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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 2003
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number: 000-21240
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NEOWARE SYSTEMS, INC.
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(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
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(Address of principal executive offices)
(610) 277-8300
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(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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of May 7, 2003, there were 13,911,447 outstanding shares of the Registrant's
Common Stock.
NEOWARE SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Number
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
March 31, 2003 (unaudited) and June 30, 2002 3
Consolidated Statements of Operations:
Three and Nine Months Ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows:
Three and Nine Months Ended March 31, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24
2
NEOWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2003 June 30, 2002
(Unaudited)
--------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $26,829,821 $17,031,422
Marketable securities - 183,333
Accounts receivable, net 9,315,627 9,520,558
Inventories 1,127,061 1,040,851
Prepaid expenses and other 954,156 551,598
Deferred income taxes 570,455 1,394,864
----------- -----------
Total current assets 38,797,120 29,722,626
Property and equipment, net 562,542 622,235
Goodwill and other intangibles 11,240,494 11,568,940
Note receivable 254,269 263,732
Deferred income taxes 387,651 173,648
Capitalized software, net 25,679 47,779
----------- -----------
$51,267,755 $42,398,960
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,430,942 $3,111,164
Accrued expenses 2,149,628 2,136,776
Capital lease obligations 67,065 63,037
Deferred revenue 628,331 582,290
----------- -----------
Total current liabilities 6,275,966 5,893,267
----------- -----------
Capital lease obligations, non-current portion 151,368 204,131
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 13,870 12,936
Additional paid-in capital 44,114,915 40,291,861
Treasury stock (100,000) (100,000)
Accumulated other comprehensive income (13,338) (116,672)
Retained earnings (deficit) 824,974 (3,786,563)
----------- -----------
Total stockholders' equity 44,840,421 36,301,562
----------- -----------
$51,267,755 $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 Nine Months Ended
------------------------------- -------------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
----------- --------- ----------- -----------
Net revenues $13,468,117 $8,368,580 $41,698,573 $20,228,442
Cost of revenues 7,227,380 5,061,893 23,216,958 11,862,736
----------- ---------- ----------- -----------
Gross profit 6,240,737 3,306,687 18,481,615 8,365,706
----------- ---------- ----------- -----------
Sales and marketing 2,410,840 1,547,448 6,937,260 4,072,802
Research and development 491,981 352,570 1,300,430
1,027,421
General and administrative 1,119,780 761,656 3,002,480 1,945,930
----------- ---------- ----------- -----------
Operating expenses 4,022,601 2,661,674 11,240,170 7,046,153
----------- ---------- ----------- -----------
Operating income 2,218,136 645,013 7,241,445 1,319,553
Impairment charge (300,000) - (300,000) -
Interest income, net 83,146 60,045 264,081 255,746
----------- ---------- ----------- -----------
Income before income taxes 2,001,282 705,058 7,205,526 $1,575,299
Income tax expense 720,461 - 2,593,989 -
----------- ---------- ----------- -----------
Net income $1,280,821 $705,058 $4,611,537 $1,575,299
=========== ========== =========== ===========
Basic income per share $0.09 $0.06 $0.34 $0.15
=========== ========== =========== ===========
Diluted income per share $0.09 $0.06 $0.31 $0.14
=========== ========== =========== ===========
Weighted average number of common
shares used in basic earnings per share
computation 13,724,625 11,175,240 13,485,220 10,573,863
=========== ========== =========== ===========
Weighted average number of common
shares used in diluted earnings per share
computation 14,704,171 12,509,099 14,712,321 11,326,706
=========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
NEOWARE SYSTEMS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
Ended Ended
March 31, 2003 March 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,611,537 $1,575,299
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Impairment of investment 300,000 -
Deferred income taxes 2,578,950 -
Depreciation and amortization 563,399 331,405
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable 204,931 (2,271,440)
Inventories (86,210) (127,521)
Prepaid expenses and other (415,890) 151,978
Increase (decrease) in:
Accounts payable 319,778 635,305
Accrued expenses 12,852 4,790
Deferred revenue 46,041 (96,911)
----------- ----------
Net cash provided by operating activities 8,135,388 202,905
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of NCD ThinSTAR - (4,143,236)
Purchase of ACTIV-e Solutions - (194,986)
Purchase of intangible assets (46,538) (49,623)
Purchases of property and equipment, net (106,623) (88,744)
----------- ----------
Net cash used in investing activities (153,161) (4,476,589)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of bank debt assumed in acquisition - (388,213)
Repayments of capital leases (48,735) (18,299)
Payment of costs for prior issuance of common stock (122,410) -
Exercise of stock options and warrants 1,977,854 135,275
Decrease in note receivable 9,463 30,644
----------- ----------
Net cash provided by financing activities 1,816,172 (240,593)
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 9,798,399 (4,514,777)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,031,422 11,712,535
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $26,829,821 $7,198,258
=========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes $79,947 $27,200
Cash paid for interest 25,963 16,190
The accompanying notes are an integral part of these financial statements.
5
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 nine month periods ended March 31, 2003 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 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 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 had no such guarantees as of December 31,
2002 and plans to adopt the initial recognition and measurement provisions of
FIN No. 45 for guarantees, if any, 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.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." This Issue addresses the appropriate accounting by vendors for
arrangements that will result in the delivery of multiple products, services
and/or rights to assets that may occur over a period of time. The Issue is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not expect that the provisions of this
consensus to have a material impact on its consolidated financial statements.
3. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which 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. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 related to the disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The disclosure provisions of SFAS No. 148 are
applicable to interim or annual periods that end after December 15, 2002, and as
such have been incorporated below.
6
SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as
expense the fair value of stock-based awards, or (ii) continue to apply the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations, and provide pro forma
net income and earnings per share disclosures for employee stock option grants
as if the fair value based method defined in SFAS No. 123 had been applied. The
Company continues to apply the provisions of APB No. 25 and provides the pro
forma disclosures in accordance with the provisions of SFAS Nos. 123 and 148 to
its stock option plans. Under APB Opinion No. 25, the Company has not recorded
any stock-based employee compensation cost associated with the Company's stock
option plans, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on the net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to its stock option plans:
Three Months Ended Nine Months Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
--------------------------------------------------------------------------
Net income As reported $ 1,280,821 $ 705,058 $ 4,611,537 $ 1,575,299
Pro forma $ 829,621 $ 596,898 $ 3,661,137 $ 1,056,899
Basic EPS As reported $ 0.09 $ 0.06 $ 0.34 $ 0.15
Pro forma $ 0.06 $ 0.05 $ 0.27 $ 0.10
Diluted EPS As reported $ 0.09 $ 0.06 $ 0.31 $ 0.14
Pro forma $ 0.06 $ 0.05 $ 0.25 $ 0.09
The fair value of the Company's stock-based awards to employees was estimated at
the date of grant using the Black-Scholes option pricing model, assuming an
estimated life of five to ten years, no dividends, volatility of 70%, and
risk-free interest rates of 3.4%.
4. 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.
7
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 $322,500 respectively has been recorded in the
accompanying consolidated statements of operations for the three and nine months
ended March 31, 2003.
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 $4,189,590 including transaction costs of $189,590, 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.
5. 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. For the three months ended March 31, 2003, the Company
recorded an impairment charge of $300,000 in the accompanying consolidated
statement of operations to write-off the full cost of its investment in
Boundless Corporation, which filed for Chapter 11 bankruptcy protection in March
2003.
8
Accumulated other comprehensive loss includes an unrealized loss on marketable
securities of zero and $116,667 at March 31, 2003 and June 30, 2002,
respectively.
6. 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 sold subsequent to the initial sale are recognized
as revenue 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 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
March 31, 2003 and 2002, revenues recognized from "bill and hold" transactions
for products which had not shipped by March 31, 2003 and 2002 were $114,600 and
$142,661, respectively. Accounts receivable relating to "bill and hold"
transactions were $114,600 and $142,661 at March 31, 2003 and 2002,
respectively.
7. MAJOR CUSTOMERS
For the three months ended March 31, 2003, aggregate sales to IBM and one other
customer constituted 29% of net revenues. Accounts receivable from these two
customers as of March 31, 2003 amounted to $3,391,426. 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 March 31, 2003. No customer contributed sales exceeding 10%
of net revenues for the three months ended March 31, 2002. The percentage of
revenue derived from individual distributors, resellers or end-users can vary
significantly from quarter to quarter.
9
8. 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:
March 31, June 30,
2003 2002
----------- ----------
Purchased components and subassemblies $284,160 $211,131
Finished goods 842,901 829,720
----------- ----------
$1,127,061 $1,040,851
=========== ==========
9. 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, 2004. Borrowings under the credit agreement
bear interest at the Libor Market Index rate plus 2.5% (3.8% at March 31, 2003).
At March 31, 2003 and June 30, 2002, there was $2,000,000 available for
borrowing under the line. During the three and nine months ended March 31, 2003
and 2002, 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 March 31, 2003.
10. 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 three and nine months ended March 31, 2003, deferred income taxes
increased $214,003 and $1,968,544, respectively, 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.
11. 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, such as stock options and warrants, into
common stock.
10
The following table sets forth the computation of basic and diluted earnings per
share:
For the three months ended For the three months ended
March 31, March 31,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $1,280,821 $705,058 $4,611,537 $1,575,299
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 13,724,625 11,175,240 13,485,220 10,573,863
Effect of dilutive employee stock options 979,546 1,333,859 1,211,691 752,843
Effect of dilutive warrants - - 15,410 -
---------- ---------- ---------- ----------
Diluted 14,704,171 12,509,099 14,712,321 11,326,706
Earnings per common share:
Basic $0.09 $0.06 $0.34 $0.15
========== ========== ========== ==========
Diluted $0.09 $0.06 $0.31 $0.14
========== ========== ========== ==========
For the three and nine months ended March 31, 2003, aggregate stock options of
327,354 and 166,118, respectively, were excluded from the calculation of
dilutive earnings per share because their inclusion would have been
anti-dilutive. For the three and nine months ended March 31, 2002, aggregate
stock options of 103,500 and 367,669, respectively, were so excluded.
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, a proven 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 thin client 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 Voyager products are thin client appliances, which are
cost-effective alternatives to personal computers used by businesses, and
powerful replacements for green-screen terminals. The Company's ThinPC product
is software that enables a PC to function as a thin client appliance. Used in
conjunction with Citrix MetaFrame or Microsoft Terminal Services, the Company's
software and thin client appliances allow users to run Windows-based
applications from a server, plus connect to mainframes, midrange systems and the
Internet. Unlike personal computers, thin client 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.
11
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.
For the Three Months For the Nine Months Ended
Ended Ended
March 31, 2003 March 31, 2002
--------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Gross profit 46.3% 39.5% 44.3% 41.4%
Operating expenses
Sales and marketing 17.9 18.5 16.6 20.1
Research and development 3.6 4.2 3.1 5.1
General and administrative 8.3 9.1 7.2 9.6
---- ---- ----- ----
Operating income 16.5 7.7 17.4 6.6
Impairment charge (2.3) - (0.7) -
Interest income, net 0.6 0.7 0.6 1.2
Income tax expense (5.3) (6.2)
---- ---- ----- ----
Net income 9.5% 8.4% 11.1% 7.8%
===== ==== ===== ====
Net revenues for the three and nine months ended March 31, 2003 increased to
$13,468,117 and $41,698,573, respectively, from $8,638,580 and $20,228,442,
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 computing appliance products, as well as increased sales
of software products.
The Company's gross profit as a percentage of net revenues for the three and
nine months ended March 31, 2003 increased to 46.3% and 44.3%, respectively,
compared to 39.5% and 41.4%, 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 sales of software upgrades to IBM customers and
others. In addition, fixed overhead costs represented a lower percentage of
revenue during the three and nine months ended March 31, 2003 than in the prior
fiscal year.
Operating expenses for the three and nine months ended March 31, 2003
declined to 29.8% and 26.9% of net revenues, respectively, from 31.8% and 34.8%,
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 nine months ended March 31, 2003 were $4,022,601 and $11,240,170,
respectively, an increase of 51.1% and 59.5% from operating expenses of
$2,661,674 and $7,046,153, 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 nine months ended March
31, 2003 were 17.9% and 16.6% of net revenues, respectively, compared to 18.5%
and 20.1%, respectively, for the comparable periods in the prior fiscal year.
Sales and marketing expenses for the three and nine months ended March 31, 2003
were $2,410,840 and $6,937,260, respectively, an increase of 55.8% and 70.3%
from $1,547,448 and $4,072,802, respectively, in the comparable periods in the
prior fiscal year. This increase resulted from the hiring of additional sales
and marketing personnel for recently opened domestic and international sales
offices and from the retention of additional sales and marketing personnel as a
result of the ACTIV-e Solutions, ThinSTAR, and IBM transactions, and from the
payment of higher commissions due to increased sales.
12
Research and development expenses for the three and nine months ended
March 31, 2003 were $491,981 and $1,300,430, respectively, an increase of 39.5%
and 26.6% from $352,570 and $1,027,421, 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.
General and administrative expenses for the three and nine months ended
March 31, 2003 were 8.3% and 7.2% of net revenues, respectively, versus 9.1% and
9.6%, respectively, for the comparable periods of the prior fiscal year. General
and administrative expenses for the three and nine months ended March 31, 2003
were $1,119,780 and 3,002,480, respectively, an increase of 47.0% and 54.3% from
$761,656 and $1,945,930, respectively for 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 nine months ended March 31, 2003 was
$83,146 and $264,081, respectively, an increase of 38.5% and 3.3% from $60,045
and $255,746, 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.
For the three and nine months ended March 31, 2003, the Company recorded income
tax expense of $720,461 and $2,593,989, 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 nine months ended March 31, 2003, the Company had net income
of $1,280,821 and $4,611,537, respectively, including the effect of the
non-operating impairment charge of $300,000, as compared to pre-tax net income
of $705,058 and $1,575,299, 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 March 31, 2003, the Company had net working capital of $32,521,154
consisting primarily of cash and cash equivalents and accounts receivable. The
Company's principal sources of liquidity include $26,829,821 of cash and cash
equivalents and a $2,000,000 bank line of credit facility, all of which was
available as of March 31, 2003. Interest on the line of credit facility accrues
at the Libor Market Index plus 2.5% (3.8% at March 31, 2003) with all principal
and interest due and payable on December 31, 2004. The Company had no borrowings
under the line of credit during the nine months ended March 31, 2003.
Cash and cash equivalents increased by $9,798,399 during the nine months ended
March 31, 2003, primarily as a result of net income and the exercise of stock
options and warrants in addition to the increase in 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 $8,135,388 for the nine months
ended March 31, 2003, primarily as a result of higher revenues, improved gross
margins and the increase in deferred income taxes assets generated from the
exercise of stock options.
The Company used cash from investing activities of $153,161 for the nine months
ended March 31, 2003 primarily as a result of the purchase of property plant and
equipment.
13
The Company generated cash from financing activities of $1,816,172 during the
nine months ended March 31, 2003 primarily as a result of the exercise of
warrants and employee and director stock options, offset by the payment of
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 other sources of debt or equity financing. 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 24 months, we have made three acquisitions and entered into an
alliance with IBM. 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.
We experienced significant growth in our business in the past two years due
to internal expansion and business acquisitions, and if we do not appropriately
manage this growth and any future growth, including the integration of our newly
hired employees and executive officers, our business will suffer.
Our business has grown during the past two years through both internal expansion
and business acquisitions, and has put pressure on our infrastructure, internal
systems and managerial resources. The number of our employees increased from 51
employees at March 31, 2001 to 106 employees at March 31, 2003. Our new
employees include a number of senior executive officers and other key
managerial, technical, sales and marketing personnel. To manage our growth
effectively, we must continue to improve and expand our infrastructure,
including operating and administrative systems and controls, and continue
managing and integrating our personnel in an efficient manner. Our business may
be adversely affected if we do not integrate and train our new employees quickly
and effectively and coordinate among our executive, engineering, finance,
marketing, sales, operations and customer support organizations, all of which
add to the complexity of our organization and increase our operating expenses,
which may grow at a faster rate than our sales. In addition, because of the
growth of our foreign operations, we now have facilities located in multiple
locations, and we have limited experience coordinating a geographically
separated organization.
Although we have generated operating profits for the past two years, 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 operating profits in the recent past, we have
incurred net losses in prior periods. We expect to continue to incur significant
operating expenses. Our operating expenses increased during the three and nine
months ended March 31, 2003 reflecting the hiring of additional key personnel as
we continue to implement our growth strategy. 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.
14
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 thin client 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 thin client 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 thin client
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.
15
Our business is dependent on customer adoption of Windows and Linux-based
thin client 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 thin client appliances to perform
discrete tasks for corporate and Internet-based networks to increase our
revenues. If the role of thin client 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 thin client 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 certain versions of the Windows operating system. 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.
We depend upon single source suppliers for some of our thin client 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.
16
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 thin client appliances that are bundled
with our software. These thin client 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.
The Recent Outbreak of SARS in the Asia-Pacific Region and Its Continued
Spread Could Harm Our Business.
The Asia-Pacific region is experiencing outbreaks of Severe Acute Respiratory
Syndrome, or SARS. As a result of these outbreaks, businesses can be shut down
temporarily and individuals can become ill or quarantined. A majority of the
parts and products that we obtain from outside suppliers are obtained from
suppliers in the Asia-Pacific region, and many of our products are manufactured
and assembled in China. This could disrupt our ability to manufacture our
products and important components for our products as well as cause
interruptions and/or delays in our ability to ship components to other locations
for continued manufacture and assembly. Any such delays or interruptions could
result in delays in our ability to fill orders and have an adverse effect on our
results of operation and financial condition. If our manufacturing operations
are curtailed because of SARS, we may need to seek alternate sources of supply
for manufacturing or other services and alternate sources may be more expensive.
Alternate sources may result in delays in shipments to our customers, which
would reduce our profitability.
If we are unable to continue generating substantial revenues from
international sales our business could be adversely affected.
Currently, approximately 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, including IBM, 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 the continued viability and financial condition of NCD or our other
channel partners, one of which has accounted for more than 10% of our net sales.
17
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 thin client appliances, we face significant competition from
larger companies which have greater 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.
Thin client 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 thin client appliance 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
are unable 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 thin client appliances.
18
Our thin client 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 thin client appliances,
we may need to hire additional personnel. Competition for employees 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 thin client 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.
19
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..
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 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 revenues or earnings, such as the recent
volatility we have experienced; 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.
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, risks associated with the outbreak of SARS; and risks associated
with foreign operations and political and economic uncertainties associated with
current world events.
20
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 March 31, 2003 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 March
31, 2003 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.
21
PART II. OTHER INFORMATION
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 Keith D. Schneck, 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. Report on Form 8-K
On January 29, 2003, the Company filed a Form 8-K relating to a press
release announcing earnings for the three months ended December 31,
2003.
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: May 15, 2003 By: MICHAEL G. KANTROWITZ
-----------------------------
Michael G. Kantrowitz
Chairman, President and Chief
Executive Officer
Date: May 15, 2003 By: KEITH D. SCHNECK
------------------------
Keith D. Schneck
Executive Vice President and 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: May 15, 2003
Michael G. Kantrowitz
-------------------------
Michael G. Kantrowitz
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
24
I, Keith D. Schneck, 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: May 15, 2003
Keith D. Schneck
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Keith D. Schneck
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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