NETOPIA INC - 10-K Annual Report

Delaware
(State or other jurisdiction of
incorporation or organization)

94-3033136
(I.R.S. Employer
Identification Number)

6001 Shellmound Street, 4th Floor
Emeryville, California 94608
(Address of principal executive offices, including Zip Code)

(510) 420-7400
(Registrant’s telephone number, including area code)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

[X]

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended September 30, 2003

[ ]

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)

Indicate by 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 [ ]

Indicate by check if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check whether the registrant is an accelerated filer. Yes [ ] No [X]

As of the last business day of the registrant’s most recently completed second fiscal quarter, March 31, 2003, the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold was $27,165,518.

As of December 12, 2003, there were 22,813,659 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Stockholders Meeting to be held on January 30, 2004 are incorporated by reference in Part III of this Form 10-K.

NETOPIA, INC.
FORM 10-K
Table of Contents


PART I

Item 1.	Business	1
Item 2.	Properties	8
Item 3.	Legal Proceedings	9
Item 4.	Submission of Matters to a Vote of Security Holders	9
Item 4A.	Executive Officers of Registrant	9

PART II

Item 5.	Market for Registrants Common Equity and Related Stockholder Matters	10
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	64
Item 9A.	Controls and Procedures	64

PART III

Item 10.	Directors and Executive Officers of the Registrant	64
Item 11.	Executive Compensation	64
Item 12.	Security Ownership of Certain Beneficial Owners and Management	65
Item 13.	Certain Relationships and Related Transactions	65
Item 14.	Principal Accounting Fees and Services	65

PART IV

Item 15.	Exhibits, Financial Schedules and Reports on Form 8-K	65
Index to Exhibits		65
Signatures		67
Certifications		73

PART I

ITEM 1. BUSINESS

Some of the information in this Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “potential,” “believe,” “estimate,” “intends” 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. There will be events in the future that we are not able to predict or over which we have no control, which may adversely affect our future results of operations, financial condition or stock price. The risk factors described in this Form 10-K, as well as any cautionary language in this Form 10-K, 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 risks, uncertainties, or events described in this Form 10-K could seriously harm our business and that, upon the occurrence of any of these events, the trading price of our common stock could decline.

Company Background

We develop, market and support broadband and wireless (Wi-Fi) products and services that enable our carrier and service provider customers to simplify and enhance the delivery of broadband services to their residential and business-class customers. Our product and service offerings enable carriers and broadband service providers to (i) deliver to their customers feature-rich modems, routers and gateways, (ii) utilize software that allows remote management of equipment located at their customers’ premises, and (iii) provide value added services to enhance revenue generation. Our broadband modems, routers and gateways are installed by customers of carriers and broadband service providers in order to obtain faster access to the Internet than is possible with dial-up connections. These bundled service offerings often include digital subscriber line (DSL) or broadband cable equipment bundled with backup, bonding, virtual private networking or VPN that allows more secure communications over the Internet, firewall protection, parental controls, Web content filtering, combined voice and data services, hosting of web sites that we call eSites, and hosting of web stores that we call eStores. Our netOctopus suite of server software products enable remote support and centralized management of installed broadband gateways, allowing carriers and broadband service providers to provide support to their customers on a remote basis. We also offer Timbuktu and eCare software products for help desk customers. These products allow business help desks to provide support on a remote basis when computer users experience problems with their desktop or laptop computers.

We were incorporated in California in 1986 as Farallon Computing, Inc. In 1996 we were reincorporated in Delaware as Farallon Communications, Inc. In November 1997, we changed our name Netopia, Inc. We initially focused on the development of networking products for AppleTalk local area networks (LANs). In 1993, we revised our business strategy to concentrate on the Internet and Intranet markets thru the utilization of our transmission control protocol/Internet protocol (TCP/IP) and routing expertise. In 1998, we introduced our family of DSL broadband Internet equipment. In 2002, we expanded and enhanced our broadband product and service offerings, primarily as a result of the technology acquired in connection with our acquisitions of Cayman Systems, Inc. (Cayman) and DoBox, Inc. (DoBox). In 2003, we introduced our Wi-Fi modems and gateways. Our principal offices are located at 6001 Shellmound Street, 4th Floor, Emeryville, California 94608, and our telephone number is (510) 420-7400.

Event Occurring After September 30, 2003

In October 2003, we acquired JadeSail Systems, Inc. (JadeSail), a provider of Internet Protocol (IP) services management and network equipment provisioning software. We intend to integrate JadeSail’s technology into our netOctopus suite of server software products, adding policy-based IP Services definition and provisioning for firewall and VPN services.

Under the terms of the purchase agreement, we issued 160,000 shares of our common stock in exchange for all the outstanding common stock of JadeSail. The aggregate purchase price, including the common stock issued and transaction-related expenses, was approximately $1.4 million. Based upon our valuation of the assets acquired,

we expect to allocate the purchase price to other intangible assets and goodwill. The amount allocated to other intangible assets will be amortized through our operating expenses in future periods.

Products and Services

Broadband Equipment. We have developed a comprehensive family of broadband Internet modems, routers and gateways, which allow the transport of high-speed data over the local copper loop and enable telecommunications carriers to provide cost-effective and high-speed services over existing copper infrastructure. This family of products serves an array of wide area network (WAN) interfaces including DSL, cable and T1, and LAN interfaces including Wi-Fi and Ethernet. Our broadband Internet products are designed to deliver high performance, excellent reliability, scalability, and affordability, and to be a platform from which our carrier and service provider customers can offer their customers additional services and applications. We believe key components to our success are comprehensive interoperability with leading central office DSL equipment, a common firmware platform across all versions of our broadband Internet products, and technology such as our 3-D ReachTM technology which gives our Wi-Fi products greater and more reliable wireless coverage than that of many of our competitors. The substantial majority of our revenues are derived from sales of our broadband Internet products, in particular our DSL modems, routers and gateways. During each of fiscal years 2003, 2002 and 2001, revenue from the sale of our broadband Internet products have accounted for 79%, 71% and 76%, respectively, of our total revenues. When reading our statement of operations and comprehensive loss, revenues and cost of revenues related to the sale of our broadband Internet equipment are classified as “Internet equipment.”

The following table summarizes our broadband equipment product family and their applications:

Product Line	Description	Applications
Netopia 3000 Series DSL, Ethernet and Wi-Fi Broadband Modems, Routers and Gateways	DSL gateway that connects to a corresponding DSL device in the service providers’ central office. Our “smart” class of self-installable and remotely manageable and configurable modems and gateways.	For the single or multi-computer home, small business and Internet wireless “hot spots”. LAN interface options include Wi-Fi, Ethernet and USB.
Netopia 4000 Series DSL and T1 Broadband Gateways	Business class gateways that connect to the service providers’ central office. Provide robust routing, security, and management features optimized for the business and enterprise applications.	For small and medium size businesses and distributed enterprises: Ethernet LAN interface; hardware based VPN acceleration; dial back-up; firewall protection.
Netopia R-Series DSL, Leased Line, ISDN and Analog Broadband Gateways	Business class gateways that connect to the service providers’ central office. Provide robust routing, security, and management features optimized for the business user. Modular architecture allows for cost-effective WAN interface hardware upgrades.	For small and medium size businesses: Ethernet LAN interface; VPN features; firewall protection; dial back-up.

Broadband Services. Our service delivery platform includes the netOctopus suite of server software products and systems management software products. The netOctopus suite includes: EdgeManager, which enables remote support and centralized management of installed broadband gateways and real-time customer support; eCare and Desktop Support enable broadband service providers and other enterprise customers to support their customers by remotely viewing and operating the customer’s desktop computer; and, our Web eCommerce server solution that provides “no assembly required” Web sites and online stores that we call eSites and eStores, with a wide variety of vertical market content packages to suit many needs, from franchisees to sole proprietors. Our systems management software includes Timbuktu, a systems management tool providing remote computer control, configuration, support and file transfer. We hold one United States patent relating to eCare and Timbuktu systems management software. The term of this patent is through August 2010. During each of fiscal years 2003, 2002 and 2001, revenue from the sale of our broadband services have accounted for 21%, 29% and 24%, respectively, of

our total revenues. When reading our statement of operations and comprehensive loss, revenues and cost of revenues related to the sale of our broadband services are classified as “Web platform licenses and services.”

The following table summarizes our broadband services product family:

Product Line				Description
netOctopus Server Platform
EdgeManager				EdgeManager is designed to enable the network operation centers (NOCs) of broadband service providers to proactively manage the broadband gateways installed on their network, thereby reducing help desk call loads and support costs. Using gateway discovery mechanisms, configuration comparisons, automatic delivery of configuration updates directly to the gateway and post updated diagnostics, EdgeManager enables the service provider to easily and cost-effectively support and provision its installed gateways, improve the quality of customer support, and increase the level of customer satisfaction.
DesktopSupport				DesktopSupport utilizes a Web architecture requiring a small size personal computer (PC) component, or thin applet, to provide live desktop assistance remotely. Technical support and customer service agents can communicate with their customers while remotely sharing and operating their desktops, sharing files, chatting as well as diagnosing and troubleshooting desktop problems in real time.
eCare				eCare is support interaction software that enables call centers and help desks to assist computer users in resolving technical support issues by providing bi-directional remote desktop assistance and the ability to observe and operate the user’s desktop. eCare can maintain log and report on call statistics, and can be integrated into an existing customer relation management (CRM) system.
eCommerce				Includes the eSite and eStore hosting solutions which offer “no assembly required” eSites and e-commerce enabled eStores for small and medium size businesses.
Systems Management Software
Timbuktu and netOctopus Enterprise				Includes systems management tools for the multi-platform enterprise, which include remote computer configuration, computer asset management, software distribution, remote control and file transfer.

DSL Technology

The substantial majority of our business is based and dependent upon products that utilize DSL technology. This technology uses complex modulation methods to enable high-speed data services over copper phone lines. DSL technology allows the simultaneous transmission of data at speeds from 1 Megabit per second (Mbps) to 8Mbps, or 17 times to 140 times faster than standard 56 Kilobits per second (Kbps) modem service, while also providing standard analog telephone service over a single pair of copper wires at distances of up to 18,000 feet. With DSL technology, a user can talk and have high-speed data transmissions at the same time over a regular phone line. DSL products enable telecommunication carriers to provide interactive multimedia services over copper wire while simultaneously carrying traditional telephone services, thus mitigating the need for the telecommunication carriers to install second lines to support these services. Our products support many DSL WAN interfaces such as: asynchronous DSL (ADSL) which refers to DSL technology that provides bi-directional transmission capacity at varying speeds; and symmetric DSL (SDSL), symmetric high bit-rate SDL (SHDSL) and integrated services digital network DSL (IDSL), each of which refers to DSL technology that provides bi-direction transmission capacity at the same speeds.

The DSL connection, or link, is comprised of a DSL Access Multiplexer (DSLAM), which we do not build or sell, and a DSL modem, gateway or router, which we do build and sell. The DSLAM is a piece of equipment that typically resides in the telephone carrier’s central offices and aggregates, or multiplexes, multiple DSL access lines into the carrier’s high-speed line back to its core or central network. The DSL modem, gateway, or router resides at the user’s location, and is a small device enabling DSL services at the user’s premises.

Customers

We sell our products in the United States, and internationally, primarily in Europe, to:

•

Telecommunication carriers, including: incumbent local exchange carriers (ILECs), such as Swisscom AG (Swisscom), SBC Communications Inc. (SBC), BellSouth Telecommunications, Inc. (BellSouth), Eircom Ltd. (Eircom) and Verizon Communications Inc. (Verizon); competitive local exchange carriers (CLECs), including Covad Communications Group, Inc. (Covad) and NextGenTel (NGT); Internet service providers (ISPs) and managed service providers (MSPs), including EarthLink, Inc. (EarthLink), MegaPath Networks, Inc. (MegaPath) and Netifice Communications, Inc. (Netifice); and Internet exchange carriers (IXCs) including Sprint Corporation (Sprint) and WorldCom, Inc. (WorldCom);

•

Distributors, including: Ingram Micro Inc. (Ingram Micro), Tech Data Corporation (Tech Data), and Groupe Softway (Softway); and

•

Directly to end-users.

Historically, we have primarily depended upon the ability of our customers to successfully offer DSL broadband services. Prior to our acquisition of Cayman in October 2001, our largest customers were CLECs. Many CLECs filed for protection under the Bankruptcy Act or ceased operations. Covad, which currently is our largest CLEC customer and historically has been among our largest customers, is expecting operating losses and negative cash flow to continue into 2004.

As a result of financial and operational difficulties encountered by many of our CLEC customers, which primarily had the business market for DSL services, we acted aggressively to expand our customer base and markets served. As a result of our acquisition of Cayman, we have expanded our customer base to include two ILEC customers, SBC and BellSouth, to which we previously had not sold our broadband equipment, and have developed new products designed for the residential market for DSL services, which have enabled us to win new customers such as Swisscom in Switzerland, EarthLink in the United States, and Eircom in Ireland. We expect that the success of our operations will remain substantially dependent upon our ability to develop and enhance products that meet the needs of both the residential and business market for DSL and Wi-Fi services and requirements of our ILEC customers. Our major customers are significantly larger than we are, and are able to exert a high degree of influence over our business. For example, our larger customers may be able to reschedule or cancel orders without significant penalty and may force lengthy approval and purchase processes before purchasing our products.

Distribution, Sales and Marketing

We sell our products through a domestic and international field sales organization and through selected distributors. We market our products in the United States, Canada, Europe and the Asia Pacific region. Our broadband equipment products are generally sold directly to our carrier and service provider customers or in some cases to distributors who then resell our products. Our broadband service products are generally sold directly to our customers.

The sales process for both our broadband equipment and broadband services can be lengthy. At the first stage of the process, our telecommunication carrier customers invite us, and many competitors, to respond to detailed requests for information or proposal. Even if our products are selected for further consideration after receiving our response to such a request, prior to selling our broadband equipment to telecommunication carriers, the products generally undergo lengthy approval and purchase processes. Although the telecommunication carrier approval processes vary to some extent depending on the customer and the product being evaluated, they generally are conducted as follows:

•

Laboratory Evaluation. The product’s function and performance are tested against all relevant industry standards and customer requirements.

•

Technical Trial. A number of DSL lines are equipped with the product for simulated operation in a field trial. The field trial is used to evaluate performance, assess ease of installation and establish troubleshooting procedures.

•

Commercial Deployment. Commercial deployment does not usually mean that one supplier’s product is purchased for all of the carriers needs throughout the system as telecommunication carriers often rely upon

multiple suppliers to ensure that their needs can be met. Subsequent orders, if any, are generally placed under supply agreements that, regardless of term, are generally not subject to minimum volume commitments.

Although our business in recent years has not been materially affected by seasonal trends, to the extent that our products are used more widely by residential customers, we may experience increased seasonality based on trends in consumer markets.

Research and Development

We believe that our future business and operating results depend in part on our ability to continue to develop new products and enhance existing products in a timely manner, and to develop strategic product development relationships. We continuously evaluate changing market needs to provide customers with new broadband Internet equipment and services incorporating new technologies, standards and functionality. We continue to make a significant investment in product engineering, research and development. Research and development expenses were $15.6 million, $17.5 million and $13.8 million for fiscal years 2003, 2002 and 2001, respectively. We expect to continue to devote substantial resources to product and technological development.

Our research and development personnel are organized into development teams focused either on the development of our broadband equipment, our netOctopus Server Platform or our systems management software. Each product development team is generally responsible for conceiving new products for its target markets, adapting standard products or technology to meet new customer needs, and sustaining engineering activities related to our existing products. In particular, our hardware development team endeavors to achieve enhanced product performance and reduced product costs for each succeeding generation of broadband equipment product. We believe the key to this strategy is developing an initial architecture for each product that enables engineering innovations to result in performance enhancements and future cost reductions.

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 and services that provide increasingly higher levels of performance, reliability, compatibility, and cost savings for our customers. We may not be able to successfully develop, introduce, enhance or market these or other products and services necessary to our future success. In addition, any delay in developing, introducing or marketing these or other products would seriously harm our business.

Product and Customer Support

We believe that effective product and customer support are key criteria used by our customers in selecting our broadband Internet equipment and service offerings. Telecommunication carriers, ISPs, independent distributors and dealers, value-added resellers (VARs), end users, network managers and administrators, consultants and other experienced technical experts utilize our toll-free telephone support lines, fax and online support services to access our support personnel and internal technical databases. Additionally, support personnel are trained to satisfy the needs of our customers and end users, as well as the needs of our customers’ end users who are not technical experts and do not have access to sophisticated technical support. We believe that our support programs have been successful in creating brand loyalty through our focused support of the specialized needs of these customers and end users, and through the easy-to-use, plug-and-play design of our broadband Internet equipment and services.

With different service programs, including VPN set-up services, we can remotely configure our Internet gateways and assist users in setting up Internet service with the user’s telecommunication carrier and ISP. Our expertise in solving technical problems enables us to commit our resources to analyze any problem a customer or end user may have, even if it involves a product from another company. The effect of these activities is to build customer loyalty to us as the single source for broadband Internet equipment and services.

Manufacturing

We primarily utilize third-party contract manufacturers, and have a limited internal manufacturing capability, to meet our customer requirements and product demand. Our third-party contract manufacturers produce our products in factories primarily located in Thailand, China and Mexico. They produce substantially all of the circuit boards for our broadband Internet equipment and in certain circumstances assemble, package and ship our products

directly to our customers. Reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity and reduced control over product quality, delivery schedules, manufacturing yields and costs.

Competition

The markets for our broadband Internet equipment and broadband services are intensely competitive, highly fragmented and characterized by rapidly changing technology, evolving industry standards, price competition and frequent new product introductions. A large number of companies offer competitive products. 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. Our current and prospective competitors include original equipment manufacturers (OEMs), product manufacturers of broadband Internet equipment, developers of Web site and e-commerce software, developers of remote control and collaboration software, and developers of Web based help desk applications. In the market for broadband Internet equipment and services, we primarily compete with 2Wire, Inc., Siemens Aktiengesellschaft (Siemens) (through its Siemens Subscriber Networks, Inc. subsidiary, formerly known as Efficient Networks), Thomson Corporation (Thomson), Westell Technologies, Inc. (Westell) and ZyXEL Communications Co. (ZyXEL). In the market for our Web platforms products, we primarily compete with Altiris, Inc., Computer Associates International, Inc. (Computer Associates), CrossTec Corporation (CrossTec), Expertcity, Inc., LANDesk Software, Inc. (LANDesk), Microsoft Corporation (Microsoft) and Symantec Corporation (Symantec).

Many of our current and potential competitors in each product area have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater 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 each product area for various reasons, including lower prices and other incentives that we did not match. Furthermore, 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 believe that the principal competitive factors in our markets are:

•

Product feature, function and reliability;

•

Customer service and support;

•

Price and performance;

•

User experience, including ease of installation and use;

•

Timeliness of new product introductions;

•

Integration of hardware and software;

•

Size and scope of distribution channels;

•

Breadth of product line;

•

Size and loyalty of customer base;

•

Brand name recognition; and

•

Strategic alliances.

We cannot assure you that we will be able to compete successfully in the future. Our inability to successfully compete would seriously harm our business.

Government Regulations

The telecommunications industry, including most of our customers, is subject to regulation from federal and state agencies, including the Federal Communications Commission (FCC) and various state public utility and service commissions. While such regulation does not affect us directly, the effects of such regulations on our

customers may, in turn, adversely impact our business and results of operations. For example, FCC regulatory policies affecting the availability of telephone and communications services and other terms on which service providers conduct their business may impede our penetration of certain markets. The Telecommunications Act lifted certain restrictions on the carriers’ ability to provide interactive multimedia services including video on demand. Under the Telecommunications Act, new regulations have been established whereby carriers may provide various types of services beyond traditional voice offerings. Additionally, the Telecommunications Act permits the carriers to engage in manufacturing activities after the FCC authorizes a carrier to provide long distance services within its service territory. A carrier must first meet specific statutory and regulatory tests demonstrating that its monopoly market for local exchange services is open to competition before it will be permitted to enter the long distance market. When these tests are met, a carrier will be permitted to engage in manufacturing activities, and the carriers, which are our largest customers, may become our competitors as well.

Intellectual Property and Other Proprietary Rights

Our ability to compete is dependent in part on our proprietary rights and technology. We rely primarily on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary rights. We presently have one United States patent issued that relates to eCare and Timbuktu and remote control software. The term of this patent is through August 2010. We also have filed a provisional patent application relating to the design of our Wi-Fi DSL gateways. We generally enter into confidentiality or license agreements with our employees, consultants, resellers, distributors, customers and potential customers and limit access to the distribution of our software, hardware designs, documentation and other proprietary information. However, in some instances, we may find it necessary to release our source code to certain parties.

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 the safeguards we employ will protect our intellectual property and other valuable competitive information. 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 or licensed, and integrated into our products, which would seriously harm our business.

There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. Although we have not been party to any such litigation, in the future third parties may claim that our current or potential future products or we infringe their intellectual property. The evaluation and defense of any such claims, with or without merit, could be time-consuming and expensive. Furthermore, such claims could cause product shipment delays or require us to enter into royalty or licensing agreements on financially unattractive terms, which could seriously harm our business.

Employees

As of December 12, 2003, we employed 307 persons, including 112 in research and development, 72 in sales and marketing, 64 in customer service and support, 32 in manufacturing operations, and 27 in general and administrative functions. We also contract with consultants who provide us short and long-term services in various areas of our business. During the past two years, we have reduced our workforce to align expenses better with revenue levels. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

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 our employees are 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 harm our business. Competition for qualified personnel in our

industry and geographic location is intense. Although we believe that our personnel turnover rate is consistent with industry norms, 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 as well as provide extensive training to new hires so they achieve desired levels of productivity.

Segment Financial Information

You can find certain financial information with respect to our reportable segments and geographic areas in which we operate in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, particularly Note 10 of Notes to Consolidated Financial Statements.

ITEM 2. PROPERTIES

Each of the facilities we occupy is leased for a term of one to five years. We believe that our existing facilities are adequate for our current needs and that additional space sufficient to meet our needs for the foreseeable future will be available on reasonable terms. Since our California facilities are located near major earthquake fault lines in the San Francisco Bay area, our business could be seriously harmed in the event of a major earthquake. The following table sets forth our facilities and their related lease terms as of September 30, 2003:

Location	Primary use	Operating segment	Square feet		Lease term	Expires	Renewal option	Renewal term	Renewal commences
Emeryville, California	Headquarters; research and development, selling, marketing, service, general and administrative	Internet equipment and Web platforms		30,438	5 years, 6 months	June 30, 2008	No	n/a	n/a
Billerica, Massachusetts (a)	Research and development, customer service	Internet equipment		19,291 4,909	5 years 5 years	March 31, 2005 March 31, 2005	Yes Yes	3 years, 9 months 3 years	April 1, 2005 April 1, 2005
San Leandro, California	Distribution center	Internet equipment and Web platforms		14,406	2 years, 8 months	August 27, 2005	No	n/a	n/a
Lawrence, Kansas	Research and development	Web platforms		7,465	3 years	June 30, 2005	Yes	3 years	July 1, 2005
Fremont, California	Research and development	Internet Equipment and Web platforms		7,061	5 years	November 30, 2004	Yes	5 years	December 1, 2004
Addison, Texas	Selling	Web platforms		7,160	5 years, 8 months	August 31, 2008	Yes	3 years	September 1, 2008
Other (b)	Selling, marketing and research and development	Internet equipment and Web platforms	Less than 7,000

(a)

Subleased from Eastman Kodak Company.

(b)

Other office space with less than 7,000 square feet per location in Orem, Utah; Paris, France; Neunkirchen am Brand, Germany; Maastricht, The Netherlands; Alexandria, Virginia; and Beijing, China used primarily for selling, marketing and research and development activities.

ITEM 3. LEGAL PROCEEDINGS

From time to time we are involved in litigation incidental to the conduct of our business. We are not party to any legal proceeding that in our opinion is likely to seriously harm our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of our security holders during the fiscal fourth quarter ended September 30, 2003.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, and their ages as of December 12, 2003, are as follows:

Name		Position
Alan B. Lefkof	50	President, Chief Executive Officer and Director
William D. Baker	57	Senior Vice President, Finance and Operations, and Chief Financial Officer
Brooke A. Hauch	55	Senior Vice President, Chief Information Officer
Jayant Kadambi	38	Vice President, Research and Development
David A. Kadish	51	Senior Vice President, General Counsel and Secretary
Jeffrey G. Porter	40	Vice President, Marketing
Thomas A. Skoulis	47	Senior Vice President and General Manager

Alan B. Lefkof. Mr. Lefkof, President, Chief Executive Officer and Director, joined Netopia as President and a member of the Board of Directors in August 1991 and has been Chief Executive Officer since November 1994. He also serves as a director of QuickLogic Corporation. Prior to joining Netopia; Mr. Lefkof served as President of GRiD Systems, and as a Management Consultant at McKinsey & Company. Mr. Lefkof received a B.S. in computer science from the Massachusetts Institute of Technology in 1975 and a M.B.A. from Harvard Business School in 1977.

William D. Baker. Mr. Baker, Senior Vice President, Finance and Operations, and Chief Financial Officer, joined Netopia in July 2001 as Senior Vice President and Chief Financial Officer. He was appointed to his current position in January 2002. Prior to joining Netopia, Mr. Baker was Vice President and Chief Financial Officer at BITMICRO NETWORKS, Inc., a developer of solid-state storage devices, from June 2000 through April 2001, and Vice President and Chief Financial Officer at the JPM Company, an international manufacturer of wire harness and cable assemblies for the computer, networking and telecommunications industries, from January 1996 through June 2000. Mr. Baker received a B.A. in Business Administration from St. Francis College in 1969 and is a Certified Public Accountant.

Brooke A. Hauch. Ms. Hauch, Senior Vice President, Chief Information Officer, joined Netopia in October 1991 as Director, MIS. Ms. Hauch was appointed Vice President and Chief Information Officer in May 1997, and became Senior Vice President in October 2000. Prior to joining Netopia, Ms. Hauch served in various positions at Argonaut Information Systems, Inc., Ross Systems, Inc. and Blue Cross of Northern California. Ms. Hauch holds a bachelor’s degree in business from Arizona State University.

Jayant Kadambi. Mr. Kadambi, Vice President, Research and Development, joined Netopia in October 1999. Prior to joining Netopia, Mr. Kadambi co-founded StarNet Technologies, Inc. (StarNet), a provider of voice over DSL equipment that Netopia acquired. Mr. Kadambi previously served in various engineering and marketing positions at Advanced Micro Devices and was a Member of Technical Staff at AT&T Bell Laboratories. Mr. Kadambi received a B.S.E.E from Rensselaer Polytechnic University in 1985 and an M.S.E.E from Rensselaer Polytechnic Institute in 1986.

David A. Kadish. Mr. Kadish, Senior Vice President, General Counsel and Secretary, joined Netopia in June 1999. Mr. Kadish provided legal services to Netopia as a consultant from September 1996 to June 1999. Mr. Kadish operated an independent legal consulting practice from May 1996 to June 1999. He previously served in various corporate legal positions at the Electric Power Research Institute, Integral Systems and BRAE Corporation, and as an associate at the law firm of Morrison & Foerster. Mr. Kadish received a B.A. in American history from University of California at Santa Cruz in 1973, an M.A. in American history from Brandeis University in 1974 and a J.D. from Yale University in 1979.

Jeffrey G. Porter. Mr. Porter, Vice President, Marketing, joined Netopia in July 1991 as an Inside Sales Representative. Mr. Porter was appointed Vice President, Timbuktu Marketing in November 1999, and he became Vice President, Web Platforms Marketing in November 2000. He was appointed to his current position in October 2001. He previously held various sales positions at Logitech Corporation. Mr. Porter a B.A. in Management Science from University of California at San Diego in 1986.

Thomas A. Skoulis. Mr. Skoulis, Senior Vice President and General Manager, joined Netopia in September 1991 as Corporate Accounts Manager. Mr. Skoulis was appointed Vice President, North America Sales in October 1994, and became Senior Vice President in February 1997. Prior to joining Netopia, Mr. Skoulis held various sales management positions with 3Com and Digital Equipment Corporation. Mr. Skoulis received a B.A. in business administration from Miami University in Oxford, Ohio, in 1980.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since our initial public offering in June 1996, our common stock has been traded on the Nasdaq Stock Market. We were originally listed under the symbol FRLN. In November 1997, when we changed our name from Farallon Communications, Inc. to Netopia, Inc., our symbol changed to NTPA. The following table sets forth the range of quarterly intra-day high and low sale prices of our common stock on the Nasdaq Stock Market for the last two fiscal years ended September 30, 2003 and 2002.

				2003								2002
				High				Low				High