<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-28450
Netopia, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3033136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2470 Mariner Square Loop
Alameda, California 94501
(Address of principal executive offices, including Zip Code)
-----------------------------------------
(510) 814-5100
(Registrant's telephone number, including area code)
-----------------------------------------
Indicate by X check whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ________
---
As of April 30, 2000 there were 17,239,502 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
NETOPIA, INC.
FORM 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE 4
- ----------------------------------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Financial Statements............................................................... 2
Condensed consolidated balance sheets at March 31, 2000 and September 30, 1999............................ 2
Condensed consolidated statements of operations for the three and six months ended
March 31, 2000 and 1999................................................................................... 3
Condensed consolidated statements of cash flows for the six months ended March 31,
2000 and 1999............................................................................................. 4
Notes to condensed consolidated financial statements...................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................ 33
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................................. 34
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 34
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 34
SIGNATURE............................................................................................................ 35
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
(unaudited) March 31, September 30,
2000 1999
--------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 51,332 $ 61,381
Short-term investments................................................. 9,485 8,102
Trade accounts receivable less allowance for doubtful accounts and
returns of $931 and $796, respectively............................ 15,192 9,852
Royalties receivable................................................... 319 361
Note receivable........................................................ 1,014 966
Inventories, net....................................................... 6,127 3,681
Prepaid expenses and other current assets.............................. 2,739 1,397
-------------- -------------
Total current assets............................................... 86,208 85,740
Royalties receivable...................................................... -- 377
Furniture, fixtures and equipment, net.................................... 3,065 2,403
Intangible assets, net.................................................... 38,142 2,362
Deposits and other assets................................................. 4,428 5,087
-------------- -------------
$ 131,843 $ 95,969
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 10,370 $ 5,258
Accrued compensation................................................... 2,681 2,170
Accrued liabilities.................................................... 1,921 1,564
Deferred revenue....................................................... 1,717 1,343
Other current liabilities.............................................. 1 11
-------------- -------------
Total current liabilities.......................................... 16,690 10,346
Long-term liabilities..................................................... 518 544
-------------- -------------
Total liabilities.................................................. 17,208 10,890
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;
17,043,105 and 15,519,198 shares issued and outstanding at
March 31, 2000 and September 30, 1999, respectively.................... 17 15
Additional paid-in capital............................................. 139,816 99,978
Accumulated deficit.................................................... (25,479) (14,942)
Accumulated other comprehensive income................................. 281 28
-------------- -------------
Total stockholders' equity......................................... 114,635 85,079
-------------- -------------
$ 131,843 $ 95,969
============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Internet equipment............................... $15,660 $ 5,470 $ 26,499 $ 9,621
Web platform licenses and services............... 6,136 5,065 11,589 8,837
------------ ------------ ----------- ------------
21,796 10,535 38,088 18,458
Cost of revenues:
Internet equipment............................... 10,879 3,452 18,488 6,098
Web platform licenses and services............... 124 192 246 352
------------ ------------ ----------- ------------
11,003 3,644 18,734 6,450
------------ ------------ ----------- ------------
Gross profit..................................... 10,793 6,891 19,354 12,008
Operating expenses:
Research and development......................... 3,143 2,346 6,141 4,331
Selling and marketing............................ 6,272 4,828 11,919 9,589
General and administrative....................... 1,317 899 2,293 1,681
Acquired in-process research and development..... 2,990 -- 8,658 4,205
Amortization of goodwill and other intangible
assets........................................... 2,038 181 3,747 181
------------ ------------ ----------- ------------
Total operating expenses...................... 15,760 8,254 32,758 19,987
------------ ------------ ----------- ------------
Operating loss................................ (4,967) (1,363) (13,404) (7,979)
Other income, net................................... 892 430 1,720 1,000
------------ ------------ ----------- ------------
Loss from continuing operations
before income taxes........................... (4,075) (933) (11,684) (6,979)
Income tax benefit.................................. -- -- -- --
------------ ------------ ----------- ------------
Loss from continuing operations.................. (6,979)
(4,075) (933) (11,684)
Discontinued operations:
Income from discontinued operations, net of taxes.. -- -- 1,147 --
------------ ------------ ----------- ------------
Net loss......................................... $(4,075) $ (933) $ (10,537) $(6,979)
============ ============ =========== ============
Comprehensive loss:
Net loss......................................... $(4,075) $ (933) $ (10,537) $(6,979)
Other comprehensive Income (loss)................ (52) -- 253 --
------------ ------------ ----------- ------------
Total comprehensive loss......................... $(4,127) $ (933) $ (10,284) $(6,979)
============ ============ =========== ============
Per share data, continuing operations:
Basic and diluted loss per share................. $ (0.25) $ (0.07) $ (0.72) $ (0.56)
============ ============ =========== ============
Common shares used in the per share
calculations.................................. 16,564 12,613 16,304 12,386
============ ============ =========== ============
Per share data, net loss:
Basic and diluted loss per share................. $ (0.25) $ (0.07) $ (0.65) $ (0.56)
============ ============ =========== ============
Common shares used in the per share
calculations................................... 16,564 12,613 16,304 12,386
============ ============ =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NETOPIA, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited) Six months ended March 31,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. $ (10,537) $ (6,979)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 4,762 1,393
Charge for in-process research and development.......................... 8,658 4,205
Changes in allowance for doubtful accounts and returns on accounts
receivable............................................................ 135 12
Changes in operating assets and liabilities:
Trade accounts receivable............................................. (5,475) (3,907)
Inventories........................................................... (2,446) 64
Prepaid expenses, and other current assets............................ (1,348) 26
Deposits and other assets............................................. 844 (10)
Accounts payable and accrued liabilities.............................. 5,980 (1,302)
Deferred revenue...................................................... 393 346
Other liabilities..................................................... (55) (54)
----------- -------------
Net cash provided by (used in) operating activities................. 911 (6,206)
----------- -------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment........................... (868) (736)
Capitalization of software development costs............................ (364) (288)
Acquisition of technology............................................... (12,694) (4,299)
Purchase of short-term investments...................................... (25,704) (12,666)
Proceeds from the sale and maturity of short-term investments........... 24,321 20,271
----------- -------------
Net cash provided by (used in) investing activities................. (15,309) 2,282
----------- -------------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net......................... 4,349 1,386
----------- -------------
Net cash provided by financing activities........................... 4,349 1,386
----------- -------------
Net decrease in cash and cash equivalents................................. (10,049) (2,538)
Cash and cash equivalents, beginning of period............................ 61,381 19,244
----------- -------------
Cash and cash equivalents, end of period.................................. $ 51,332 $ 16,706
=========== =============
Supplemental disclosures of noncash investing and financing activities:
Issuance of common stock and common stock options for acquisition of
intangible assets...................................................... $ 35,491 $ 2,811
----------- -------------
Issuance of common stock for consulting services........................ $ -- $ 92
=========== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NETOPIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements included in this
Form 10-Q reflect all adjustments, consisting only of normal recurring
adjustments which in our opinion are necessary to fairly present our
consolidated financial position, results of operations and cash flows for the
periods presented. These condensed consolidated financial statements should be
read in conjunction with our consolidated financial statements included in our
Annual Report on Form 10-K and other filings with the United States Securities
and Exchange Commission. The consolidated results of operations for the period
ended March 31, 2000 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
September 30, 2000.
(2) 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. We
adopted SOP 98-1 on October 1, 1999, which did not have a material impact on our
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 amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. We will adopt SFAS 133 in our fiscal first quarter of 2001 and we do
not expect a material impact on our results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements," SAB 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. We will adopt SAB 101 as required in our fiscal first
quarter of 2001 and we are evaluating the effect, if any, that such adoption may
have on our consolidated results of operations and financial position.
(3) Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Net inventories consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------- ------------------
<S> <C> <C>
Raw materials and work in process........................... $2,738 $1,699
Finished goods.............................................. 3,389 1,982
------------------- ------------------
$6,127 $3,681
=================== ==================
</TABLE>
(4) Furniture, Fixtures and Equipment, net (in thousands):
------------------------------------------------------
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------------ ------------------
<S> <C> <C>
Furniture, fixtures and equipment............................ $ 14,433 $ 13,565
Accumulated depreciation and amortization.................... (11,368) (11,162)
------------------ ------------------
$ 3,065 $ 2,403
================== ==================
</TABLE>
5
<PAGE>
(5) Loss Per Share
--------------
Basic net loss per share (EPS) is based on the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per share
is based on the weighted average number of shares of common stock outstanding
during the period and dilutive common equivalent shares from options and
warrants outstanding during the period. No common equivalent shares are included
for loss periods as they would be anti-dilutive. Dilutive common equivalent
shares consist of options and warrants.
Potentially dilutive common shares have been excluded from the computation
of diluted EPS for the three and six months ended March 31, 2000 and 1999 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 4,083,002 shares and 3,950,813 shares for the three and
six months ended March 31, 2000 and 1999, respectively, and warrants to purchase
common stock totaling 60,000 shares for the three and six months ended March 31,
1999.
(6) Acquisitions
------------
WebOrder
On March 23, 2000, we acquired all the outstanding common and preferred
stock of WebOrder, a California corporation, in a merger transaction in which
WebOrder merged into WO Merger Corporation, our wholly owned subsidiary formed
in connection with the transaction. WebOrder is a developer of e-commerce
infrastructure for small and medium size businesses. WebOrder's Smart Commerce
System offers e-commerce solutions to on-line businesses including the ability
to manage order processing, and the ability to maintain records of customer
transactions flowing through a merchant's E-Store.
We accounted for the transaction under the purchase method. The aggregate
purchase price of the transaction was approximately $20.7 million, based on the
consideration we paid at closing. The final purchase price is dependent on
potential earnout payments as discussed below. The aggregate purchase price
includes:
. $1.6 million in cash paid on the closing date of the transaction;
. 233,119 shares of our common stock issued on the closing date;
. a series of potential earnout payments paid in cash and common stock
after the closing date if certain revenue milestones are achieved. These
earnout opportunities will be added to and included in the purchase
price for accounting purposes when it is deemed probable that the
earnouts will be paid;
. The substitution of stock options to purchase our common stock in
replacement of the WebOrder options held by WebOrder's former employees,
who joined Netopia after the closing, valued at approximately $2.1
million. We used the Black-Scholes method to value the options issued
using the following assumptions: volatility of 101%, expected life of 5
years, interest rate of 5.7%; and no dividends; and
. transaction costs of approximately $975,000 which include legal fees,
accounting fees, and fees for other related professional services.
Approximately 15,695 shares of our common stock will be held in escrow for
one year after the closing to satisfy WebOrder's indemnification obligations.
6
<PAGE>
The excess purchase price over the net book value of the assets acquired
was approximately $20.1 million. The transaction resulted in goodwill and other
intangible assets of approximately $17.1 million, which is being amortized over
four and three years, respectively and a charge for acquired in-process research
and development of approximately $3.0 million.
Both cost and income approaches were used to appraise the value of the
business and projects acquired. Such methods take into consideration replacement
costs of assets acquired, the stage of completion of the projects 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 our fiscal
first quarter of 2001. These cash flows were discounted using a weighted average
discount rate of 42%. 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, we determined the products purchased
in aggregate, including products under development and completed products, to be
approximately 82% complete at the time of acquisition. We expect to complete the
in-process research and development during our third quarter of fiscal 2000 and
we estimate the costs to complete the in-process research and development to be
approximately $50,000.
The funds used to pay the cash portion of the purchase price were derived
from our existing working capital.
All of WebOrder's former full time employees became employees of Netopia.
WebOrder's founder and one other key shareholder/employee entered into non-
competition agreements in connection with the acquisition.
The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated statements of operations for the three months ended
March 31, 2000 and 1999 assuming WebOrder had been acquired as of the beginning
of the periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Revenues............................................. $ 21,954 $ 10,568
Net loss............................................. ($2,600) ($2,206)
Basic and diluted loss per share..................... ($0.16) ($0.17)
Weighted-average shares used in pro forma per share
computation.......................................... 16,774 12,846
</TABLE>
The above pro forma net loss figures for the three months ended March 31,
2000 and 1999 exclude the charge for acquired in-process research and
development and have been adjusted to include the amortization of goodwill and
other intangibles related to the WebOrder acquisition for each period.
The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated statements of operations for the six months ended
March 31, 2000 and 1999 assuming WebOrder had been acquired as of the beginning
of the periods presented (in thousands, except per share data):
7
<PAGE>
<TABLE>
<CAPTION>
March 31 March 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Revenues.............................................. $ 38,356 $ 18,517
Net loss.............................................. ($9,350) ($8,319)
Basic and diluted loss per share...................... ($0.57) ($0.66)
Weighted-average shares used in pro forma per share
computation........................................... 16,526 12,619
</TABLE>
The above pro forma net loss figures for the six months ended March 31,
2000 and 1999 exclude the charge for acquired in-process research and
development and have been adjusted to include the amortization of goodwill and
other intangibles related to the WebOrder acquisition for each period.
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
StarNet Technologies
On October 13, 1999, we acquired StarNet Technologies, Inc., ("StarNet"), a
California corporation, in a merger transaction in which StarNet merged into our
newly formed, wholly owned, subsidiary. StarNet has been developing a voice
channel technology architecture that allows the transmission of voice lines over
a digital subscriber line along with the simultaneous transmission of standard
data packets. We intend to integrate StarNet's technology into our existing
Internet equipment development and begin offering voice and data integrated
access devices. Any delay in the completion of the development of the products
would cause us to incur additional unplanned development expenses as well as the
loss or deferral of customer purchases, either of which could seriously harm our
business.
We accounted for the transaction under the purchase method. The aggregate
consideration constituting the purchase price was approximately $27.5 million at
closing (which included $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
included:
. $8.4 million in cash paid on the closing date of the transaction;
. 447,852 shares of our 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 paid. At
the acquisition date, we had deemed probable and recorded approximately
$1.0 million in earnout payments;
. The substitution of stock options to purchase our common stock in
replacement of the StarNet options held by StarNet's former employee,
who joined Netopia after the closing, valued at approximately $1.4
million. We used the Black-Scholes method to value the options issued
using the following assumptions: volatility of 101%, expected life of 4
years, interest rate of 4.9%; and no dividends; and
. Transaction costs of approximately $820,000 which include legal fees,
accounting fees, fees paid for an independent fairness opinion, and fees
for other services.
Approximately 30,673 shares of common stock are being held in escrow for a
period of time after the closing to satisfy StarNet's indemnification
obligations under the definitive acquisition agreements.
8
<PAGE>
The acquisition has been accounted for as a purchase and resulted in
goodwill and other intangible assets of approximately $22.4 million which is
being amortized over four and three years, respectively and a charge for
acquired in-process research and development of $5.7 million.
We 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 projects 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 our fiscal fourth quarter of 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, we determined the products purchased in aggregate, including products
under development and completed products, to be approximately 73% complete at
the time of acquisition. We expect to complete the in-process research and
development in the summer of calendar 2000 and we estimate the cost to complete
the in-process research and development to be approximately $1.8 million.
The funds used to pay the cash portion of the purchase price were derived
from our existing working capital.
All of StarNet's former full time employees became employees of Netopia.
Each of StarNet's founders, and certain other key employees, entered into non-
competition agreements in connection with the acquisition.
(7) Discontinued Operations
-----------------------
On August 5, 1998, we sold our 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 we received, in aggregate, for
the sale of the LAN Division totaled $4.9 million and consisted of cash, a note
receivable, royalties receivable and a warrant to purchase up to 5% of the
equity of Farallon.
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. On May 9, 2000, Farallon paid the note and related interest
receivable in its entirety.
The royalties receivable are based upon Farallon's total annual revenues
over each of the next five fiscal years ending on July 31, 2003. At March 31,
2000 there was a balance of $319,000 recorded as royalties receivable due from
Farallon. Farallon's total revenues in each annual period must reach at least
$15.0 million for a royalty to be paid to us.
The disposition of our 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. Income from discontinued
operations, net of taxes was $1.1 million for the three months ended December
31, 1999. This income represents the reversal of a liability we recorded for the
excess space created at our Alameda, California headquarters that we believed
could not be subleased to third parties. During the three months ended December
31, 1999, we found alternative uses for this excess space.
(8) Geographic, Segment and Significant Customer Information
---------------------------------------------------------
We 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
9
<PAGE>
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 our Chief Operating Decision Maker (CODM) uses for operational
decisions and financial performance assessments. Our Chief Executive Officer
(CEO) is considered our CODM. For purposes of making operating decisions and
assessing financial performance, our 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 or assets are not disaggregated by
product group for purposes of making operating decisions and assessing
performance.
We generate revenue from three groups of products and services.
Disaggregated financial information regarding our three operating segments for
the three months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
----------------------------------------------
WEB PLATFORM LICENSES AND SERVICES
--------------------- ---------------------------------------------- --------------------
INTERNET EQUIPMENT E-BUSINESS PRODUCTS TIMBUKTU PRODUCTS TOTAL PRODUCTS
--------------------- --------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Three months ended March 31, 2000
- ---------------------------------
Revenues......................... $15,660 $2,352 $3,784 $21,796
Cost of revenues................. 10,879 4 120 11,003
--------------------- --------------------- --------------------- --------------------
Gross profit..................... 4,781 2,348 3,664 10,793
Unallocated operating expenses... 15,760
--------------------
Operating loss............... (4,967)
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
WEB PLATFORM LICENSES AND SERVICES
--------------------- ---------------------------------------------- --------------------
INTERNET EQUIPMENT E-BUSINESS PRODUCTS TIMBUKTU PRODUCTS TOTAL PRODUCTS
--------------------- ------------------------ ------------------- --------------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
- ---------------------------------
Revenues......................... $5,470 $793 $4,272 $10,535
Cost of revenues................. 3,452 4 188 3,644
--------------------- ------------------------ ------------------- --------------------
Gross profit..................... 2,018 789 4,084 6,891
Unallocated operating expenses... 8,254
--------------------
Operating loss............... (1,363)
</TABLE>
Disaggregated financial information regarding our three operating segments
for the six months ended March 31, 2000 and 1999 is as follows:
10
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------
WEB PLATFORM LICENSES AND SERVICES
--------------------- ----------------------------------------------- ----------------------
INTERNET EQUIPMENT E-BUSINESS PRODUCTS TIMBUKTU PRODUCTS TOTAL PRODUCTS
--------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Six months ended March 31, 2000
- --------------------------------
Revenues........................ $26,499 $4,184 $7,405 $ 38,088
Cost of revenues................ 18,488 10 236 18,734
--------------------- --------------------- ---------------------- ----------------------
Gross profit.................... 8,011 4,174 7,169 19,354
Unallocated operating expenses.. 32,758
----------------------
Operating loss.............. (13,404)
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------
WEB PLATFORM LICENSES AND SERVICES
-------------------- ----------------------------------------------- ----------------------
INTERNET EQUIPMENT E-BUSINESS PRODUCTS TIMBUKTU PRODUCTS TOTAL PRODUCTS
-------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Six months ended March 31, 1999
- --------------------------------
Revenues........................ $9,621 $1,335 $7,502 $18,458
Cost of revenues................ 6,098 9 343 6,450
-------------------- ---------------------- ---------------------- ----------------------
Gross profit.................... 3,523 1,326 7,159 12,008
Unallocated operating expenses.. 19,987
----------------------
Operating loss.............. (7,979)
</TABLE>
We sell our products and provide services worldwide through a direct sales
force, telecommunication service providers, Internet service providers (ISPs),
independent distributors, value-added resellers and directly to end users. We
currently operate in five regions: United States, Europe, Asia/Pacific, Canada,
and Latin America. Revenues outside of the United States are primarily export
sales and have historically been denominated in United States dollars. Beginning
in our fiscal third quarter of 2000, international sales to members of the
European Union are being denominated in the Euro.
Disaggregated financial information regarding our products and services and
revenues by geographic region is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------ ----------------------------
<S> <C> <C> <C> <C>
United States........................... $17,635 $ 7,459 $29,916 $12,537
Europe.................................. 3,148 2,517 6,408 4,834
Asia/Pacific............................ 607 270 906 513
Canada.................................. 325 278 684 516
Latin America........................... 81 11 174 58
------------- ------------ ----------------------------
Total revenues...................... $21,796 $10,535 $38,088 $18,458
============= ============ ============================
</TABLE>
11
<PAGE>
We do not have material operating assets outside of the United States.
During the three months ended March 31, 2000:
. Northpoint Communications, a competitive local exchange carrier
(CLEC), accounted for 15% of our total revenues and 9% of our total
accounts receivable. All revenues derived from this customer were
related to sales of our Internet equipment; and
. Covad Communications, a CLEC, accounted for 13% of our revenues and
19% of our total accounts receivable. All revenues derived from this
customer were related to sales of our Internet equipment.
No other customers during the three months ended March 31, 2000 accounted
for 10% or more of our total revenues.
During the three months ended March 31, 1999, Ingram Micro, a worldwide
distributor of computer technology products and services, accounted for 11% of
our total revenues and 13% of our total accounts receivable. Of our total sales
to Ingram Micro, approximately 60% related to sales of our Internet equipment
and 40% related to sales of our web platform products.
During the six months ended March 31, 2000:
. Northpoint Communications, a CLEC, accounted for 13% of our total
revenues and 9% of our total accounts receivable. All revenues derived
from this customer were related to sales of our Internet equipment; and
. Covad Communications, a CLEC, accounted for 11% of our revenues and 19%
of our total accounts receivable. All revenues derived from this
customer were related to sales of our Internet equipment.
No other customers during the six months ended March 31, 2000 accounted for
10% or more of our total revenues.
During the six months ended March 31, 1999, Ingram Micro, accounted for 10%
of our total revenues and 14% of our total accounts receivable. Of our total
sales to Ingram Micro, approximately 57% related to sales of our Internet
equipment and 43% related to sales of our web platform products.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------------------
Results of Operations
- ---------------------
Some of the information in this Form 10-Q contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they: (i) discuss our
expectations about our future performance; (ii) contain projections of our
future operating results or of our future financial condition; or (iii) state
other "forward-looking" information. We believe it is important to communicate
our expectations to our investors. There may be events in the future, however,
that we are not accurately able to predict or over which we have no control. The
risk factors listed in this Form 10-Q, as well as any cautionary language in
this Form 10-Q, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we described
in our forward-looking statements. You should be aware that the occurrence of
any of the events described in this Form 10-Q could seriously harm our business
and that upon the occurrence of any of these events, the trading price of our
common stock could decline.
Overview
We develop, market and support Internet and electronic commerce
infrastructure for small and medium size businesses. Our digital subscriber line
(DSL) equipment and e-commerce Web platforms enable businesses to connect easily
and cost-effectively to the Internet, establish and enhance their Internet
presence, and conduct business and electronic commerce on the Web.
Our revenues are derived from the sale of hardware and software products.
Our hardware revenues primarily include sales of our DSL routers as well as
sales of our integrated services digital network (ISDN) Internet routers,
modems, integrated access devices (IADs), T1/frame relay internet routers and
analog Internet routers. Our revenues include license revenues of our e-business
platform and Timbuktu Pro software, recurring revenues from our e-business
platform, and fees for related services. We recognize revenue from the sale of
our hardware products upon shipment. We recognize 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. We recognize maintenance and service revenues over the period
in which the services are provided. Certain of our sales are made to customers
under agreements permitting limited rights of return for stock balancing or with
protection for future price decreases. We record revenue net of an estimated
allowance for returns and price protection. Any product returns or price
decreases in the future that exceed our allowances may seriously harm our
business.
We sell our products and related maintenance, support and other services
through telecommunication service providers, Internet service providers (ISPs),
distributors, value-added resellers (VARs) and directly to end users.
During the three months ended March 31, 2000:
. Our five largest customers, who each individually represented at least
5% of our total revenues, accounted for 47% of our total revenues; and
. Northpoint Communications, a competitive local exchange carrier (CLEC),
accounted for 15% of our revenues. Covad Communications, another CLEC,
accounted for 13% of our revenues. No other customer during the three
months ended March 31, 2000 accounted for 10% or more of our total
revenues.
13
<PAGE>
During the three months ended March 31, 1999:
. Our three largest customers, who each individually represented at least 5%
of our total revenues, accounted for 24% of our total revenues; and
. Ingram Micro, a worldwide distributor of computer technology products and
services, accounted for 11% of our revenues. No other customers during the
three months ended March 31, 1999 accounted for 10% or more of our total
revenues.
During the six months ended March 31, 2000:
. Our five largest customers, who each individually represented at least 5%
of our total revenues, accounted for 43% of our total revenues; and
. Northpoint Communications, a CLEC, accounted for 14% of our revenues. Covad
Communications, another CLEC, accounted for 11% of our revenues. No other
customers during the six months ended March 31, 2000 accounted for 10% or
more of our total revenues.
During the six months ended March 31, 1999:
. Our three largest customers, who each individually represented at least 5%
of total revenues, accounted for 24% of our total revenues; and
. Ingram Micro, a worldwide distributor of computer technology products and
services, accounted for 10% of our revenues. No other customers during the
six months ended March 31, 1999 accounted for 10% or more of our total
revenues.
For the six months ended March 31, 2000 and 1999, international revenues
accounted for 22% and 32% of our total revenues, respectively.
We do not have purchase contracts with any of our customers that obligate
them to continue to purchase our products. These customers could cease
purchasing our products at any time, which could seriously harm our business.
Historically, a significant portion of our revenues has been derived from
customers outside of the United States, and we expect this trend to continue.
For the three months ended March 31, 2000 and 1999, international revenues
accounted for 19% and 29% of our total revenues, respectively. Our international
revenues have historically been denominated in United States dollars, and
revenues generated by our international distributors have historically been paid
to us in United States dollars. Beginning in our fiscal third quarter of 2000,
international sales to customers located in countries that are members of the
European Union are being denominated in the Euro.
We provide end users of our products with a one-year limited warranty on our
Internet equipment and a 90-day limited warranty on single-user versions of our
Timbuktu Pro software. We permit end users to return our Internet equipment and
Timbuktu Pro for replacements or for refund of the full purchase price if the
products do not perform as warranted. Our e-business products are provided on an
"as is" basis, and we generally do not offer a warranty on this product. End
users of our Web sites are offered a free 30-day evaluation period to evaluate
the product prior to purchase and thereafter can discontinue their service at
any time at no cost. In the past, we have not encountered material warranty
claims. In the future, if warranty claims exceed our reserves for such claims,
our business would be seriously harmed. Additionally, we attempt to further
limit our liability to end users through disclaimers of special, consequential
and indirect damages and similar provisions. However, we cannot assure you that
such limitations of liability will be legally enforceable.
14
<PAGE>
Results of Operations for the Three Months Ended March 31, 2000 and 1999
The following table sets forth for the periods indicated, certain statement
of operations data expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues:
Internet equipment............................................. 71.8% 51.9%
Web platform licenses and services............................. 28.2% 48.1%
-------------- --------------
100.0% 100.0%
Cost of revenues:
Internet equipment............................................. 49.9% 32.8%
Web platform licenses and services............................. 0.6% 1.8%
50.5% 34.6%
-------------- --------------
Gross profit................................................... 49.5% 65.4%
Operating expenses:
Research and development....................................... 14.4% 22.3%
Selling and marketing.......................................... 28.8% 45.8%
General and administrative..................................... 6.0% 8.5%
Acquired in-process research and development................... 13.7% --
Amortization of goodwill and other intangible assets........... 9.4% 1.7%
-------------- --------------
Total operating expenses....................................... 72.3% 78.3%
-------------- --------------
Operating loss................................................. (22.8%) (12.9%)
Other income, net................................................. 4.1% 4.1%
-------------- --------------
Loss from continuing operations before income taxes............ (18.7%) (8.9%)
Income tax provision (benefit)................................... -- --
-------------- --------------
Loss from continuing operations................................ (18.7%) (8.9%)
Income from discontinued operations, net of taxes................. -- --
-------------- --------------
Net loss....................................................... (18.7%) (8.9%)
============== ==============
</TABLE>
Revenue. Our revenues increased 106.9% to $21.8 million in the three months
ended March 31, 2000 from $10.5 million in the three months ended March 31,
1999.
The increase in the three months ended March 31, 2000 was primarily due to:
. Increased sales in North America of our digital subscriber line (DSL)
Internet equipment as our strategic relationships for the distribution
of our DSL products continued to expand, as well as the introduction
in fiscal 2000 of our DSL Internet equipment that is interoperable
with Nokia's DSL central office access; and
. Increased license sales of our e-business products.
These increases were partially offset by decreased sales of our integrated
services digital network (ISDN) Internet routers in North America as demand for
DSL products increased, decreased sales of the
15
<PAGE>
shrink wrap versions of Timbuktu Pro for the Macintosh, and decreased volume
license sales of the Windows version of Timbuktu Pro.
International revenues increased 35.3% to $4.2 million in the three months
ended March 31, 2000 from $3.1 million in the three months ended March 31, 1999.
International revenues increased primarily due to sales of our DSL Internet
equipment which were not available during the three months ended March 31,
1999, sales of our ISDN integrated access devices (IADs), as well as increased
license sales of our e-business products. International revenues accounted for
19% and 29% of our total revenues for the three months ended March 31, 2000 and
1999, respectively. International revenues declined as a percentage of total
revenues primarily due to increasing sales of our DSL Internet equipment and Web
platform products in the United States.
The following table provides a breakdown of revenue by region expressed as
a percentage of total revenues for the periods presented.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Europe............................................................. 14% 24%
Pacific Rim........................................................ 3 3
Canada and Other................................................... 2 2
------------------------
Subtotal international revenues................................... 19 29
United States...................................................... 81 71
------------------------
Total revenues.................................................. 100% 100%
========================
</TABLE>
Although international revenues as a percentage of total revenue decreased
in the three months ended March 31, 2000, a substantial portion of our revenues
was derived from sales to international customers, and we expect sales to
international customers to continue.
Gross Margin. Our total gross margin decreased to 49.5% in the three months
ended March 31, 2000 from 65.4% in the three months ended March 31, 1999. The
decrease was primarily due to:
. Increased sales of our Internet equipment, particularly our DSL
routers, which have a lower gross margin than our Web platform
products;
. Increased costs of flash memory chips and other components used in our
DSL routers; and
. Declining average selling prices of our Internet equipment as a result
of price competition and more volume DSL contracts.
These decreases were partially offset by:
. Increased volume license sales of our Web platform products; and
. Declining average costs of our Internet equipment.
In the past, our gross margin has varied significantly and will likely vary
significantly in the future. Our gross margins depend primarily on:
. The mix of hardware and software products sold;
. Pricing strategies;
. Standard cost changes;
16
<PAGE>
. New versions of existing products; and
. External market factors, including, but not limited to, price
competition.
Our Web platform products have a higher average gross margin than our
Internet equipment. Accordingly, to the extent we sell more Internet equipment
than Web platform products, our gross margins would be lower.
Research and Development. Our research and development expenses increased
34.0% to $3.1 million for the three months ended March 31, 2000 from $2.4
million for the three months ended March 31, 1999. Research and development
expenses increased primarily due to increased headcount and employee related
expenses, increased development expenses related to our DSL Internet equipment
and our acquisition of StarNet in October 1999 whose operations were not
included in our research and development expenses for the three months ended
March 31, 1999.
We expect to continue to devote substantial resources to product and
technological development, in particular, in connection with our acquisitions of
WebOrder and StarNet and therefore, research and development costs may increase
in absolute dollars in fiscal years 2000 and 2001. Historically, we have
believed that our process for developing software is essentially completed
concurrently with the establishment of technological feasibility, and we have
not capitalized any internal software development costs to date. However, during
the three months ended March 31, 2000, we capitalized $338,000 of product
development costs incurred subsequent to the delivery of a working model, under
a development agreement with third parties.
Selling and Marketing. Our selling and marketing expenses increased 29.9%
to $6.3 million for the three months ended March 31, 2000 from $4.8 million for
the three months ended March 31, 1999. Selling and marketing expenses increased
primarily due to:
. Increased headcount and other employee related expenses;
. Increased travel costs related to developing our sales and marketing
channels; and
. Increased promotional expenses.
These expenses were partially offset by reduced use of external marketing
professional services.
We believe that our selling and marketing expenses will increase in
absolute dollars in fiscal years 2000 and 2001 as a result of:
. Our acquisitions of StarNet and WebOrder;
. Increased advertising and promotional campaigns related to our e-
business platform as well as our DSL Internet equipment; and
. Continued expansion of our sales staff domestically and
internationally.
General and Administrative. Our general and administrative expenses
increased 46.5% to $1.3 million for the three months ended March 31, 2000 from
$899,000 for the three months ended March 31, 1999. General and administrative
expenses increased primarily due to:
. Increased employee related expenses;
. Increased use of third party contractors and temporary employee
services; and
17
<PAGE>
. In creased occupancy costs related to our Alameda facility.
Acquired In-Process Research and Development. Based upon an independent
third party valuation analysis of our acquisition of WebOrder, we allocated a
one-time charge of approximately $3.0 million of the purchase price to acquired
in-process research and development for the three months ended March 31, 2000.
See Note 6 of "Notes To Condensed Consolidated Financial Statements."
We believe we followed recent guidance disseminated by the SEC in our
valuation of the assets acquired and liabilities assumed and, in particular, in
the valuation of in-process research and development. However, in the event that
it is determined that we did not properly value such assets and liabilities, we
may have to restate the charges to operations taken in connection with such
transactions.
Amortization of Goodwill and Other Intangible Assets. For the three months
ended March 31, 2000, amortization of goodwill and other intangible assets
represents the amortization of such amounts allocated to goodwill and other
intangible assets related to our acquisitions of Serus, netOctopus, StarNet and
WebOrder.
The amounts allocated to goodwill and other intangible assets in connection
with our acquisition of WebOrder was $17.1 million. We are amortizing the
goodwill and other intangible assets over four and three years, respectively.
The amount allocated to goodwill and other intangible assets in connection with
our acquisition of StarNet was $22.4 million. We are amortizing the goodwill and
other intangible assets over four and three years, respectively. The amount
allocated to goodwill and other intangible assets in connection with our
acquisition of Serus was $2.1 million and the amount allocated to goodwill and
other intangible assets in connection with our acquisition of netOctopus was
$700,000. We are amortizing the goodwill and other intangible assets related to
these transactions over four years.
Other Income, Net. Other income, net, primarily represents interest we
earn on our cash, cash equivalents and short-term investments. Other income,
net, increased 107.4% to $892,000 for the three months ended March 31, 2000 from
$430,000 for the three months ended March 31, 1999. The increase was due to the
higher cash, cash equivalents and short-term investment balances on hand
primarily from the cash we raised through our secondary offering in August 1999.
Income Tax Benefit. We did not record an income tax benefit during the
three months ended March 31, 2000 or 1999 primarily due to continued substantial
uncertainty regarding our ability to realize our tax assets.
18
<PAGE>
Results of Operations for the Six Months Ended March 31, 2000 and 1999
The following table sets forth for the periods indicated, certain statement
of operations data expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Six months ended
March 31,
---------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues:
Internet equipment............................................ 69.6% 52.1%
Web platform licenses and services............................. 30.4% 47.9%
-------------- --------------
100.0% 100.0%
Cost of revenues:
Internet equipment............................................ 48.5% 33.0%
Web platform licenses and services............................. 0.6% 1.9%
49.1% 34.9%
-------------- --------------
Gross profit.................................................. 50.9% 65.1%
Operating expenses:
Research and development...................................... 16.1% 23.5%
Selling and marketing......................................... 31.3% 52.0%
General and administrative.................................... 6.0% 9.1%
Acquired in-process research and development.................. 22.7% 22.8%
Amortization of goodwill and other intangible assets.......... 9.8% 1.0%
-------------- --------------
Total operating expenses...................................... 86.0% 108.3%
-------------- --------------
Operating loss................................................ (35.2%) (43.2%)
Other income, net................................................ 4.5% 5.4%
-------------- --------------
Loss from continuing operations before income taxes........... (30.7%) (37.8%)
Income tax provision (benefit).................................. -- --
-------------- --------------
Loss from continuing operations ............................. (30.7%) (37.8%)
Income from discontinued operations, net of taxes................ 3.0% --
-------------- --------------
Net loss...................................................... (27.7%) (37.8%)
============== ==============
</TABLE>
Revenue. Our revenues increased 106.3% to $38.1 million in the six months
ended March 31, 2000 from $18.5 million in the six months ended March 31, 1999.
The increase in the six months ended March 31, 2000 was primarily due to:
. Increased sales in North America of our digital subscriber line (DSL)
Internet equipment as our strategic relationships for the distribution
of our DSL products continued to expand, as well as the introduction
of our DSL Internet equipment that is interoperable with Nokia's DSL
central office access concentrator; and
. Increased license sales of our e-business products.
These increases were partially offset by decreased sales of our integrated
services digital network (ISDN) Internet routers in North America as demand for
DSL products increased, and decreased sales of the shrink wrap versions of and
maintenance services for Timbuktu Pro for the Macintosh.
19
<PAGE>
International revenues increased 38.0% to $8.2 million in the six months
ended March 31, 2000 from $5.9 million in the three months ended March 31, 1999.
International revenues increased primarily due to sales of our DSL Internet
equipment which were not available during the six months ended March, 1999, the
introduction of our ISDN integrated access devices (IADs), as well as increased
license sales of our e-business products. International revenues accounted for
21% and 32% of our total revenues for the six months ended March 31, 2000 and
1999, respectively. International revenues declined as a percentage of total
revenues primarily due to increasing sales of our DSL Internet equipment and Web
platform products in the United States.
The following table provides a breakdown of revenue by region expressed as
a percentage of total revenues for the periods presented.
<TABLE>
<CAPTION>
Six months ended March 31,
------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Europe............................................................. 17% 26%
Pacific Rim........................................................ 2 3
Canada and Other................................................... 3 3
------------------------------------------
Subtotal international revenues................................... 22 32
United States...................................................... 78 68
------------------------------------------
Total revenues.................................................. 100% 100%
==========================================
</TABLE>
Although international revenues as a percentage of total revenue decreased
in the six months ended March 31, 2000, a substantial portion of our revenues
was derived from sales to international customers, and we expect sales to
international customers to continue.
Gross Margin. Our total gross margin decreased to 50.8% in the six months
ended March 31, 2000 from 65.1% in the six months ended March 31, 1999. The
decrease was primarily due to:
. Increased sales of our Internet equipment, particularly our DSL
routers, which have a lower gross margin than our Web platform
products;
. Increased costs of flash memory chips and other components used in our
DSL routers; and
. Declining average selling prices of our Internet equipment as a result
of price competition and more volume DSL contracts.
These decreases were partially offset by:
. Increased volume license sales of our Web platform products; and
. Declining average costs of our Internet equipment. In the past, our
gross margin has varied significantly and will likely vary
significantly in the future.
Our gross margins depend primarily on:
. The mix of hardware and software products sold;
. Pricing strategies;
. Standard cost changes;
. New versions of existing products; and
. External market factors, including, but not limited to, price
competition.
20
<PAGE>
Our Web platform products have a higher average gross margin than our
Internet equipment. Accordingly, to the extent we sell more Internet equipment
than Web platform products, our total gross margins would be lower.
Research and Development. Our research and development expenses increased
41.8% to $6.1 million for the six months ended March 31, 2000 from $4.3 million
for the six months ended March 31, 1999. Research and development expenses
increased primarily due to increased headcount and employee related expenses,
increased development expenses related to our DSL Internet equipment and our
acquisitions of Serus and netOctopus in December 1998, and StarNet in October
1999.
We expect to continue to devote substantial resources to product and
technological development, in particular, in connection with our acquisitions of
WebOrder and StarNet and therefore, research and development costs may increase
in absolute dollars in fiscal years 2000 and 2001. Historically, we have
believed that our process for developing software is essentially completed
concurrently with the establishment of technological feasibility, and we have
not capitalized any internal software development costs to date. However, during
the six months ended March 31, 2000, we capitalized $364,000 of product
development costs incurred subsequent to the delivery of a working model, under
a development agreement with third parties.
Selling and Marketing. Our selling and marketing expenses increased 24.3%
to $11.9 million for the six months ended March 31, 2000 from $9.6 million for
the six months ended March 31, 1999. Selling and marketing expenses increased
primarily due to:
. Increased headcount and other employee related expenses;
. Increased travel costs related to developing our sales and marketing
channels; and
. Increased participation in trade shows.
These expenses were partially offset by reduced advertising placement fees.
We believe that our selling and marketing expenses will increase in
absolute dollars in fiscal years 2000 and 2001 as a result of:
. Our acquisitions of StarNet and WebOrder;
. Increased advertising and promotion campaigns related to our e-
business platform as well as our DSL Internet equipment; and
. Continued expansion of our sales staff domestically and
internationally.
General and Administrative. Our general and administrative expenses
increased 36.4% to $2.3 million for the six months ended March 31, 2000 from
$1.7 million for the six months ended March 31, 1999. General and administrative
expenses increased primarily due to:
. Increased employee related expenses;
. Increased use of third party contractors and temporary employee
services; and
. In creased occupancy costs related to our Alameda facility.
Acquired In-Process Research and Development. Based upon independent third
party valuation analysis of our acquisitions of WebOrder and StarNet, we
allocated one-time charges of approximately $3.0 million and $5.7 million,
respectively of the purchase prices to acquired in-process research and
21
<PAGE>
development for the six months ended March 31, 2000. See Note 6 of "Notes To
Condensed Consolidated Financial Statements."
We believe we followed recent guidance disseminated by the SEC in our
valuation of the assets acquired and liabilities assumed and, in particular, in
the valuation of in-process research and development. However, in the event that
it is determined that we did not properly value such assets and liabilities, we
may have to restate the charges to operations taken in connection with such
transactions.
Amortization of Goodwill and Other Intangible Assets. For the six months
ended March 31, 2000, amortization of goodwill and other intangible assets
represents the amortization of such amounts allocated to goodwill and other
intangible assets related to our acquisitions of Serus, netOctopus, StarNet and
WebOrder.
The amounts allocated to goodwill and other intangible assets in connection
with our acquisition of WebOrder was $17.1 million. We are amortizing the
goodwill and other intangible assets over four and three years, respectively.
The amount allocated to goodwill and other intangible assets in connection with
our acquisition of StarNet was $22.4 million. We are amortizing the goodwill and
other intangible assets over four and three years, respectively. The amount
allocated to goodwill and other intangible assets in connection with our
acquisition of Serus was $2.1 million and the amount allocated to goodwill and
other intangible assets in connection with our acquisition of netOctopus was
$700,000. We are amortizing the goodwill and other intangible assets related to
these transactions over four years.
Other Income, Net. Other income, net, primarily represents interest we
earn on our cash, cash equivalents and short-term investments. Other income,
net, increased 72.0% to $1.7 million for the six months ended March 31, 2000
from $1.0 million for the six months ended March 31, 1999. The increase was due
to the higher cash, cash equivalents and short-term investment balances on hand
primarily from the cash we raised through our secondary offering in August 1999.
Income Tax Benefit. We did not record an income tax benefit during the six
months ended March 31, 2000 or 1999 primarily due to continued substantial
uncertainty regarding our ability to realize our tax assets.
Discontinued Operations. Income from discontinued operations of $1.1
million during the six months ended March 31, 2000 primarily represents the
reversal of a liability we recorded for the excess space created at our Alameda,
California facility, in connection with the sale of our LAN Division on August
5, 1998, that we believed could not be subleased to third parties.
22
<PAGE>
Other Factors That You Need To Be Aware Of Which May Affect Our Future Operating
Results
We have a history of losses and negative cash flow, and we expect to incur
losses and we may incur negative cash flow in the future.
Our failure to significantly increase our revenues would result in
continuing losses. We incurred losses from continuing operations of $4.1 million
and $933,000 for the three months ended March 31, 2000 and 1999, respectively.
We expect to incur net losses in the future, and these losses may be
substantial. Further, we may incur negative cash flow in the future particularly
to the extent we complete any acquisition opportunities. Because of continuing
substantial capital expenditures and product development, sales, marketing and
administrative expenses, we will need to generate significant revenues to
achieve profitability and positive cash flow. Even if we do achieve
profitability and positive cash flow, we may not be able to sustain or increase
profitability or cash flow on a quarterly or annual basis.
Our quarterly operating results are likely to fluctuate because of many factors
and may cause our stock price to fluctuate.
Our revenues and operating results have varied in the past and are likely
to vary in the future from quarter to quarter. As a result, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of any one quarter or
series of quarters as an indication of our future performance.
It is likely that in some future quarter or quarters our operating results
will be below the expectations of securities analysts or investors. In such
event, the market price of our common stock may decline significantly.
These variations in our operating results will likely be caused by factors
related to the operation of our business, including:
. Variations in the timing and size of orders for our Internet equipment;
. Our ability to license, and the timing of licenses, of our Web platform
products, particularly our e-business and Timbuktu Pro products;
. The growth rate in the number of Web sites that are built using our e-
business products from which we derive revenues;
. Loss of significant customers, or significant decreases or delays in
purchases by significant customers, such as Covad Communications, Northpoint
Communications, Rhythms Netconnections, Ingram Micro and Softway
International;
. The mix of products and services and the gross margins associated with such
products and services, including the impact of our increased sales of lower
margin Internet equipment as a percentage of our total revenues;
. The price and availability of chip sets, which we obtain from Conexant
Systems, for our DSL Internet equipment;
. The timing and size of expenses, including operating expenses and expenses of
developing new products and product enhancements; and
. Our ability to attract and retain key personnel.
These variations may also be caused by factors related to the development
of the DSL market, the market for our Web platform products and the competition
we face in these markets, including:
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. The timing and rate of deployment of DSL services by telecommunications
service providers;
. The timing and rate of deployment of alternative high-speed data transmission
technologies, such as cable modems and high-speed wireless data transmission;
. Anticipated price and promotion competition in the market for Internet
equipment and Web platform products;
. The level of market penetration of our Internet equipment and Web platform
products relative to those of our competitors; and
. Anticipated increases in competition among producers of e-business products,
including the impact of products that are available from some of our
competitors at no cost.
These variations may also be caused by other factors affecting our
business, many of which are substantially outside of the control of our
management, including:
. Costs associated with future litigation, including litigation relating to the
use or ownership of intellectual property;
. A cquisition costs or other non-recurring charges in connection with the
acquisition of companies, products or technologies;
. Foreign currency and exchange rate fluctuations which may make our dollar-
denominated products more expensive in those foreign markets where we sell
our products in U.S. dollars or could expose us to currency rate fluctuation
risks if our sales become denominated in foreign currencies, to the extent we
do not adequately hedge these foreign currency sales; and
. General global economic conditions which could adversely affect sales to our
customers.
We may not be able to compete successfully against current and future
competitors.
We sell products and services in markets that are highly competitive. We
expect competition to intensify as current competitors expand their product and
service offerings and new competitors enter the market. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any one of which could seriously harm our business. Competitors vary in
size, scope and breadth of the products and services offered.
In the DSL router market, we primarily encounter competition from 3Com,
Cayman Systems, Cisco Systems, Efficient Networks (FlowPoint), Ramp Networks and
several other companies. In addition to these competitors, there have been a
growing number of announcements by other companies that they intend to enter the
DSL router market. Further, some competitors offer low-cost or no-cost support
programs that are similar to our ''Up & Running, Guaranteed!'' program.
In the market for Web sites and electronic commerce platforms, we encounter
competition primarily from Homestead Technologies, IBM, Inc. Online, Site
Architects, Sitematic, Verio, Yahoo!Geocities and several other companies. In
the market for our remote control and enterprise software, we primarily
encounter competition from Computer Associates, Intel, Microcom (Compaq),
Microsoft, Vector Networks, Stac Software, Symantec, Tivoli Systems (IBM) and
several other companies. We anticipate intense competition from some of these
companies because some of these competitors provide their products to consumers
at no cost. For example, Microsoft has available at no cost a communications and
collaboration software product that could limit the market for Timbuktu Pro.
Many of our current and potential competitors in all three product areas
have longer operating histories, significantly greater financial, technical,
marketing and other resources, significantly greater
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name recognition and a larger base of customers than we do. In addition, many of
our competitors have well-established relationships with our current and
potential customers and have extensive knowledge of these industries. In the
past, we have lost potential customers to competitors in all three product areas
for various reasons, including lower prices and other incentives not matched by
us. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products and services to address customer needs.
Accordingly, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. We also expect that competition will
increase as a result of industry consolidation.
We need to develop, introduce and market new and enhanced products in a timely
manner to remain competitive.
We compete in markets characterized by continuing technological
advancement, changes in customer requirements and evolving industry standards.
To compete successfully, we must design, develop, manufacture and sell new or
enhanced products that provide increasingly higher levels of performance,
reliability and compatibility. For example, we anticipate that voice over DSL
technology will become an important feature of future DSL router products. As a
result, we believe we will need to successfully develop, introduce and market
integrated access devices which will combine voice over DSL functionality in our
products. Additionally, we will need to continue to integrate our DSL router
technology with the architectures of leading central office equipment providers
in order to enhance the reliability, ease-of-use and management functions of
each of our DSL products. Currently, our router products are fully integrated
with Copper Mountain's CopperView management for CopperEdge central office
access concentrators and are interoperable with Lucent's Stinger, Nokia's
ATM/DSL D50 Speedlink and Paradyne's Hotwire GranDSLAM digital subscriber line
central office access concentrators. However, we may not be able to successfully
develop, introduce, enhance or market these or other products necessary to our
future success. In addition, any delay in developing, introducing or marketing
these or other products would seriously harm our business.
We may engage in acquisitions or divestitures that involve numerous risks,
including the use of cash and the diversion of management attention.
In the past, we have engaged in both acquisitions and divestitures. For
example, in August 1998, we sold our LAN Division, which developed and sold
local area network (LAN) products. We may continue to acquire companies,
technologies or products or to sell or discontinue some of our technologies or
products in future periods. In the past, our acquisitions and divestitures have
involved numerous risks, including the use of significant amounts of our cash,
diversion of the attention of our management from our core business, loss of our
key employees and significant expenses and write-offs. For example, in December
1998, we acquired netOctopus and Serus, in October 1999, we acquired StarNet
Technologies, Inc. and in March 2000, we acquired WebOrder. The success of these
acquisitions depends upon our ability to timely and successfully develop,
manufacture and gain market acceptance for the products we acquired. If we
engage in additional acquisitions or divestitures in future periods, we may not
be able to address these risks and our business may be harmed.
We may experience declining gross margins due to price competition and an
increase in sales of lower margin Internet equipment as a percentage of our
total revenue.
We expect that sales of our Internet equipment may account for a larger
percentage of our total revenues in future periods. Because these products are
generally sold at lower gross margins than our Web platform products, this will
likely result in a decrease in our overall gross margins. Further, we expect
that the market for Internet equipment, in particular DSL products, will become
increasingly competitive and that we will be forced to lower the prices we
charge for our Internet equipment in the future. As the average selling price of
our routers declines, our gross margins related to such products, and in
general, are likely to decline.
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The loss of, or decline in, purchases by one or more of our key distributors or
customers would result in a significant decline in our revenues.
Our revenues will decline and our losses will increase if we lose one or
more of our significant customers or if our customers reduce or delay purchases
of our products. During the three months ended March 31, 2000, our top five
customers who each individually represented at least 5% of our total revenues
accounted for approximately 47% of our total revenues as a group, respectively.
In this period, sales to Northpoint Communications and Covad Communications
represented approximately 15% and 13% of our total revenues, respectively.
Our limited operating history in DSL Internet equipment makes it difficult to
evaluate our prospects.
Our DSL Internet equipment has only recently been introduced. You should
consider our prospects in light of the difficulties we may encounter because
these products are at an early stage of development in a relatively new, rapidly
evolving and intensely competitive market. For example, we may not correctly
anticipate market requirements, including requirements for performance, price,
features and compatibility with other DSL equipment. We may not be able to
rapidly introduce innovative new products that meet these market requirements.
It is possible that the market for DSL Internet equipment will develop in a
manner that we do not anticipate. Our competitors have introduced DSL products,
some of which may compete effectively against our DSL products. Such
developments could render our DSL products obsolete.
Our revenues will not grow and our losses will increase if we cannot continue to
successfully introduce, market and sell our DSL Internet equipment.
A portion of our revenues from Internet equipment is derived from non-DSL
routers. We anticipate that in the future the market for such non-DSL products
will decrease and that sales of our non-DSL products will decline as a
percentage of our total revenues. Accordingly, our revenues will not grow if we
are unable to continue to introduce, market and sell our DSL Internet equipment.
Sales of our DSL Internet equipment will decline substantially if Copper
Mountain and Nokia DSL equipment is not widely deployed.
We are currently dependent on the selection of Copper Mountain and Nokia
DSL equipment by telecommunications service providers that are deploying DSL
services. Historically, substantially all of our sales of DSL routers have been
for use with DSL equipment manufactured by these companies. We have recently
introduced our DSL routers for use with DSL central office access concentrators
manufactured by Lucent and Paradyne. If Copper Mountain, Nokia, Lucent or
Paradyne DSL equipment is not widely used in DSL deployments, our business will
be seriously harmed.
Substantial sales of our DSL Internet equipment will not occur unless
telecommunications service providers initiate substantial deployment of DSL
services.
The success of our DSL Internet equipment depends upon whether
telecommunications service providers deploy DSL technologies and upon the timing
of the deployment of such technologies. Factors that will impact such deployment
include:
. A prolonged approval process by service providers, including laboratory
tests, technical trials, marketing trials, initial commercial deployment
and full commercial deployment;
. The development of a viable business model for DSL services, including the
capability to market, sell, install and maintain DSL services;
. Cost constraints, such as installation costs and space and power
requirements at the telecommunications service provider's central office;
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. Lack of compatibility of DSL equipment that is supplied by different
manufacturers;
. Evolving industry standards for DSL technologies; and
. Government regulation.
If telecommunications service providers do not expand their deployment of
DSL services, or if additional telecommunications providers do not offer DSL
services on a timely basis, then our business, financial condition and results
of operations will be seriously harmed.
Other technologies for the high-speed Internet equipment market will compete
with DSL services.
DSL services are competing with a variety of different high-speed Internet
connectivity technologies, including cable modem, satellite and other wireless
technologies. Many of these technologies will compete effectively with DSL
services. If any technology competing with DSL technology is more reliable,
faster, less expensive, reaches more customers or has other advantages over DSL
technology, then the demand for our products and services and our revenues and
gross margins may decrease.
We depend upon the ability of emerging competitive telecommunications service
providers to compete effectively with traditional telephone companies in
providing DSL services.
The purchasers of our DSL Internet equipment are primarily emerging
competitive telecommunications service providers such as NorthPoint
Communications, Covad Communications and Rhythms Netconnections. We depend upon
the ability of such competitive telecommunications service providers to
successfully offer DSL services. These competitive telecommunications service
providers are competing with traditional regional telephone companies.
Traditional regional telephone companies may have a number of competitive
advantages over their new competitors, including greater resources, name
recognition and access to customers. Also, traditional regional telephone
companies may restrict, or attempt to restrict, the ability of competitive
telecommunications service providers to install DSL equipment at the regional
telephone companies' central offices.
We purchase the semi-conductor chips for our DSL routers from a limited number
of suppliers.
All of our DSL routers rely on certain semi-conductor chips that we
purchase from a limited number of suppliers. We do not have volume purchase
contracts with any of our suppliers and they could cease selling us these semi-
conductor chips at any time. If we are unable to timely obtain a sufficient
quantity of these semiconductor chips from any of our suppliers for any reason,
sales of our DSL routers could be delayed or halted. Further, we could also be
forced to redesign our DSL routers and qualify new suppliers of semiconductor
chip sets. The resulting stoppage or delay in selling our products and the
expense of redesigning our DSL routers would seriously harm our reputation and
business.
Substantially all of our circuit boards are manufactured by SMTC Corporation
(SMTC), a contract manufacturer.
Substantially all of our Internet equipment include circuit boards that are
manufactured by SMTC which recently acquired Hi-Tech Manufacturing, or HTM, our
former contract manufacturer. Additionally, certain of our DSL routers are
assembled and packaged by SMTC. If supplies of circuit boards or DSL routers
from SMTC are interrupted for any reason, we will incur significant losses until
we can arrange for alternative sources. Any such interruption may seriously harm
our reputation and business.
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We may be unable to obtain components for our Internet equipment from
independent contractors and specialized suppliers.
We do not manufacture any of the components used in our products and
perform only limited assembly on some products. All of our Internet equipment
rely on components that are supplied by independent contractors and specialized
suppliers. We generally do not have guaranteed supply arrangements with these
third-parties and they could cease selling components to us at any time.
Moreover, the ability of independent contractors and specialized suppliers to
provide us with sufficient router components also depends on our ability to
accurately forecast our future requirements. If we are unable to timely obtain a
sufficient quantity of components from the independent contractors or
specialized suppliers for any reason, sales of our Internet equipment could be
delayed or halted. In addition, we may be required to pay premiums for
components to other vendors should our regular independent contractors and
specialized suppliers be unable to timely provide us with sufficient quantity of
components. To the extent we pay any premiums, our gross margins and operating
results would be harmed. Further, we could also be forced to redesign our
Internet equipment and qualify new suppliers of components. The resulting
stoppage or delay in selling our products and the expense of redesigning our
Internet equipment would seriously harm our reputation and business. In
addition, we anticipate that it will be necessary for us to establish
relationships with additional component suppliers in the future. If we are
unsuccessful in establishing these relationships, we may not be able to obtain
sufficient components in some future period.
Our revenues will not grow and our losses will increase if we cannot
successfully introduce, market and sell our Web platform.
A substantial majority of revenues from our Web platform is derived from
the sale of Timbuktu Pro. We anticipate that in the future, the market for
Timbuktu Pro will grow more slowly than the market for other Web platform
products and services. In addition, we rely on licensees of our Web platform to
promote the use of our Web platform for building Web sites. The extent and
nature of the promotions by licensees of our Web platform are outside of our
control. If licensees of our Web platform do not successfully promote our Web
platform, we will not generate recurring revenues from royalties on Web sites
promoted by licensees of our Web platform.
The market for our Web platform may be limited by products and services that are
available at no cost.
Some companies are offering Web presence and enhancement products at no
cost. In some instances, we believe these companies are not charging for such
products and services because they are generating revenue from their Web sites
from other sources, such as advertising or subscription fees. If such free
products and services become widely used, the market for our Web platform
products will be limited.
To be successful, use of our Web platform must become widespread, and this will
require us to rapidly build our sales channel, which we may be unable to do.
Growth in revenues from our Web platform will be heavily dependent on
recurring fees from Web sites created by licensees. Accordingly, to be
successful, our Web platform must become widely used. The sales cycle for
licensing our Web platform can be long. We will be required to build our
internal sales organization and customer support organization to increase the
number of licensees of our Web platform. Because the market for technical sales
and support personnel is intensely competitive, growing our sales and support
organization may be difficult. If we are unable to rapidly establish the
widespread use of our Web platform, it is possible that competing products could
become widely used, reducing the likelihood that we will generate significant
revenues from our Web platform.
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If hosting services for our Web platform perform poorly, our reputation will be
damaged and we could be sued.
We depend on our servers, networking hardware and software infrastructure,
and third-party service and maintenance of these items to provide reliable,
high-performance Web site hosting services for our customers. In addition, our
servers are located at third-party facilities. Failure or poor performance by
the third parties with which we contract to maintain our servers, hardware and
software, could lead to interruption or deterioration of our Web site hosting
services. Additionally, a slowdown or failure of our systems due to an increase
in the use of the Web sites we currently host, or due to damage or destruction
of our systems for any reason, could also lead to interruption or deterioration
of our Web site hosting services. If there is an interruption or a deterioration
of our Web site hosting services, our reputation would be seriously harmed and,
consequently, sales of our products and services would decrease. If such
circumstances do arise in some future period, in order to retain current
customers and attract new customers, we may have to provide our Web site hosting
services at a subsidized price or even at no cost. In addition, if our Web site
hosting services are interrupted, perform poorly, or are unreliable, we are at
risk of litigation from our customers.
We license a substantial portion of our Timbuktu Pro software to a limited
number of large customers and these licenses have a lengthy sales cycle.
A volume license of our Timbuktu Pro software involves a significant
commitment of financial resources by our customers. As a result, volume licenses
of our Timbuktu Pro software have a long sales cycle, and in the past, we have
only sold volume licenses of our Timbuktu Pro software to a small number of
large customers each quarter. Further, volume license sales of Timbuktu Pro are
typically closed in the final weeks of the quarter and the timing of these
licenses may cause our quarterly results to vary. We generally incur significant
expenses in sales and marketing prior to obtaining customer commitments for the
volume licenses of our Timbuktu Pro software. As a result, our inability to get
customer commitments or delays in such commitments due to the lengthy sales
cycles would reduce our revenues and cause our losses to increase.
A substantial portion of our revenues come from sales to international
customers.
A substantial portion of our revenues come from sales to international
customers. We expect sales to international customers to continue to comprise a
significant portion of our revenues. In the past, our international sales have
typically been denominated in United States dollars. Beginning in the third
quarter of fiscal 2000, sales to our European customers who are members of the
European Union are being denominated in the Euro. All other international sales
will continue to be denominated in United States dollars. For our international
sales that continue to be denominated in United States dollars, fluctuations in
currency exchange rates could cause our products and services to become
relatively more expensive to our foreign customers. This could lead to decreased
profitability of our products and services. In addition, changes in the value of
the Euro relative to the United States dollar, could adversely affect our
operating results, to the extent we do not hedge sales denominated in the Euro.
We typically experience a seasonal reduction in revenues in the three months
ended September 30.
In the past, we have experienced a seasonal reduction in our revenues in
the three months ended September 30, primarily due to European vacation
schedules which typically result in reduced economic activity in Europe during
such periods. We anticipate that this trend will continue.
Our success depends on retaining our current key personnel and attracting
additional key personnel.
Our future performance depends on the continued service of our senior
management, product development and sales personnel, particularly Alan Lefkof,
our President and Chief Executive Officer. None of these persons, including Mr.
Lefkof, is bound by an employment agreement, and we do not carry key person life
insurance. The loss of the services of one or more of our key personnel could
seriously
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harm our business. Our future success depends on our continuing ability to
attract, hire, train and retain a substantial number of highly skilled
managerial, technical, sales, marketing and customer support personnel. In
addition, new hires frequently require extensive training before they achieve
desired levels of productivity. Competition for qualified personnel is intense,
and we may fail to retain our key employees or to attract or retain other highly
qualified personnel.
Our intellectual property may not be adequately protected, and our products may
infringe upon the intellectual property rights of third parties.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and patent, copyright and trademark law.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and there is no guarantee that the safeguards that we employ will
protect our intellectual property and other valuable competitive information.
For example, in selling our Timbuktu Pro software, we often rely on license
cards that are included in our products and are not signed by licensees.
Therefore, such licenses may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries where our
products are or may be manufactured or sold, particularly developing countries
including various countries in Asia, such as the People's Republic of China, do
not protect our proprietary rights as fully as do the laws of the United States.
We rely upon certain software, firmware and hardware designs that we
license from third parties, including firmware that is integrated with our
internally developed firmware and used in our products to perform key functions.
We cannot be certain that these third-party licenses will continue to be
available to us on commercially reasonable terms. The loss of, or inability to
maintain, such licenses could result in shipment delays or reductions until
equivalent firmware is developed, identified, licensed and integrated which
would seriously harm our business.
Our customers may return our products to us for replacement or refund.
We provide end users of our products with a one-year limited warranty on
our Internet equipment and a 90-day limited warranty on single-user versions of
our Timbuktu Pro software. We permit end users to return our Internet equipment
and Timbuktu Pro for replacements or for refund of the full purchase price if
the products do not perform as warranted. Our e-business products are provided
on an "as is" basis, and we generally do not offer a warranty on this product.
End users of our Web sites are offered a free 30-day evaluation period to
evaluate the product prior to purchase and thereafter can discontinue their
service at any time at no cost. In the past, we have not encountered material
warranty claims. In the future, if warranty claims exceed our reserves for such
claims, our business would be seriously harmed. Additionally, we attempt to
further limit our liability to end users through disclaimers of special,
consequential and indirect damages and similar provisions. However, we cannot
assure you that such limitations of liability will be legally enforceable.
Our products are complex and may contain undetected or unresolved defects.
Our products are complex and may contain undetected or unresolved defects
when first introduced or as new versions are released. We cannot assure you
that, despite our testing, defects will not be found in new products or new
versions of products following commercial release. If our products do contain
undetected or unresolved defects, we may lose market share, experience delays in
or losses of market acceptance or be required to issue a product recall. In
addition, we would be at risk of product liability litigation for financial or
other damages to our customers because of defects in our products. Although we
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attempt to limit our liability to end users through disclaimers of special,
consequential and indirect damages and similar provisions, we cannot assure you
that such limitations of liability will be legally enforceable.
Substantial sales of our common stock by our large stockholders could cause our
stock price to fall.
We have a limited number of stockholders that hold a large portion of our
common stock. To the extent our large stockholders sell substantial amounts of
our common stock in the public market, the market price of our common stock
could fall.
Our industry may become subject to changes in tariffs and regulations.
Our industry and industries that our business depends on may be affected by
changes in tariffs and regulations. For example, we depend on telecommunications
service providers for sales of our DSL Internet equipment, and companies in the
telecommunications industry must comply with numerous regulations and pay
numerous tariffs. If our industry or industries that we depend on become subject
to increases in tariffs and regulations that lead to corresponding increases in
the cost of doing our business or doing business with us, our revenues could
decline. For example, if a regulatory agency imposed restrictions on DSL service
that were not also imposed on other forms of high-speed Internet access, our
business could be harmed.
Our California facilities are located near major earthquake fault lines.
Our California facilities are located near major earthquake fault lines. If
there is a major earthquake in the region, our business could be seriously
harmed.
We may find it difficult to raise needed capital in the future, which could
significantly harm our business.
We may require substantial capital to finance our future growth and fund
our ongoing research and development activities beyond fiscal 2000. Our capital
requirements will depend on many factors, including:
. Acceptance of and demand for our products;
. The number and timing of acquisitions;
. The costs of developing new products;
. The costs associated with our expansion; and
. The extent to which we invest in new technology and research and development
projects.
If we issue additional stock or other instruments to raise capital, the
percentage ownership in Netopia of existing stockholders would be reduced.
Additional financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to us.
Our stock price may be volatile, which may result in substantial losses for our
stockholders.
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
. Variations in our quarterly operating results;
. Changes in securities analysts' estimates of our financial performance;
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. Changes in market valuations of similar companies;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital commitments;
. Losses of major customers or the failure to complete significant licensing
transactions;
. Additions or departures of key personnel; and
. Fluctuations in the stock market price and volume, which are particularly
common among highly volatile securities of companies in our industry.
We are at risk of securities class action litigation due to the expected
volatility of our stock price.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be a target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
A third party may have difficulty acquiring us, even if doing so would be
beneficial to our stockholders.
Provisions of our Amended and Restated Certificate of Incorporation, our
Bylaws and Delaware law could make it difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
Liquidity and Capital Resources
We have funded our operations to date primarily through the private sale of
equity securities and the public offerings of our common stock. As of March 31,
2000, we had cash, cash equivalents and short-term investments representing 46%
of total assets.
Our operating activities provided $911,000 of cash for the six months ended
March 31, 2000 and used $6.2 million for the six months ended March 31, 1999.
The cash provided by operations in the six months ended March 31, 2000 was
primarily due to cash generated from our normal operating activities as well as
an increase in accounts payable and accrued liabilities, partially offset by
increases in accounts receivable and inventories. The cash used by operations in
the six months ended March 31, 1999 was primarily due to supporting our
operating activities as well as the increase in accounts receivable and the
reduction of accounts payable and accrued liabilities related to the sale of our
LAN Division.
Cash used in investing activities for the six months ended March 31, 2000
was primarily due to:
. Purchases of short-term investments; and
. Our acquisitions of WebOrder and StarNet.
These amounts were partially offset by proceeds realized from the sale and
maturity of short-term investments.
Cash provided by investing activities for the six months ended March 31,
1999 was primarily due to proceeds from the sale of short-term investments
partially offset by:
. Purchases of short-term investments;
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. Our acquisitions of Serus and netOctopus; and
. Purchases of capital equipment.
Cash provided by our financing activities for the six months ended March
31, 2000 and 1999 was primarily related to the exercise of employee stock
options and activities related to our Employee Stock Purchase Plan.
Although we believe that our existing cash balance may decrease moderately
during the remainder of fiscal 2000 as a result of increased operating expenses,
we believe that our existing cash, cash equivalents and short-term investments
will be adequate to meet our cash needs for working capital, capital
expenditures and earnouts related to our acquisitions for at least the next
twelve months. We may require substantial capital to finance our future growth
and fund our ongoing research and development activities during the remainder of
fiscal 2000 and thereafter. If we issue additional stock to raise capital, the
percentage ownership in Netopia of existing stockholders would be reduced.
Additional financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to us.
From time to time, in the ordinary course of business, we may evaluate
potential acquisitions of businesses, products and technologies. Accordingly, a
portion of our cash may be used to acquire or invest in complementary businesses
or products, to obtain the right to use complementary technologies, to obtain
additional presence on the Internet or to support additional advertising and
promotional campaigns. In the past, our acquisitions and divestitures have
involved numerous risks, including the use of significant amounts of our cash,
diversion of the attention of our management from our core business, loss of our
key employees and significant expenses and write-offs. For example, in December
1998, we acquired netOctopus and Serus, in October 1999, we acquired StarNet
and, in March 2000, we acquired WebOrder. The success of these acquisitions
depends upon our ability to timely and successfully develop, manufacture and
gain market acceptance for the products we acquired. If we engage in additional
acquisitions or divestitures in future periods, we may not be able to address
these risks and our business may be harmed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments for
speculative or trading purposes. We place our investments in instruments that
meet high credit quality standards, as specified in our investment policy. This
policy also limits the amount of credit exposure to any one issue, issuer and
type of instrument. We do not expect any material loss with respect to our
investment portfolio.
The table below presents the carrying value and related weighted-average
interest rates for our investment portfolio. The carrying value approximates
fair value at March 31, 2000. All of our investments mature in twelve months or
less.
<TABLE>
<CAPTION>
Carrying Average
Principal (notional) amounts in United States dollars: Amount Interest Rate
--------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash equivalents - fixed rate................................. $49,985 5.96%
Short-term investments - fixed rate........................... 9,302 5.94%
-----------------
$59,287
=================
</TABLE>
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On March 23, 2000 we issued 233,119 shares of our Common Stock as
partial consideration for the acquisition of WebOrder. In addition to the
issuance of the Common Stock, the consideration we paid included (i) $1.6
million in cash paid on the closing date of the transaction; (ii) a series of
potential cash and common stock earnout payments if certain revenue milestones
are achieved; and, (iii) the substitution of stock options to purchase 28,274
shares of our Common Stock in replacement of the WebOrder options held by
WebOrder's former employees, who joined Netopia after the closing, valued at
approximately $2.1 million. The shares issued in the merger were not registered
under the Securities Act of 1933, as amended, in reliance upon the exemption
under Section 4(2) of the Act for nonpublic offerings.
Item 4. Submission of Matters to a Vote of Security Holders
On February 29, 2000, the Annual Meeting of Stockholders of Netopia,
Inc. was held in Alameda, California.
An election of directors was held, with the following individuals being
elected to the Board of Directors of the Company:
Votes For: Votes Withheld:
------------- ---------------
Reese M. Jones........................... 11,619,019 162,016
Alan B. Lefkof........................... 11,620,419 160,616
David F. Marquardt....................... 11,654,719 126,316
David C. King............................ 11,633,779 147,256
Other matters voted upon at the meeting and the number of affirmative
and negative votes cast with respect to each such matter were as follows:
1. To approve amendments to the Company's 1996 Stock Option Plan, including
a 500,000 share increase to the number of shares available under the
1996 Stock Option Plan and to amend the option plan's automatic option
grant program. (6,549,463 votes in favor, 5,214,734 votes opposed,
16,838 votes abstaining and no broker non-votes).
2. To approve an amendment to the Company's Employee Stock Purchase Plan to
increase the number of shares of the Company's Common Stock available
for issuance by 50,000 shares. (10,643,348 votes in favor, 1,117,984
votes opposed, 19,703 votes abstaining and no broker non-votes).
3. To ratify the appointment of KPMG LLP as independent auditors of the
Company. (11,753,012 votes in favor, 20,969 votes opposed and 7,054
votes abstaining).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months ended
March 31, 2000.
34
<PAGE>
SIGNATURE
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 NETOPIA, INC.
(Registrant)
By: /s/ James A. Clark
---------------------------------
James A. Clark
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
35
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 51,332
<SECURITIES> 9,485
<RECEIVABLES> 15,192
<ALLOWANCES> 931
<INVENTORY> 6,127
<CURRENT-ASSETS> 86,208
<PP&E> 14,433
<DEPRECIATION> (11,368)
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0
0
<COMMON> 17
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<TOTAL-LIABILITY-AND-EQUITY> 131,843
<SALES> 21,796
<TOTAL-REVENUES> 21,796
<CGS> 11,003
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (892)
<INCOME-PRETAX> (4,075)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,075)
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<NET-INCOME> (4,075)
<EPS-BASIC> (0.25)
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