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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 December 31, 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 February 10, 2003, there were 13,534,248 outstanding shares of the
Registrant's Common Stock.
NEOWARE SYSTEMS, INC.
---------------------
INDEX
-----
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets:
December 31, 2002 (unaudited) and June 30, 2002 3
Consolidated Statements of Operations:
Three and Six Months Ended December 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows:
Three and Six Months Ended December 31, 2002 and 2001 (unaudited) 5
Notes to Unaudited 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 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 23
Certifications 24
2
NEOWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2002
(Unaudited) June 30, 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 23,995,453 $ 17,031,422
Marketable securities 96,667 183,333
Accounts receivable, net 10,693,809 9,520,558
Inventories, net 793,421 1,040,851
Prepaid expenses and other 552,798 551,598
Deferred income taxes 1,290,916 1,394,864
------------ ------------
Total current assets 37,423,064 29,722,626
Property and equipment, net 592,594 622,235
Goodwill and other intangibles 11,360,880 11,568,940
Note receivable from officer 254,269 263,732
Deferred income taxes 173,648 173,648
Capitalized and purchased software, net 33,046 47,779
------------ ------------
$ 49,837,501 $ 42,398,960
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,273,397 $ 3,111,164
Accrued expenses 1,825,589 2,136,776
Capital lease obligations 66,951 63,037
Deferred revenue 686,077 582,290
------------ ------------
Total current liabilities 6,852,014 5,893,267
------------ ------------
Capital lease obligations, non-current portion 169,495 204,131
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,
13,623,351 and 12,935,615 shares issued and outstanding in
2002 and 2002, respectively 13,623 12,936
Additional paid-in capital 43,557,818 40,291,861
Treasury stock (100,000 shares at cost) (100,000) (100,000)
Accumulated other comprehensive loss (199,602) (116,672)
Accumulated deficit (455,847) (3,786,563)
------------ ------------
Total stockholders' equity 42,815,992 36,301,562
------------ ------------
$ 49,837,501 $ 42,398,960
============ ============
The accompanying notes are an integral part of these financial statements
3
NEOWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues $ 14,713,778 $ 6,595,133 $ 28,230,456 $ 11,859,862
Cost of revenues 8,167,076 3,740,254 15,989,578 6,800,843
------------ ------------ ------------ ------------
Gross profit 6,546,702 2,854,879 12,240,878 5,059,019
------------ ------------ ------------ ------------
Sales and marketing 2,299,087 1,315,246 4,526,420 2,525,354
Research and development 420,686 343,985 808,449 674,851
General and administrative 974,583 668,827 1,882,700 1,184,274
------------ ------------ ------------ ------------
Operating expenses 3,694,356 2,328,058 7,217,569 4,384,479
------------ ------------ ------------ ------------
Operating income 2,852,346 526,821 5,023,309 674,540
Interest income, net 90,912 83,747 180,935 195,701
------------ ------------ ------------ ------------
Income before income taxes 2,943,258 610,568 5,204,244 870,241
Income tax expense (1,059,573) -- (1,873,528) --
------------ ------------ ------------ ------------
Net income $ 1,883,685 $ 610,568 $ 3,330,716 $ 870,241
============ ============ ============ ============
Basic income per share $ 0.14 $ 0.06 $ 0.25 $ 0.08
============ ============ ============ ============
Diluted income per share $ 0.13 $ 0.06 $ 0.23 $ 0.08
============ ============ ============ ============
Weighted average number of common shares
used in basic earnings per share
computation 13,573,656 10,376,892 13,368,120 10,275,409
============ ============ ============ ============
Weighted average number of common shares
used in diluted earnings per share
computation 14,785,902 10,884,693 14,719,001 10,742,097
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
NEOWARE SYSTEMS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
December 31, December 31,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,330,716 $ 870,241
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Deferred income taxes 1,858,489 --
Depreciation and amortization 375,508 161,567
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable (1,173,251) (894,266)
Inventories 247,430 89,655
Prepaid expenses and other 2,536 191,159
Increase (decrease) in:
Accounts payable 1,162,233 (104,631)
Accrued expenses (311,187) (177,523)
Deferred revenue 103,787 (181,072)
------------ ------------
Net cash provided by (used in) operating activities 5,596,261 (44,870)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets (44,424) (12,421)
Purchase of ACTIV-e Solutions -- (146,956)
Purchases of property and equipment, net (78,650) (50,413)
------------ ------------
Net cash used in investing activities (123,074) (209,790)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of assumed bank debt -- (388,216)
Repayments of capital leases (30,722) (6,533)
Exercise of stock options and warrants 1,634,512 26,574
Expenses for prior issuance of common stock (122,409) --
Decrease in notes receivable 9,463 30,644
------------ ------------
Net cash provided by (used in) financing activities 1,490,844 (337,531)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,964,031 (592,191)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,031,422 11,712,535
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,995,453 $ 11,120,344
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes $ 79,947 $ 9,000
Cash paid for interest $ 17,189 $ 4,189
Cash received for interest $ 160,976 $ 128,556
The accompanying notes are an integral part of these 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 and six month periods ended December 31, 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 April 2002, the Financial Accounting Standards Board ("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 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require additional disclosure in both annual and
interim financial statements on the method of accounting for stock-based
employee compensation. The Company plans to adopt the disclosure provisions of
SFAS No. 148 in the third quarter of fiscal 2003.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN No. 45 requires companies to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. Guarantees in existence at
December 31, 2002 are grandfathered for the purposes of recognition and would
only need to be disclosed. The Company plans to adopt the initial recognition
and measurement provisions of FIN No. 45 for guarantees issued or modified after
December 31, 2002. The Company does not expect the provisions of FIN No. 45 to
have a material impact on its consolidated financial statements.
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.
6
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 $58,115, has been allocated to intangible assets. Of the total
consideration, $1,900,000 has been allocated to acquired distribution
agreements, with the remainder of $505,615 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 $215,000 respectively, has been recorded in the
accompanying consolidated statements of operations for the three and six months
ended December 31, 2002.
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
declared effective on June 24, 2002. 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 $4,187,476, including transaction costs of $187,476, 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 $199,602 and
$116,672 at December 31, 2002 and June 30, 2002 includes an unrealized loss on
marketable equity securities for the six months ended December 31, 2002 and 2001
of $86,666 and $66,667, respectively.
7
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. Post contract services for
periods in excess of one year or sold subsequent to the initial sale are
recognized as revenues ratably over the contract period. 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. For the three
months ended December 31, 2002 and 2001, revenues recognized from "bill and
hold" transactions for products which had not shipped by December 31, 2002 and
2001 were zero and $271,600, respectively. Accounts receivable relating to "bill
and hold" transactions were zero and $271,600 at December 31, 2002 and 2001,
respectively.
6. MAJOR CUSTOMERS
---------------
For the three months ended December 31, 2002, sales to IBM and one European
distributor constituted 29% of net revenues. Accounts receivable from these two
customers as of December 31, 2002 amounted to $4,338,948. Each of these
customers resells the Company's products to individual resellers and/or
end-users, none of which contributed sales of more than 10% of the Company's net
revenues for the three months ended December 31, 2002. No customer contributed
sales exceeding 10% of net revenues for the three months ended December 31,
2001. The percentage of revenue derived from individual distributors, resellers
or end-users can vary significantly from quarter to quarter.
7. INVENTORIES, NET
----------------
Inventories, net are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method and consists of the following:
December 31, June 30,
2002 2002
---------- ----------
Purchased components and subassemblies $ 326,180 $ 211,131
Finished goods 467,241 829,720
---------- ----------
$ 793,421 $1,040,851
========== ==========
8
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 March 31, 2003. Borrowings under the credit agreement bear
interest at the bank's prime rate plus 1/2% (4.75% at December 31, 2002). At
December 31, 2002 and June 30, 2002, there was $2,000,000 available for
borrowing under the line. During the three months ended December 31, 2002 and
2001, there were no borrowings under the line.
The line of credit is unsecured and requires the Company to maintain a minimum
balance of $3,000,000 in cash and cash equivalents with the bank. The Company is
in compliance with this condition at December 31, 2002.
9. INCOME TAXES
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset-and-liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect of deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
During the six months ended December 31, 2002, deferred income taxes included an
increase of $1,754,541 as a result of the income tax benefit realized from the
exercise of employee and director stock options. This benefit was recorded as
an increase in additional paid-in capital in the accompanying consolidated
balance sheet.
10. EARNINGS PER SHARE
------------------
The Company applies SFAS No. 128, "Earnings per Share." SFAS No. 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.
9
The following table sets forth the computation of basic and diluted earnings per
share:
For the three months ended For the six months ended
December 31, December 31,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 1,883,685 $ 610,568 $ 3,330,716 $ 870,240
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 13,573,656 10,376,892 13,368,120 10,275,409
Effect of dilutive employee stock options 1,196,836 507,801 1,335,471 466,688
Effect of dilutive warrants 15,410 -- 15,410 --
----------- ----------- ----------- -----------
Diluted 14,785,902 10,884,693 14,719,001 10,742,097
Earnings per common share:
Basic $ 0.14 $ 0.06 $ 0.25 $ 0..08
=========== =========== =========== ===========
Diluted $ 0.13 $ 0.06 $ 0.23 $ 0..08
=========== =========== =========== ===========
For the three and six months ended December 31, 2002 and 2001, an aggregate of
165,500 and 83,500, respectively, compared to 577,250 and 999,506, respectively,
of 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.
The Company has identified critical accounting policies with respect to revenue
recognition, accounts receivable, inventories and income taxes. These policies
are discussed in the Company's Form 10-K for the year ended June 30, 2002.
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 For the Six Months Ended
Ended Ended
December 31, 2002 December 31, 2001
---------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Gross profit 44.5% 43.3% 43.4% 42.7%
Operating expenses
Sales and marketing 15.6 19.9 16.0 21.3
Research and development 2.9 5.2 2.9 5.7
General and administrative 6.6 10.2 6.7 10.0
------ ------ ------ ------
Operating income 19.4 8.0 17.8 5.7
Interest income, net 0.6 1.3 0.6 1.6
Income tax expense (7.2) - (6.6) -
------ ------ ------ ------
Net income 12.8% 9.3% 11.8% 7.3%
====== ====== ====== ======
Net revenues for the three and six months ended December 31, 2002 increased to
$14,713,778 and $28,230,456, respectively, from $6,595,133 and $11,859,862,
respectively, for the comparable periods in the prior fiscal year. The increase
in net revenues was primarily attributable to increased sales of the Company's
Eon, Capio and ThinSTAR products, as well as increased sales of software
upgrades and third party products.
The Company's gross profit as a percentage of net revenues for the three and six
months ended December 31, 2002 increased to 44.5% and 43.4%, respectively,
compared to 43.3% and 42.7%, respectively, for the comparable periods of the
prior fiscal year. The increase is attributable to reductions in the purchase
costs of components and third party license fees, an increase in the number of
higher margin units sold, and initial sales of software upgrades primarily to
IBM customers. In addition, fixed overhead costs represented a lower percentage
of revenue during the three and six months ended December 31, 2002 than in the
prior fiscal year.
Operating expenses for the three and six months ended December 31, 2002
declined to 25.1% and 25.6% of net revenues, respectively, from 35.3% and 37.0%,
respectively, in the comparable periods of the prior fiscal year as a result of
increased sales and controlled increases in expenditures. Operating expenses
for the three and six months ended December 31, 2002 were $3,694,356 and
$7,217,569, respectively, an increase of 58.7% and 64.6% from operating expenses
of $2,328,058 and $4,384,479, respectively, in the comparable periods of the
prior fiscal year as a result of the Company's execution of its growth strategy.
These operating expenses consist of the following:
Sales and marketing expenses for the three and six months ended
December 31, 2002 were 15.6% and 16.0% of net revenues, respectively, compared
to 19.9% and 21.3%, respectively, for the comparable periods in the prior fiscal
year. Sales and marketing expenses for the three and six months ended December
31, 2002 were $2,299,087 and $4,526,420, respectively, an increase of 74.8% and
79.2% from $1,315,246 and $2,525,354, respectively, in the comparable periods 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.
Research and development expenses for the three and six months ended
December 31, 2002 were $420,686 and $808,449, respectively, an increase of 22.3%
and 19.8% from $343,985 and $674,851, respectively, in the comparable periods in
the prior year primarily as a result of an increase in personnel dedicated to
software development activities resulting from the Company's growth.
11
General and administrative expenses for the three and six months ended
December 31, 2002 were 6.6% and 6.7% of net revenues, respectively, versus 10.2%
and 10.0%, respectively, for the comparable periods of the prior fiscal year.
General and administrative expenses for the three and six months ended December
31, 2002 were $974,583 and $1,882,700, respectively, an increase of 45.7% and
59.0% from $668,827 and $1,184,274, respectively, in the comparable periods in
the prior fiscal year due to increased staffing and additional costs as a result
of the Company's growth strategy.
Net interest income for the three and six months ended December 31, 2002 was
$90,912 and $180,935, respectively, an increase of 8.6% and a decrease of 7.5%
from $83,747 and $195,701, respectively, in the comparable periods in the prior
fiscal year. The increase in interest income for the comparable three-month
periods is due to the investment of higher cash balances, offset by the effect
of lower interest rates. The decrease for the comparable six-month periods was
primarily due to lower interest rates.
For the three and six months ended December 31, 2002, the Company recorded
income tax expense of $1,059,573 and $1,873,528, respectively, or 36% of net
income. The Company did not record income tax expense for the comparable periods
in the prior year due to the availability of net operating loss carryforwards.
For the three and six months ended December 31, 2002, the Company had net income
of $1,883,685 and $3,330,716, respectively, as compared to pre-tax net income of
$610,568 and $870,241, respectively, for the comparable periods in the prior
year primarily as a result of increased revenues and gross margin, offset by
increases in operating expenses and income tax expense.
Liquidity and Capital Resources
As of December 31, 2002, the Company had net working capital of $30,571,050
consisting primarily of cash and cash equivalents and accounts receivable. The
Company's principal sources of liquidity include $24,092,120 of cash, cash
equivalents and marketable securities and a $2,000,000 bank line of credit
facility, all of which was available as of December 31, 2002. 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 March 31, 2003. The Company
had no borrowings under the line of credit during the six month period ended
December 31, 2002.
Cash and cash equivalents increased by $6,964,031 during the six months ended
December 31, 2002, 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 $5,596,261 for the six months
ended December 31, 2002, primarily as a result of higher revenues, improved
gross margins and the utilization of deferred income taxes assets.
The Company used cash from investing activities of $123,074 for the six months
ended December 31, 2002 primarily as a result of $78,650 for the purchase of
property plant and equipment.
The Company generated cash from financing activities of $1,490,844 during the
six months ended December 31, 2002 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.
12
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. 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 21 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 some of 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 eight 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 eight reported
quarters, we have incurred net losses in the past and have an accumulated
deficit of $456,000 as of December 31, 2002. We expect to continue to incur
significant operating expenses. Our operating expenses increased during the
three and six months ended December 31, 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.
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.
13
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 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.
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.
14
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, which
could significantly increase our costs.
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.
15
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 to 40 percent of our revenues are derived 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.
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.
16
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.
In order to continue to develop and market our line of computing appliances, we
may need to hire additional personnel. Competition for employees is significant
and we may experience difficulty in attracting suitably qualified people.
17
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.
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.
18
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, the enhancement of the Company's technology, the
investment of significant resources in software development activities, the
growth in the thin client market, and the development of new products. 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 December 31, 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
December 31, 2002 would have decreased by less that $50,000. 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 date of this Quarterly Report on
Form 10-Q, the Company carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
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.
(b) Changes in Internal Controls
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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On December 4, 2002, the Company held its Annual Meeting of Stockholders. The
Stockholders voted to elect five members to the Board of Directors, to approve
an amendment to the Company's 1995 Stock Option Plan to increase the number of
shares issuable thereunder and to ratify the selection of KPMG LLP as the
Company's independent accountants for the fiscal year ending June 30, 2003.
Elected to the Board of Directors were Michael G. Kantrowitz (9,716,450 shares
voted for election and 1,778,135 shares were withheld), John M. Ryan (11,440,326
shares voted for election and 54,259 shares were withheld), Christopher G.
McCann (11,390,515 shares voted for election and 104,070 shares were withheld),
John P. Kirwin, III (11,386,763 shares voted for election and 107,822 shares
were withheld) and David D. Gathman (11,388,413 shares voted for election and
106,172 shares were withheld).
The amendment of the 1995 Stock option Plan was approved with 8,939,073 shares
voting in favor, 2,535,535 shares voting against and 19,977 shares abstaining.
The selection of KPMG LLP as the Company's independent accountants was ratified
with 11,328,085 shares voting in favor of ratification, 150,660 shares voting
against ratification and 15,840 shares abstaining.
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.
-----------
10.1 Termination agreement dated November 1, 2002 between the
Company and Anthony J. DePaul.
10.2 Employment Offer Letter dated December 9, 2002 between the
Company and Eric Rubino.
10.3 Employment Offer Letter dated November 8, 2002 between the
Company and Matthew Wrabley.
10.4 1995 Stock Option Plan, as amended through December 4, 2002
99.1 Certification of Michael 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.
21
b. Reports on Form 8-K
On December 9, 2002, the Company filed a Form 8-K relating to the
Company's annual meeting of shareholders held on December 4, 2002.
On October 31, 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 3, 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.
22
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: February 14, 2003 By: /S/ MICHAEL G. KANTROWITZ
-----------------------------
Michael G. Kantrowitz
Chairman, President and Chief
Executive Officer
Date: February 14, 2003 By: /S/ VINCENT T. DOLAN
------------------------
Vincent T. Dolan
Chief Financial Officer
23
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: February 14, 2003
/s/Michael G. Kantrowitz
------------------------
Michael G. Kantrowitz
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
24
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: February 14, 2003
/s/ Vincent T. Dolan
--------------------
Vincent T. Dolan
Chief Financial Officer
(Principal Financial Officer)
25