Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
--------------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --------- THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2002
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: 000-21240
---------------------------------
NEOWARE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2705700
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
400 Feheley Drive
King of Prussia, Pennsylvania 19406
(Address of principal executive offices)
(610) 277-8300
(Registrant's telephone number including area code)
------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 November 4, 2002, there were 13,556,304 outstanding shares of the
Registrant's Common Stock.
1
NEOWARE SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets:
September 30, 2002 (unaudited) and June 30, 2002 3
Consolidated Statements of Operations:
Three Months Ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows:
Three Months Ended September 30, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23
2
NEOWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2002
(Unaudited) June 30, 2002
------------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 20,062,339 $ 17,031,422
Marketable securities 146,667 183,333
Accounts receivable, net 10,188,130 9,520,558
Inventories 721,431 1,040,851
Prepaid expenses and other 658,147 551,598
Deferred income taxes 595,728 1,394,864
------------ ------------
Total current assets 32,372,442 29,722,626
Property and equipment, net 634,454 622,235
Goodwill and other intangibles 11,468,607 11,568,940
Notes receivable from officers 254,269 263,732
Deferred income taxes 173,648 173,648
Capitalized and purchased software, net 40,413 47,779
------------ ------------
$ 44,943,833 $ 42,398,960
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,934,061 $ 3,111,164
Accrued expenses 2,019,942 2,136,776
Capital lease obligations 64,597 63,037
Deferred revenue 714,151 582,290
------------ ------------
Total current liabilities 5,732,751 5,893,267
------------ ------------
Capital lease obligations, non-current portion 187,388 204,131
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 13,556,054 and 12,935,615 shares issued and
outstanding in 2002 and 2001, respectively 13,556 12,936
Additional paid-in capital 41,616,574 40,291,861
Treasury stock (100,000 shares at cost) (100,000) (100,000)
Accumulated other comprehensive loss (166,904) (116,672)
Accumulated deficit (2,339,532) (3,786,563)
------------ ------------
Total stockholders' equity 39,023,694 36,301,562
------------ ------------
$ 44,943,833 $ 42,398,960
============ ============
See accompanying notes to consolidated financial statements.
3
NEOWARE SYSTEMS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
September 30, September 30,
2002 2001
------------------ ------------------
Net revenues $ 13,516,678 $ 5,264,729
Cost of revenues 7,822,502 3,060,589
------------ ------------
Gross profit 5,694,176 2,204,140
------------ ------------
Sales and marketing 2,227,333 1,210,108
Research and development 387,763 330,866
General and administrative 908,117 515,447
------------ ------------
Operating expenses 3,523,213 2,056,421
------------ ------------
Operating income 2,170,963 147,719
Interest income, net 90,023 111,953
------------ ------------
Income before income taxes 2,260,986 259,672
Income tax expense (813,955) --
------------ ------------
Net income $ 1,447,031 $ 259,672
============ ============
Basic income per share $ 0.11 $ 0.03
============ ============
Diluted income per share $ 0.10 $ 0.02
============ ============
Weighted average number of common
shares outstanding used in basic
earnings per share computation 13,162,589 10,179,851
============ ============
Weighted average number of common
shares outstanding used in diluted
earnings per share computation 14,652,096 10,596,720
============ ============
See accompanying notes to consolidated financial statements.
4
NEOWARE SYSTEMS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
Ended Ended
September 30, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,447,031 $ 259,672
Adjustments to reconcile net income to net cash
provided by operating activities-
Deferred income taxes 799,136 --
Depreciation and amortization 187,509 50,821
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable (667,572) 166,954
Inventories 319,420 43,590
Prepaid expenses and other (120,114) 114,403
Increase (decrease) in:
Accounts payable (177,103) 168,587
Accrued expenses (116,834) (348,755)
Deferred revenue 131,861 4,694
------------ ------------
Net cash provided by operating activities 1,803,334 459,966
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets (29,652) (12,421)
Purchases of property and equipment, net (62,378) (31,336)
------------ ------------
Net cash used in investing activities (92,030) (43,757)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital leases (15,183) --
Exercise of stock options and warrants 1,444,273 6,112
Expenses for prior issuance of common stock (118,940) --
Repayments of officer loans 9,463 30,644
------------ ------------
Net cash provided by financing activities 1,319,613 36,756
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,030,917 452,965
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,031,422 11,712,535
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,062,339 $ 12,165,500
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes $ 54,180 $ 9,000
Cash paid for interest 8,918 1,897
Cash received for interest 88,276 97,542
See accompanying notes to consolidated financial statements.
5
NEOWARE SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Neoware Systems,
Inc. and Subsidiaries (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America. These
statements, while unaudited, reflect all normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the
consolidated financial statements. The interim results of operations for the
three month period ended September 30, 2002 are not necessarily indicative of
results expected for the full year or for any other interim period. Certain
information and footnote disclosures included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and regulations
relating to interim financial statements. The consolidated financial statements
included in this Form 10-Q should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations".
SFAS No. 141 eliminates the use of the pooling-of-interests method of accounting
for business combinations and establishes the purchase method of accounting as
the only acceptable method for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired
in a purchase business combination must meet to be recognized and reported apart
from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement requires that goodwill and intangible assets with
indefinite useful lives are no longer amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS. No. 142.
This statement also requires that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values. There was no significant impact on the consolidated financial
statements as a result of adopting this statement.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" that applies to legal obligations associated with the retirement of
a tangible long-lived asset that results from the acquisition, construction
development and/or the normal operation of a long-lived asset. Companies are
required to adopt the pronouncement in their fiscal year beginning after June
15, 2002. The Company adopted the provisions of this statement effective July 1,
2002. There was no significant impact on the consolidated financial statements
as a result of adopting this statement.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
This Statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary, for which control is likely to be temporary. This Statement provides
guidance on financial accounting and reporting for the impairment or disposal of
long-lived assets. Companies are required to adopt the pronouncement in their
fiscal year beginning after December 15, 2001. The Company adopted the
provisions of this statement effective July 1, 2002. There was no significant
impact on the consolidated financial statements as a result of adopting this
statement.
6
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
Generally, SFAS No. 145 is effective for transactions occurring after May 15,
2002. There was no significant impact on the consolidated financial statements
as a result of adopting this statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Under SFAS No. 146, companies will record
exit or disposal costs when they are "incurred" and can be measured at fair
value, and they will subsequently adjust the recorded liability for changes in
estimated cash flow. SFAS No. 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002. There was no significant
impact on the consolidated financial statements as a result of adopting this
statement.
3. ACQUISITIONS AND ALLIANCE
On December 4, 2001, the Company acquired all of the assets and assumed
substantially all of the liabilities of Telcom Assistance Center Corporation,
d/b/a ACTIV-e Solutions, a full service Information Technology consulting
company in the server-based computing marketplace. The acquisition was accounted
for using the purchase method of accounting. The purchase price was payable in
cash of $75,000 and, after the adjustments as provided for in the acquisition
agreement, an aggregate of 569,727 shares of the Company's newly issued common
stock with a market value of $3.24 per share at the date of acquisition. In
addition, the Company assumed net liabilities, exclusive of cash acquired of
$9,774, of $1,185,693. The aggregate cost of the acquisition was $3,250,913
(including transaction costs of $154,079) which is equal to the excess of the
purchase price over the value of the net assets acquired. The entire purchase
price has been allocated to goodwill based on management's assessment as
required by SFAS No. 141, "Business Combinations". The results of operations
subsequent to December 4, 2001 have been included in the accompanying
consolidated statement of operations.
The following is a summary of the net cash paid for the ACTIV-e Solutions
transaction:
Cash $ 9,774
Accounts receivable 348,192
Prepaids and other 128,893
Property and equipment 469,034
Goodwill 3,250,913
Bank debt (388,213)
Accounts payable (1,124,370)
Accrued expenses (164,944)
Capital leases (300,485)
Deferred revenue (153,800)
Fair value of stock issued (1,845,915)
------------
Net cash paid $ 229,079
============
On January 8, 2002, the Company entered into a worldwide alliance with IBM
Corporation under which the Company is the preferred provider of thin client
appliance products to IBM and its customers. In addition, the Company licensed
from IBM the intellectual property associated with its thin client appliance
products. As consideration for these agreements, the Company issued to IBM
375,000 newly issued shares of common stock with a fair market value of $6.26
per share. The fair value of the shares issued of $2,347,500, plus transaction
costs of $53,115, has been allocated to intangible assets. Of the total
consideration, $1,900,000 has been allocated to acquired distribution
agreements, with the remainder of $500,615 allocated to acquired technology.
Amortization of the distribution agreements and technology acquired is being
recorded on a straight-line basis over five and ten years, respectively.
Amortization of $107,500 and zero was recorded in the accompanying statements of
operations for the three months ended September 30, 2002 and 2001, respectively.
7
A registration statement covering the shares issued in connection with the
ACTIV-e acquisition and the IBM alliance was filed on April 3, 2002, and
subsequently declared effective. The agreements with ACTIV-e and IBM provide for
limitations on the number of shares which may be sold within the first twelve
months after effectiveness of the registration statement for the shares granted
to ACTIV-e and within fifteen months of issuance for the shares granted to IBM.
On March 26, 2002, the Company acquired the ThinSTAR product line of Network
Computing Devices, Inc. (NCD). In addition, the Company entered into an alliance
with NCD to grow the worldwide thin client appliance market. The acquisition was
accounted for using the purchase method of accounting. The purchase price was
payable in cash of $4,177,702, including transaction costs of $177,702, and was
allocated to intangible assets. The entire purchase price was allocated to
goodwill based on management's assessment as required by SFAS No. 141, "Business
Combinations." The results of operations of the ThinSTAR product line have been
included in the accompanying consolidated statement of operations from the date
of the acquisition.
4. MARKETABLE SECURITIES
The Company's marketable equity securities have been classified as
"available-for-sale" under the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and are reported at their
estimated fair value. Unrealized gains or losses are included as a component of
accumulated other comprehensive loss, which is reported as a separate component
of stockholders' equity. Accumulated other comprehensive loss of $166,904 and
$116,672 at September 30, 2002 and June 30, 2002 includes an unrealized gain and
loss on marketable equity securities of $116,667 and $66,667, respectively.
5. REVENUE RECOGNITION
The Company's products include both a hardware and software component. In
accordance with Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"), software revenue recognition should be followed for products or
services where a software element exists, unless the software is incidental to
the product being sold. The software has been deemed to be essential to the
functionality of the hardware and, therefore, SOP 97-2 has been followed for
revenue recognition. Revenue is recognized on product sales when a formal
arrangement exists, delivery of the product has occurred or title has
transferred, the fee is fixed or determinable and collection is probable.
Revenue related to post contract services is recognized with the initial sale as
the fee is included with the initial licensing fee, post-contract services are
typically for one year or less, the estimated cost of providing such services
during the arrangement is deemed insignificant, and unspecified
upgrades/enhancements offered during the period historically have been and are
expected to continue to be minimal and infrequent. Revenue from consulting
services is recognized upon performance. Product warranty costs and an allowance
for sales returns are accrued at the time revenues are recognized.
From time to time, customers request delayed shipment, usually because of
customer scheduling for systems integration and lack of storage space at a
customer's facility during the implementation. In such "bill and hold"
transactions, the Company recognizes revenues when the following conditions are
met: the equipment is complete, ready for shipment and segregated from other
inventory; the Company has no further significant performance obligations in
connection with the completion of the transaction; the commitment and delivery
schedule is fixed; the customer requested the transaction be completed on this
basis; and the risks of ownership have passed to the customer. Revenues
recognized from "bill and hold" transactions for products which had not shipped
by September 30, 2002 and 2001 were $312,438 and $16,920 respectively. Accounts
receivable relating to "bill and hold" transactions were $257,333 and $16,920 at
September 30, 2002 and 2001, respectively.
8
6. MAJOR CUSTOMERS
For the three months ended September 30, 2002, sales to two customers
constituted 18% and 16% of net revenues, respectively, and accounts receivable
from these customers as of September 30, 2002 amounted to $4,549,956. For the
three months ended September 30, 2001, sales to one customer constituted 16% of
net revenues.
7. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method and consists of the following:
September 30, June 30,
2002 2002
------------ ------------
Purchased components and subassemblies $242,947 $211,131
Finished goods 478,484 829,720
------------ ------------
$721,431 $1,040,851
============ ============
8. LINE OF CREDIT
The Company has a line of credit agreement with a bank, which provides for
borrowing up to $2,000,000 subject to certain limitations, as defined. The line
of credit matures on December 31, 2002. Borrowings under the credit agreement
bear interest at the bank's prime rate plus 1/2% (5.25% at September 30, 2002).
At September 30, 2002 and June 30, 2002, there was $2,000,000 available for
borrowing under the line. During the three months ended September 30, 2002 and
2001, there were no borrowings under the line.
The line of credit is collateralized by substantially all of the assets of the
Company and requires the Company to maintain certain financial ratios and meet
other financial conditions, as defined. The Company is in compliance with these
ratios and conditions at September 30, 2002. Subsequent to September 30, 2002,
the bank has agreed to release the collateral and extend the line of credit to
March 31, 2003.
9. EARNINGS PER SHARE
The Company applies SFAS No. 128, "Earnings per Share." SFAS 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for complex capital
structures on the face of the statement of operations. Basic EPS is computed by
dividing income by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options and warrants.
The following table sets forth the computation of basic and diluted earnings per
share:
9
For the three months ended
September 30,
----------------------------
2002 2001
------------ -----------
Net income $1,447,031 $259,672
============ ===========
Weighted average shares outstanding:
Basic 13,162,589 10,179,851
Effect of dilutive employee stock options 1,474,097 416,869
Effect of dilutive warrants 15,410 -
------------ -----------
Diluted 14,652,096 10,596,720
Earnings per common share:
Basic $0.11 $0.03
============ ===========
Diluted $0.10 $0.02
============ ===========
For the three month periods ended September 30, 2002 and 2001, an aggregate of
5,500 and 824,750 stock options and warrants were excluded from the calculation
of dilutive earnings per share because their inclusion would have been
anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
The Company provides software, services and solutions to enable Appliance
Computing, an Internet-based computing architecture targeted at business
customers that is designed to be simpler and easier than traditional PC-based
computing. The Company's software and management tools power and manage a new
generation of smart computing appliances that utilize the benefits of open,
industry-standard technologies to create new alternatives to personal computers
used in business and a wide variety of proprietary business devices. The
Company's Eon, Capio and ThinSTAR products are thin client computing appliances,
which are cost-effective alternatives to personal computers used by businesses,
and powerful replacements for green-screen terminals. Used in conjunction with
Citrix MetaFrame or Microsoft Terminal Services, the Company's computing
appliances allow users to run Windows-based applications from a server, plus
connect to mainframes, midrange systems and the Internet. Unlike personal
computers, computing appliances can be centrally managed and remotely
configured, which greatly simplifies administration.
Results of Operations
The following table sets forth, for the periods indicated, certain items from
the Company's unaudited consolidated statements of operations as a percentage of
net revenues.
10
For the Three Months Ended
September 30,
---------------------------
2002 2001
---- ----
Gross profit 42.1% 41.9%
Operating expenses
Sales and marketing 16.5 23.0
Research and development 2.8 6.3
General and administrative 6.7 9.8
--------- -------
Operating income 16.1 2.8
Interest income, net 0.6 2.1
Income tax expense (6.0) -
--------- -------
Net income 10.7% 4.9%
========= =======
Net revenues for the three month period ended September 30, 2002 increased by
$8,251,949 or 157.0% to $13,516,678 from $5,264,729 for the comparable period in
the prior fiscal year. The increase in net revenues was primarily attributable
to the shipment of a higher number of units of the Company's Eon and Capio
products. In addition, net revenues for the three month period ended September
30, 2002 include product and service revenues of approximately $600,000 and
$1,500,000 as a result of the ACTIV-e Solutions and ThinSTAR transactions,
respectively, compared to zero in the prior year period.
The Company's gross profit as a percentage of net revenues for the three month
period ended September 30, 2002 increased to 42.1% compared to 41.9% for the
comparable period of the prior fiscal year. The increase is attributable to
reductions in the purchase costs of components and third party license fees due
to higher unit volumes and a favorable mix of products sold, offset by lower
margins on the product revenues resulting from the ACTIV-e Solutions and
ThinSTAR transactions. In addition, fixed overhead costs represented a lower
percentage of revenue during the three month period ended September 30, 2002
than in the comparable period in the prior fiscal year.
Operating expenses for the three month period ended September 30, 2002 were
$3,523,213, an increase of $1,466,792 or 71.3% from operating expenses of
$2,056,421 in the comparable period of the prior fiscal year. Operating expenses
declined to 26.0% of revenues in the three month period ended September 30,
2002, compared to 39.1% in the comparable period of the prior fiscal year
primarily as a result of increased revenues in relation to contained levels of
operating expenses.
Sales and marketing expenses for the three month period ended September 30, 2002
were $2,227,333, an increase of $1,017,225 or 84.1% from sales and marketing
expenses of $1,210,108 for the comparable period in the prior fiscal year. This
increase reflects additional sales and marketing personnel, including the
opening of additional domestic and international sales offices, additional sales
and marketing personnel as a result of the ACTIV-e Solutions, ThinSTAR, and IBM
transactions, and higher commissions due to increased sales. Sales and marketing
expenses declined to 16.5% of revenues in the three month period ended September
30, 2002, compared to 23.0% in the comparable period of the prior fiscal year
primarily as a result of increased revenues in relation to a contained level of
sales and marketing expenses.
Research and development expenses for the three month period ended September 30,
2002 were $387,763, an increase of $56,897 or 17.2% from research and
development expenses of $330,866 in the comparable period in the prior year
primarily as a result of an increase in personnel dedicated to software
development activities resulting from the Company's growth. Research and
development expenses declined to 2.8% of revenues in the three month period
ended September 30, 2002, compared to 6.3% in the comparable period of the prior
fiscal year primarily as a result of increased revenues in relation to a
contained level of research and development expenses.
11
General and administrative expenses for the three month period ended September
30, 2002 were $908,117, an increase of $392,670 or 76.2% from $515,447 in the
comparable period in the prior fiscal year due to increased staffing and
personnel costs as a result of the Company's growth. General and administrative
expenses declined to 6.7% of revenues for the three month period ended September
30, 2002, compared to 9.8% for the comparable period of the prior fiscal year
primarily as a result of increased revenues in relation to a contained level of
general and administrative expenses.
Net interest income for the three month period ended September 30, 2002 was
$90,023 compared to $111,953 in the comparable period in the prior fiscal year.
The decrease was due primarily to lower interest rates.
Income tax expense of $813,955, or 36% of pretax income, was provided in the
three month period ended September 30, 2002. No income tax expense was
recognized during the three months ended September 30, 2001 due to the
availability of net operating loss carryforwards.
For the three month period ended September 30, 2002, the Company had net income
of $1,447,031 as compared to net income of $259,672 for the comparable period in
the prior year primarily as a result of increased revenues and gross margin,
offset by an increase in operating expenses and income tax expense and reduced
interest income.
Liquidity and Capital Resources
As of September 30, 2002, the Company had net working capital of $26,639,691
consisting primarily of cash and cash equivalents, marketable securities and
accounts receivable. The Company's principal sources of liquidity include
$20,209,006 of cash, cash equivalents and marketable securities and a $2,000,000
bank line of credit facility, all of which was available as of September 30,
2002. The facility is secured by a first lien security interest on all tangible
and intangible personal property of the Company and separate pledges of
investment property owned by Neoware Investments, Inc. and Neoware Licensing,
Inc., each of which is a wholly-owned subsidiary of the Company. The facility
agreement requires the Company to maintain certain financial ratios and meet
other financial conditions, as defined. Interest on the line of credit facility
accrues at the bank's prime rate plus one-half percent with all principal and
interest due and payable on December 31, 2002. The Company had no borrowings
under the line of credit during the three month periods ended September 30, 2002
and 2001. Subsequent to September 30, 2002, the bank has agreed to release the
collateral and extend the line of credit to March 31, 2003.
Cash and cash equivalents increased by $3,030,917 and $452,965 during the three
months ended September 30, 2002 and 2001, respectively, primarily as a result of
net income and the exercise of stock options and warrants in addition to the
utilization of deferred income taxes, offset by changes in other working capital
items due to the growth of the Company.
The Company generated cash from operations of $1,803,334 and $459,966 for the
three months ended September 30, 2002 and 2001, respectively. The increase in
cash generated by operations is primarily attributable to higher revenues,
improved gross margins and the utilization of deferred income taxes, offset by
increases in operating expenses and accounts receivable.
The Company used cash in investing activities of $92,030 and $43,757 for the
three months ended September 30, 2002 and 2001, respectively. The increase in
cash used in investing activities was primarily attributable to increased
purchases of property, plant and equipment.
12
The Company generated cash in financing activities of $1,319,613 and $36,756
during the three months ended September 30, 2002 and 2001, respectively,
primarily as a result of the exercise of warrants and employee stock options,
offset by the payment of additional transaction costs related to the prior
issuance of common stock.
The Company expects to fund current operations and other cash expenditures
through the use of available cash, cash from operations, funds available under
its credit facility and possible new debt or equity sources. Management believes
that there will be sufficient funds from current cash, operations and available
financing to fund operations and cash expenditures for the foreseeable future;
however, the Company may seek additional sources of funding, including equity
and/or debt financing, in order to fund potential acquisitions. Additionally,
the Company must continue to maintain sustained profitability in order to
provide adequate funding for the long term.
Factors Affecting the Company and Future Operating Results
Our future results may be affected by industry trends and specific risks in our
business. Some of the factors that could materially affect our future results
include those described below.
We may not be able to successfully integrate the acquisitions we have
completed and alliance we have entered into as part of our growth strategy,
which may materially adversely affect our growth and our operating results.
Within the last 18 months, we have made three acquisitions and entered into an
alliance with IBM to be the preferred provider of thin client appliance products
to IBM and its customers. We have not yet fully integrated these acquisitions or
fully implemented the alliance. There is no assurance that we will successfully
integrate these acquisitions into our business or successfully implement the
alliance. In addition, we may be unable to retain key employees or key business
relationships of the acquired businesses and integration of the businesses may
divert the attention and resources of our management. We cannot assure that we
will achieve anticipated revenue and earnings growth as a result of these
transactions. Our failure to successfully integrate the acquired businesses into
our operations or successfully implement the alliance could have a material
adverse effect upon our business, operating results and financial condition.
Even if the acquisitions and alliance are successfully integrated, we may not
receive the expected benefits of the transactions if we find that the business
or alliance does not further our business strategy or that we paid more than
what the assets were worth. Managing acquisitions and alliances requires
management resources, which may divert our attention from other business
operations. As a result, the effects of any completed or future transactions on
financial results may differ from our expectations.
Although we have generated an operating profit in the past seven
reported quarters, we have a prior history of losses and may experience losses
in the future, which could result in the market price of our common stock
declining.
Although we have generated an operating profit in the last seven reported
quarters, we have incurred net losses in the past and have an accumulated
deficit of $2.3 million as of September 30, 2002. We expect to continue to incur
significant operating expenses. Our operating expenses increased during the
fiscal year ended June 30, 2002 reflecting the hiring of additional key
personnel as we continue to implement our growth strategy, including the
additional personnel we hired in connection with our IBM, ThinSTAR and ACTIV-e
Solutions transactions. As a result, we will need to generate significant
revenues to maintain profitability. If we do not maintain profitability, the
market price for our common stock may decline.
13
Our financial resources may not be enough for our capital and corporate
development needs, and we may not be able to obtain additional financing. A
failure to derive significant revenues would likely cause us to incur losses and
negatively impact the price of our common stock.
Our ability to accurately forecast our quarterly sales is limited,
although our costs are relatively fixed in the short term and we expect our
business to be affected by rapid technological change, which may adversely
affect our quarterly operating results.
Because of the new and rapidly evolving market for our software and embedded
Windows and Linux-based computing appliances, our ability to accurately forecast
our quarterly sales is limited, which makes it difficult to predict the
quarterly revenues that we will recognize. In addition, most of our costs are
for personnel and facilities, which are relatively fixed in the short term. If
we have a shortfall in revenues in relation to our expenses, we may be unable to
reduce our expenses quickly enough to avoid losses. As a result, our quarterly
operating results could fluctuate.
We expect our quarterly revenues and operating results to fluctuate for
a number of reasons.
Future operating results will continue to be subject to quarterly fluctuations
based on a wide variety of factors, including:
Linearity. Our quarterly sales have historically reflected a pattern in which a
disproportionate percentage of sales occur in the last month and weeks and days
of the quarter. This pattern makes prediction of revenues, earnings and working
capital for each financial period especially difficult and uncertain and
increases the risk of unanticipated variations in quarterly results and
financial condition.
Significant Orders. We are subject to significant variances in our quarterly
operating results because of the fluctuations in the timing of our receipt of
large orders. If even a small number of large orders are delayed until after a
quarter ends, our operating results could vary substantially from quarter to
quarter and net income could be substantially less than expected.
There are factors that may affect the market acceptance of our
products, some of which are beyond our control, including the following:
o the growth and changing requirements of the computing appliance
market;
o the quality, price, performance and total cost of ownership of our
products;
o the availability, price, quality and performance of competing
products and technologies; and
o the successful development of our relationships with software
providers, original equipment manufacturers and existing and
potential channel partners.
We may not succeed in developing and marketing our software and computing
appliance products and our operating results may decline as a result.
Our gross margins can vary significantly, based upon a variety of
factors. If we are unable to sustain adequate gross margins we may be unable to
reduce operating expenses in the short term, resulting in losses.
14
Our gross margins can vary significantly from quarter to quarter depending on
average selling prices, fixed costs in relation to revenue levels and the mix of
our business, including the percentage of revenues derived from hardware,
software and consulting services. The gross profit margin also varies in
response to competitive market conditions as well as periodic fluctuations in
the cost of memory and other significant components. The market in which we
compete remains very competitive, and although we intend to continue our efforts
to reduce the cost of our products, there can be no certainty that we will not
be required to reduce prices of our products without compensating reductions in
the cost to produce our products in order to increase our market share or to
meet competitors' price reductions.
Our business is dependent on customer adoption of Windows and
Linux-based computing appliances to perform discrete tasks for corporate and
Internet-based computer networks and a decrease in their rates of adoption could
adversely affect our ability to increase our revenues.
We are dependent on the growing use of computing appliances to perform discrete
tasks for corporate and Internet-based networks to increase our revenues. If the
role of computing appliances does not increase as we anticipate, or if it in any
way decreases, our revenues would not materialize. If corporate information
technology organizations do not accept Windows or Linux-based embedded operating
systems, or if there is a wide acceptance of alternative operating systems that
provide enhanced capabilities, our operating results could be harmed.
The computing appliance market in which we compete is new and unpredictable, and
if this market does not develop and expand as we anticipate, our revenues may
not grow.
Because some of our products use embedded versions of Microsoft Windows
as their operating system, an inability to license these operating systems on
favorable terms could impair our ability to introduce new products and maintain
market share.
We may not be able to introduce new products on a timely basis because some of
our products use embedded versions of Microsoft Windows as their operating
system. Microsoft Corporation provides Windows to us, and we do not have access
to the source code for Windows. If Microsoft fails to continue to enhance and
develop its embedded operating systems, or if we are unable to license these
operating systems on favorable terms, our operations may suffer.
Because some of our products use Linux as their operating system, the
failure of Linux developers to enhance and develop the Linux kernel could impair
our ability to release new products and maintain market share.
We may not be able to release new products on a timely basis because some of our
products use Linux as their operating system. The heart of Linux, the Linux
kernel, is maintained by third parties. Linus Torvalds, the original developer
of the Linux kernel, and a small group of independent engineers are primarily
responsible for the development and evolution of the Linux kernel. If this group
of developers fails to further develop the Linux kernel, we would have to either
rely on another party to further develop the kernel or develop it ourselves. To
date, we have optimized our Linux-based operating system based on a version of
Red Hat Linux. If we were unable to access Red Hat Linux, we would be required
to spend additional time to obtain a tested, recognized version of the Linux
kernel from another source or develop our own operating system internally. We
cannot predict whether enhancements to the kernel would be available from
reliable alternative sources. We could be forced to rely to a greater extent on
our own development efforts, which would increase our development expenses and
might delay our product release schedules. In addition, any failure on the part
of the kernel developers to further develop and enhance the kernel could stifle
the development of additional Linux-based applications for use with our
products.
15
Because we depend on sole source, limited source and foreign source
suppliers for key components, we are susceptible to supply shortages that could
prevent us from shipping customer orders on time, if at all, and result in lost
sales.
We depend upon single source suppliers for some of our computing appliance
products and for several of the components in them. We also depend on limited
sources to supply several other industry standard components. We also rely on
foreign suppliers which subject us to risks associated with foreign operations
such as the imposition of unfavorable governmental controls or other trade
restrictions, changes in tariffs, political instability and currency
fluctuations. A weakening dollar could result in greater costs to us for our
components.
We have in the past experienced and may in the future experience shortages of,
or difficulties in acquiring, these components. A significant portion of our
revenues is derived from the sale of computing appliances that are bundled with
our software. These computing appliances are produced for us by third parties.
If we experience shortages of these products, or of their components, we may not
be able to deliver our products to our customers, and our revenues would
decline.
If we are unable to continue generating substantial revenues from
international sales our business could be adversely affected.
Currently, approximately 30% of our revenues come from international sales. Our
ability to sell our products internationally is subject to a number of risks.
General economic and political conditions in each country could adversely affect
demand for our products and services in these markets. Currency exchange rate
fluctuations could result in lower demand for our products or lower pricing
resulting in reduced revenue and margins, as well as currency translation
losses. Changes to and compliance with a variety of foreign laws and regulations
may increase our cost of doing business in these jurisdictions. Trade protection
measures and import and export licensing requirements subject us to additional
regulation and may prevent us from shipping products to a particular market, and
increase our operating costs.
Because we rely on channel partners to sell our products, our revenues
could be negatively impacted if our existing channel partners do not continue to
purchase products from us.
We cannot be certain that we will be able to attract channel partners that
market our products effectively or provide timely and cost-effective customer
support and service. None of our current channel partners is obligated to
continue selling our products nor to sell our new products. We cannot be certain
that any channel partner will continue to represent our products or that our
channel partners will devote a sufficient amount of effort and resources to
selling our products in their territories. We need to expand our direct and
indirect sales channels, and if we fail to do so, our growth could be limited.
As a result of our acquisition of the ThinSTAR product line from NCD, we rely on
NCD for the distribution of our ThinSTAR products in Europe. If NCD were to
discontinue sales of our products or reduce its sales efforts, it could
adversely affect our operating results. In addition, there can be no assurance
as to NCD's continued viability and financial condition.
As a result of our alliance with IBM, we rely on IBM for distribution of our
products to IBM's customers. If IBM were to discontinue sales of our products or
reduce its sales efforts, it could adversely affect our operating results.
16
We may not be able to effectively compete against other providers as a
result of their greater financial resources and brand awareness.
In the market for computing appliances, we face significant competition from
larger companies which have greater financial resources and name recognition
than we do. Increased competition may negatively affect our business and future
operating results by leading to price reductions, higher selling expenses or a
reduction in our market share.
Our future competitive performance depends on a number of factors, including our
ability to:
o continually develop and introduce new products and services with
better prices and performance than offered by our competitors;
o offer a wide range of products; and
o offer high-quality products and services.
If we are unable to offer products and services that compete successfully with
the products and services offered by our competitors, our business and our
operating results would be harmed. In addition, if in responding to competitive
pressures, we are forced to lower the prices of our products and services and we
are unable to reduce our costs, our business and operating results would be
harmed.
Computing appliance products are subject to rapid technological change
due to changing operating system software and network hardware and software
configurations, and our products could be rendered obsolete by new technologies.
The Appliance Computing market is characterized by rapid technological change,
frequent new product introductions, uncertain product life cycles, changes in
customer demands and evolving industry standards. Our products could be rendered
obsolete if products based on new technologies are introduced or new industry
standards emerge.
We may not be able to preserve the value of our products' intellectual
property because we do not have any patents and other vendors could challenge
our other intellectual property rights.
Our products will be differentiated from those of our competitors by our
internally developed technology that is incorporated into our products. If we
fail to protect our intellectual property, other vendors could sell products
with features similar to ours, and this could reduce demand for our products,
which would harm our operating results.
We may not be able to attract software developers to bundle their
products with our computing appliances.
Our computing appliances include our own software, plus software from other
companies for specific vertical markets. If we are unable to attract software
developers, and are unable to include their software in our products, we may not
be able to offer our computing appliances for certain important target markets,
and our financial results will suffer.
In order to continue to grow our revenues, we may need to hire
additional personnel, including software engineers.
17
In order to continue to develop and market our line of computing appliances, we
may need to hire additional software engineers as well as marketing and sales
personnel. Competition for employees with these skills is significant and we may
experience difficulty in attracting suitably qualified people.
Future growth that we may experience will place a significant strain on our
management, systems and resources. To manage the anticipated growth of our
operations, we may be required to:
o improve existing and implement new operational, financial and
management information controls, reporting systems and procedures;
o hire, train and manage additional qualified personnel; and
o establish relationships with additional suppliers and partners while
maintaining our existing relationships.
We rely on the services of certain key personnel, and those persons'
knowledge of our business and technical expertise would be difficult to replace.
Our products and technologies are complex and we are substantially dependent
upon the continued service of our existing personnel. The loss of any of our key
employees could adversely affect our business and profits and slow our product
development processes.
Errors in our products could harm our business and our operating
results.
Because our software and computing appliance products are complex, they could
contain errors or bugs that can be detected at any point in a product's life
cycle. Although many of these errors may prove to be immaterial, any of these
errors could be significant. Detection of any significant errors may result in:
o the loss of or delay in market acceptance and sales of our products;
o diversion of development resources;
o injury to our reputation; or
o increased maintenance and warranty costs.
These problems could harm our business and future operating results.
Occasionally, we have warranted that our products will operate in accordance
with specified customer requirements. If our products fail to conform to these
specifications, customers could demand a refund for the purchase price or assert
claims for damages.
Moreover, because our products are used in connection with critical distributed
computing systems services, we may receive significant liability claims if our
products do not work properly. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. However, these
limitations may not preclude all potential claims. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. Any such claims, whether or not successful, could seriously
damage our reputation and our business.
18
Our IT services operations, which we acquired from ACTIV-e Solutions,
would suffer and we could lose our customers or fail to attract new customers if
we are unable to attract and retain qualified personnel.
Our IT services business is labor-intensive, and our success depends in large
part upon our ability to attract, develop, motivate and retain highly skilled
personnel. Some of these individuals are in great demand and are likely to
remain a limited resource for the foreseeable future. We may not be able to
engage the services of such personnel or retain our current personnel. If we do
not succeed in attracting new, qualified personnel or successfully retaining our
current personnel, our IT services business will suffer.
If our contracts with Citrix and other vendors of hardware components
and software applications and hardware were terminated, our IT services business
would be materially adversely affected.
We depend on third-party suppliers to provide us with key hardware components
and software applications in connection with our IT services business. If such
contracts and relationships were terminated, our IT revenues would be negatively
affected.
Our stock price can be volatile.
Our stock price, like that of other technology companies, can be volatile. For
example, our stock price can be affected by many factors such as quarterly
increases or decreases in our earnings, speculation in the investment community
about our financial condition or results of operations and changes in revenue or
earnings estimates, announcement of new products, technological developments,
alliances, acquisitions or divestitures by us or one of our competitors or the
loss of key management personnel. In addition, general macroeconomic and market
conditions unrelated to our financial performance may also affect our stock
price.
Our prior use of Arthur Andersen LLP as our independent auditor may
pose risks to us and limit our ability to seek potential recoveries from them
related to their work.
Our consolidated financial statements as of and for each of the three years in
the period ended June 30, 2001 were audited by Arthur Andersen LLP (Andersen).
On March 14, 2002, Andersen was indicted on federal obstruction of justice
charges arising from the government's investigation of Enron Corporation. On
June 15, 2002, a jury convicted Andersen of these charges. On July 23, 2002, we
dismissed Andersen and retained KPMG LLP as our independent auditors for our
fiscal year ended June 30, 2002. SEC rules require us to present historical
audited financial statements in various SEC filings, such as registration
statements, along with Andersen's consent to our inclusion of its audit report
in those filings. Since our former engagement partner and audit manager have
left Andersen and in light of the cessation of Andersen's SEC practice, we will
not be able to obtain the consent of Andersen to the inclusion of its audit
report in our relevant current and future filings. The SEC has provided
regulatory relief designed to allow companies that file reports with the SEC to
dispense with the requirement to file a consent of Andersen in certain
circumstances, but purchasers of securities sold under our registration
statements, which were not filed with the consent of Andersen to the inclusion
of its audit report, will not be able to sue Andersen pursuant to Section
11(a)(4) of the Securities Act and, therefore, their right of recovery under
that section may be limited as a result of the lack of our ability to obtain
Andersen's consent.
19
Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, such as statements regarding the cost benefits and other advantages of the
Company's products, the acquisition of businesses and technologies and the
availability of cash or other financing sources to fund future operations, cash
expenditures and acquisitions. These forward-looking statements involve risks
and uncertainties. The factors set forth below, and those contained in "Factors
Affecting the Company and Future Operating Results" and set forth elsewhere in
this report, could cause actual results to differ materially from those
predicted in any such forward-looking statement. Factors that could affect the
Company's actual results include the Company's ability to lower its costs,
customers' acceptance of Neoware's line of computing appliance products, pricing
pressures, rapid technological changes in the industry, growth of the computing
appliance market, increased competition, the Company's ability to attract and
retain qualified personnel, the economic viability of the Company's channel
partners, changes in general economic conditions and risks associated with
foreign operations and political and economic uncertainties associated with
current world events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company earns interest income from its balances of cash and cash
equivalents. This interest income is subject to market risk related to changes
in interest rates which primarily affects the investment portfolio. The Company
invests in instruments that meet high credit quality standards, as specified in
its investment policy.
As of September 30, 2002 and June 30, 2002, cash equivalents consisted primarily
of certificates of deposit, commercial paper and money market funds maturing
over the following three months. Due to the average maturity and conservative
nature of the Company's investment portfolio, a sudden change in interest rates
would not have a material effect on the value of the portfolio.
Management estimates that if the average yield of the Company's investments
decreased by 100 basis points, interest income for the three months ended
September 30, 2002 would have decreased by less that $40,000. This estimate
assumes that the decrease occurred on July 1, 2002 and reduced the yield of each
investment instrument by 100 basis points.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
On a date that was within 90 days prior to the filing date of this Quarterly
Report on Form 10-Q, the chief executive officer and chief financial officer of
the Company evaluated the effectiveness of the Company's disclosure controls and
procedures and have concluded that as of such date the Company's disclosure
controls and procedures were effective to ensure that the information required
to be disclosed by the Company in the reports it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
in the periods specified in the SEC's rules and forms and were designed to
ensure that information relating to the Company and the Company's subsidiaries
required to be disclosed by the Company in such reports is accumulated and
communicated to them by others in those entities to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Controls
20
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are being filed as part of this quarterly report
on Form 10-Q:
Exhibit No.
99.1 Certification of Michael G. Kantrowitz as Chairman, President and Chief
Executive Officer of Neoware Systems, Inc pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Vincent T. Dolan Chief Financial Officer of Neoware
Systems, Inc pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
On October 29, 2002, the Company filed a Form 8-K relating to a press release
announcing earnings for the three months ended September 30, 2002.
On October 1, 2002, the Company filed a Form 8-K relating to a press release
announcing the appointment of Michael G. Kantrowitz and the resignation of
Arthur Spector as chairman of the Company's board of directors.
On September 9, 2002, the Company filed a Form 8-K announcing a stock trading
plan under Rule 10b5-1.
On August 6, 2002, the Company filed a Form 8-K to announce the trading of the
Company's stock on the Nasdaq National Market System effective August 7, 2002.
On July 23, 2002, the Company filed a Form 8-K announcing the appointment of
KPMG LLP as the Company's independent accountants and the dismissal of Arthur
Andersen LLP.
On July 9, 2002, the Company filed a form 8-K relating to a press release
announcing expected revenues for the three months ended June 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
NEOWARE SYSTEMS, INC.
Date: November 14, 2002 By: /S/ MICHAEL G. KANTROWITZ
-----------------------------
Michael G. Kantrowitz
Chairman, President and Chief
Executive Officer
.
Date: November 14, 2002 By: /S/ VINCENT T. DOLAN
------------------------
Vincent T. Dolan
Vice President-Finance/Administration
(Principal Accounting Officer and
Principal Financial Officer)
22
I, Michael G. Kantrowitz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Neoware Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Michael G. Kantrowitz
-----------------------------------------------
Michael G. Kantrowitz
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
23
I, Vincent T. Dolan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Neoware Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Vincent T. Dolan
---------------------------------------------
Vincent T. Dolan
Vice President - Finance and Administration
(Principal Financial Officer)
24