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Netopia Announces Restatement; Auditors Resign EMERYVILLE, Calif. --(Business Wire)-- Sept. 16, 2004 -- Netopia, Inc. (Nasdaq:NTPAE), a market leader in broadband gateways and service delivery software, announced today that it will restate its financial statements for the fiscal quarter ended June 30, 2002 and for each subsequent fiscal quarter and fiscal year through March 31, 2004, and also will revise previously released preliminary financial results for the third fiscal quarter ended June 30, 2004. Netopia also announced that KPMG LLP has resigned as its auditors. Netopia further is providing an update on its listing status with The Nasdaq Stock Market.Restatement of Financial Statements: As previously disclosed on August 17, 2004 in Netopia's filing on Form 12b-25, Netopia has delayed the filing of its Quarterly Report on Form 10-Q for the third fiscal quarter ended June 30, 2004 due to an ongoing review by Netopia's audit committee of Netopia's accounting and reporting practices, including the appropriateness and/or timing of revenue recognition of software license fees in two transactions with a single software reseller customer. Although the overall audit committee review is not yet complete, the review relating to these two transactions is complete, and Netopia determined on September 14, 2004 that Netopia will restate its financial statements for the fiscal quarter ended June 30, 2002 and for each subsequent fiscal quarter and fiscal year through March 31, 2004 and will revise previously released preliminary financial results for the quarter ended June 30, 2004. Accordingly, the previously filed financial statements for such periods should no longer be relied upon. The known restatements principally involve expected adjustments to Netopia's results of operations and balance sheet arising out of questions regarding the appropriateness and/or timing of revenue recognition relating to two software license transactions with a single software reseller customer that are described below. 2003 Software Reseller Transaction In one of the software license transactions, Netopia recorded in the fourth fiscal quarter of the fiscal year ended September 30, 2003 an account receivable of $750,400 and recognized $670,000 of Web platform license revenue, together with $80,400 of deferred revenue for maintenance services related to this license sale. It is anticipated that the restatements will include the elimination of the $670,000 of Web platform license revenue recorded in such fourth fiscal quarter, the elimination of the $80,400 of deferred revenue to be recognized in subsequent quarters, and the elimination of the account receivable from Netopia's balance sheet as of September 30, 2003. It is also anticipated that Netopia will file a Form 10K/A for the fiscal year ended September 30, 2003 to reflect these changes. It is further anticipated that Netopia will file Forms 10Q/A for (i) the fiscal quarter ended December 31, 2003 to reflect the elimination of $20,100 in Web platform maintenance services revenue recognized in the unaudited condensed consolidated statement of operation for such quarter related to this transaction, and to eliminate the account receivable of $750,400 and deferred revenue of $60,300 shown on the unaudited condensed consolidated balance sheet for such quarter and (ii) the fiscal quarter ended March 31, 2004 to reflect the elimination of $20,100 in Web platform maintenance services revenue recognized in the unaudited condensed consolidated statement of operations for such quarter related to this transaction, and to eliminate the account receivable of $750,400 and deferred revenue of $40,200 shown on the unaudited condensed consolidated balance sheet for such quarter. It is also anticipated that these Forms 10-Q/A will include additional changes related to the 2002 Software Reseller Transaction described below. As previously disclosed on July 22, 2004 in Netopia's filing on Form 8-K, Netopia announced that its operating expenses for the third fiscal quarter ended June 30, 2004 would include a specific bad debt charge of the full amount ($750,400) of the previously recorded account receivable relating to this transaction. Due to the restatements described above, there will be no bad debt charge for the third fiscal quarter. On August 26, 2004, Netopia received a payment of $337,500 from the software reseller customer. Netopia currently is determining the proper accounting treatment for this payment. 2002 Software Reseller Transaction In the third fiscal quarter of the fiscal year ended September 30, 2002, Netopia also entered into a Web platform software license with the same software reseller and recognized revenue of approximately $1.5 million in that quarter. Netopia collected approximately half of the related account receivable in that quarter and the remaining half in the next quarter. It is anticipated that the restatements will include (i) the elimination of approximately $750,000 of Web platform software license revenue recorded in the third fiscal quarter of the fiscal year ended September 30, 2002 and (ii) the recognition of approximately $632,000 of the amount previously recognized in the third fiscal quarter in the subsequent fiscal quarter (i.e., the fourth fiscal quarter of the fiscal year ended September 30, 2002). It is also anticipated that Netopia will file a Form 10K/A for the fiscal year ended September 30, 2002 to reflect these changes. The remainder of the previously recognized license revenue, approximately $118,000, is anticipated to be recognized as maintenance services revenue in the fourth fiscal quarter of the fiscal year ended September 30, 2003 and the first three fiscal quarters of the fiscal year ending September 30, 2004, and included in deferred revenue on Netopia's balance sheets as of September 30, 2002 and September 30, 2003. It is further anticipated that, in the Form 10K/A for the fiscal year ended September 30, 2003 and the Forms 10-Q/A for the fiscal quarters ended December 31, 2003 and March 31, 2004, for each quarter Netopia will reflect the addition of approximately $30,000 in Web platform maintenance services revenue related to this transaction. The following table summarizes the adjustments described above. -0- *T FY02 FY03 ------------------- ------------------------------------- (000's) (000's) Fiscal June September December March June September Quarter 30, 30, 31, 31, 30, 30, Ended 2002 2002 2002 2003 2003 2003 -------- ---- ---- ---- ---- ---- ---- Net Income as Reported $ (4,866) $(15,774) $ (3,938) $ (3,126) $ (1,478) $ 222 Reversal of revenue (750) - - - - (670) Recognition of revenue - 632 - - - 27 Reversal of expenses related to revenue 90 - - - - 35 Recognition of expenses related to revenue - (90) - - - - ------------------- ------------------------------------- Net Income as Adjusted $ (5,526) $(15,232) $ (3,938) $ (3,126) $ (1,478) $ (386) Basic or diluted earnings (loss) per share as Reported $ (0.26) $ (0.84) $ (0.21) $ (0.16) $ (0.08) $ 0.01 Basic or diluted earnings (loss) per share as Adjusted $ (0.30) $ (0.81) $ (0.21) $ (0.16) $ (0.08) $ (0.02) Shares used in basic or diluted per share calculation as Reported 18,648 18,822 18,906 19,163 19,370 22,646 Shares used in basic or diluted per share calculation as Adjusted 18,648 18,822 18,906 19,163 19,370 20,790 FY04 ------------------------------------- (000's) Fiscal December March Quarter 31, 31, Q3 Cumulative Ended 2003 2004 FY04 Effect -------- ---- ---- ---- ------ Net Income as Reported $ 1,130 $ (1,635) Reversal of revenue (20) (20) - (1,460) Recognition of revenue 30 30 30 749 (a) Reversal of expenses related to revenue - - - 125 Recognition of expenses related to revenue - - (35) (125) ------------------------------------- ------------ Net Income as Adjusted $ 1,140 $ (1,625) $ (5) $ (711) Basic or diluted earnings (loss) per share as Reported $ 0.04 $ (0.07) Basic or diluted earnings (loss) per share as Adjusted $ 0.04 $ (0.07) Shares used in basic or diluted per share calculation as Reported 26,091 23,536 Shares used in basic or diluted per share calculation as Adjusted 26,091 23,536 (a) On August 26, 2004, Netopia received $337,500 from the software reseller customer. Netopia currently is reviewing the proper accounting treatment for this payment. *T Auditor Resignation: On September 10, 2004, the KPMG partner in charge of its engagement as the independent registered public accounting firm for Netopia orally informed the Chairman of Netopia's audit committee that KPMG was resigning such engagement effective as of such date. The reports of KPMG on Netopia's consolidated financial statements for the fiscal years ended September 30, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended September 30, 2003 and 2002, and the subsequent interim period from October 1, 2003 through September 10, 2004, (i) there were no disagreements between Netopia and KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreement(s) in connection with its report on the consolidated financial statements for such periods, other than as described in item (1) in the next paragraph and (ii) there were no "reportable events" as such term is defined in Item 304(a)(1)(v) of Regulation S-K, other than as described in item (2) in the next paragraph. (1) Prior to KPMG's resignation, KPMG requested on September 8, 2004 that Netopia's audit committee provide KPMG with certain information, and the audit committee and KPMG were engaged in an ongoing discussion concerning such information, which consists of documents over which the Company had asserted privilege as a basis for not providing KPMG with access to such documents. This matter had not been resolved at the time of KPMG's resignation. According to KPMG, if all or some portion of such information were not provided as requested, KPMG's auditors' report would have included an audit scope limitation with respect to this matter. (2) Prior to its resignation, KPMG had advised the Netopia audit committee that information provided by the audit committee, if further investigated, (i) might materially impact the fairness or reliability of its previously issued audit reports and the underlying financial statements and (ii) might cause it to be unwilling to rely on management's representations. Because KPMG resigned before conducting such further investigation, it did not reach any conclusions and accordingly they were not resolved to KPMG's satisfaction at the time of its resignation. Prior to September 10, 2004, KPMG had not previously advised management or Netopia's audit committee of its intention to resign its engagement as Netopia's independent registered public accounting firm. The resignation was not sought or recommended by Netopia's audit committee. The audit committee has commenced an immediate search for a new independent accountant. Nasdaq Status: As previously disclosed on August 25, 2004 in Netopia's Form 8-K, Netopia's common stock is subject to delisiting from The Nasdaq Stock Market because Netopia has not filed its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004. Netopia's common stock currently trades under the symbol NTPAE, reflecting Nasdaq's convention for companies making delayed public filings. Although Netopia had requested an oral hearing before the Nasdaq Listing Qualifications Panel to seek an extension of time before its common stock is delisted in order to file the Form 10-Q, Netopia now has withdrawn such request and has requested a decision on the basis of its written submissions. Because of the ongoing review by Netopia's audit committee described above, the resignation of KPMG described above as Netopia's auditors and the need for Netopia to engage new auditors, Netopia is unable to determine at this time when the restatements described above will be completed or when the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004 or any future quarterly or annual reports will be filed with the Securities and Exchange Commission. As a result, Netopia believes that it is likely that its common stock will be delisted from The Nasdaq Stock Market in the near future. Netopia has been advised by the Securities and Exchange Commission that it has commenced an informal inquiry to determine whether the federal securities laws have been violated. As previously disclosed on August 17, 2004 in Netopia's filing on Form 12b-25, Netopia's audit committee is seeking to resolve the matter as quickly as possible and intends to continue to cooperate fully with the appropriate regulatory authorities. As previously disclosed, Netopia and certain of its officers and directors have been named in various purported class action lawsuits. These purported class action lawsuits are in their early stages and Netopia intends to defend them vigorously. Netopia and certain of its officers and directors have also been named in purported derivative actions. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Portions of this release that are not statements of historical fact may include forward-looking statements. Statements regarding Netopia's beliefs, plans, expectations or intentions regarding the future are forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements concerning the need to restate financial statements of Netopia and the impact of any restatement on Netopia's financial condition or results of operation for any prior or future period. Defending against the existing and potential securities class action litigation relating to the restatement of Netopia's consolidated financial statements will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expenses. If Netopia's defenses ultimately are unsuccessful, or if Netopia is unable to achieve a favorable settlement, Netopia could be liable for large damage awards that could seriously harm Netopia's business and results of operations. In addition, responding to the informal inquiry commenced by the Securities and Exchange Commission described above could require significant diversion of management's attention and resources in the future. For example, if the Securities and Exchange Commission elects to pursue an enforcement action, the defense against this type of action could be costly and require additional management resources. If Netopia is unsuccessful in defending against this or other investigations or proceedings, Netopia may face civil or criminal penalties that would seriously harm Netopia's business and results of operations. About Netopia Netopia, Inc. is a market leader in broadband and wireless products and services that simplify and enhance broadband delivery to residential and business-class customers. Netopia's offerings enable carriers and broadband service providers to improve their profitability with feature-rich DSL smart modems, routers and gateways, software that simplifies installation and reduces ongoing support needs, as well as value-added services to enhance their revenue generation. Netopia's Wi-Fi CERTIFIED(TM) gateways include 3-D Reach(TM) technology delivering enhanced wireless range, security and performance. Netopia's DSL smart modems, routers and gateways come with a suite of installation wizards and support utilities that offer a comprehensive approach to installation, deployment, service provisioning, application setup, self-diagnostics and troubleshooting. Netopia provides value-added services with its server software platform, including the netOctopus(R) suite of gateway and PC management and customer support software solutions, a server-based Parental Controls subscription service, and the Web eCommerce server software. netOctopus Desktop Support and eCare software enable broadband service providers and enterprises to support customers and devices by remotely viewing and operating the desktop or other device. Netopia has established strategic distribution relationships with leading carriers and broadband service providers including Belgacom, BellSouth, Covad Communications, EarthLink, eircom, Hong Kong Telecom/PCCW, MegaPath Networks, Netifice, SBC Communications, Swisscom and Verizon. Headquartered in Emeryville, Calif., Netopia's common stock trades on The Nasdaq Stock Market(R) under the symbol "NTPAE." Further information about Netopia can be obtained via phone 510-420-7400, fax 510-420-7601, or on the Web at www.netopia.com. 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