. StarNet paid in capital of $102,000 eliminated on consolidation
g) This amount represents the elimination of StarNet's promissory notes balance
upon consolidation.
<PAGE>
h) This amount represents the following:
. The $2.7 million elimination of StarNet's deficit upon consolidation; plus
. The $5.7 million charge for acquired in-process research and development;
<PAGE>
EXHIBIT 99.1(b)
<TABLE>
<CAPTION>
PRO FORMA
NETOPIA, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Company Pro Forma Pro Forma
Historical StarNet Adjustments Balances
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................................................................... $ 44,151 $ 1,080 $ (198)(a) $ 45,033
Cost of revenues........................................................... 16,243 824 -- 17,067
------------- --------- ----------- ------------
Gross Profit............................................................ 27,908 256 (198) 27,966
Operating Expenses:
Research and development................................................ 9,211 1,361 -- 10,572
Selling and marketing................................................... 20,221 12 -- 20,233
General and administrative.............................................. 3,654 645 -- 4,299
Acquired in-process research and development............................ 4,205 -- --(b) 4,205
Amortization of goodwill and other intangible assets.................... 543 -- 6,919(c) 7,462
------------- --------- ----------- -----------
Total operating expenses.......................................... 37,834 2,018 6,919 46,771
------------- --------- ----------- ------------
Operating loss.................................................... (9,926) (1,762) (7,117) (18,805)
Other income, net.......................................................... 2,066 18 -- 2,084
------------- --------- ----------- ------------
Loss from continuing operations before income taxes..................... (7,860) (1,744) (7,117) (16,721)
------------- --------- ----------- ------------
Income tax provision (benefit)............................................. -- 1 -- 1
Net income (loss) from continuing operations............................... $(7,860) $(1,745) $(7,117) $(16,722)
============= ========= =========== ============
Per share data, continuing operations:
Basic and diluted loss per share........................................ $(0.60) -- $(1.24)
============= =========== ============
Common shares used in the per share calculations........................ 13,092 448 13,540
============= =========== ============
</TABLE>
<PAGE>
a) This amount represents the elimination of a $198,000 technology license we
acquired from StarNet before the acquisition date of October 13, 1999.
b) There will be a one time write-off for acquired-in-process research and
development in the amount of approximately $5.7 million as determined by
an independent third party analysis which will be recorded in the first
quarter of fiscal 2000. We have not presented this item on the face of the
pro forma statements of operations because it is significant and unusual
in nature.
The Company used the income approach to appraise the value of the business
and projects acquired. Such method takes into consideration the stage of
completion of the project and estimates related to expected future revenues,
expenses and cash flows which are then discounted back to present day
amounts. Based upon these estimates, material net cash flows from the
acquired business are expected to occur during the calendar year 2000. These
cash flows were discounted using a weighted average discount rate of 20%.
Based upon the expenses incurred and the development time invested in the
product prior to the acquisition and the estimated expenses and development
time to complete the product, the Company determined the product to be
approximately 72.5% complete at the time of acquisition.
We believe we followed recent guidance disseminated by the SEC in the
valuation of in-process research and development. However, in the event the
SEC concludes that a different valuation is appropriate, we may have to re-
state the charges to operations taken in connection with this transaction
c) This amount represents the following:
. Amortization of $1.2 million of goodwill which we will begin amortizing in
the first quarter of fiscal 2000 over a 4 year period.
. Amortization of $5.7 million of other intangible assets which we will begin
amortizing in the first quarter of fiscal 2000 over a 3 year period.
