-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T2e5u5ZKLBj1VHM2Fps/nq/CaMW6J4PSC0kqCE4RTtadstN0NwXJErIh9eIsODyH y9PJO/I2YdDRs8Q3tFHDMQ== 0000950116-98-002242.txt : 19981118 0000950116-98-002242.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950116-98-002242 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOWARE SYSTEMS INC CENTRAL INDEX KEY: 0000894743 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 232705700 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21240 FILM NUMBER: 98750490 BUSINESS ADDRESS: STREET 1: 400 FEHELEY DR CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6102778300 MAIL ADDRESS: STREET 1: 400 FEHELEY DR CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 FORMER COMPANY: FORMER CONFORMED NAME: HDS NETWORK SYSTEMS INC DATE OF NAME CHANGE: 19950313 FORMER COMPANY: FORMER CONFORMED NAME: INFORMATION SYSTEMS ACQUISITION CORP DATE OF NAME CHANGE: 19930108 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q ----------------------- (Mark One) __X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended September 30, 1998 _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________. Commission File Number: 000-21240 -------------------------------- NEOWARE SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 23-2705700 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 400 Feheley Drive King of Prussia, Pennsylvania 19406 (Address of principal executive offices) (610) 277-8300 (Registrant's telephone number including area code) --------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 6, 1998, there were outstanding 6,285,773 shares of the Registrant's Common Stock. Page 1 of 14 pages Exhibit Index is on page 13 NEOWARE SYSTEMS, INC. INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets: September 30, 1998 and June 30, 1998 3 Consolidated Statements of Operations: Three Months Ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flows: Three Months Ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 NEOWARE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, June 30, ASSETS 1998 1998 ------ --------------- --------------- CURRENT ASSETS: Cash and cash equivalents $ 423,840 $ 1,302,984 Accounts receivable, net of allowance for doubtful accounts of $219,014 and $168,710 2,319,736 4,777,957 Inventories 2,840,162 3,119,043 Recoverable income taxes 1,121,554 1,121,554 Prepaid expenses and other 127,770 123,575 Deferred income taxes 416,530 416,530 --------------- --------------- Total current assets 7,249,592 10,861,643 PROPERTY AND EQUIPMENT, net 571,573 636,414 NOTE RECEIVABLE 700,000 700,000 CAPITALIZED AND PURCHASED SOFTWARE, net 772,768 809,470 DEFERRED INCOME TAXES 13,866 13,866 --------------- --------------- $ 9,307,799 $ 13,021,393 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 1,422,000 $ 3,074,000 Accounts payable 869,503 1,834,400 Accrued expenses 978,259 1,106,607 Deferred revenue 157,312 165,312 --------------- --------------- Total current liabilities 3,427,074 6,180,319 --------------- --------------- 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, 6,264,158 shares issued and outstanding 6,264 6,264 Additional paid-in capital 10,154,052 10,154,052 Accumulated deficit (4,275,249) (3,301,874) Deferred compensation (4,342) (17,368) --------------- --------------- Total stockholders' equity 5,880,725 6,841,074 --------------- --------------- $ 9,307,799 $ 13,021,393 =============== ===============
The accompanying notes are an integral part of these financial statements. Page 3 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended September 30, --------------------------------- 1998 1997 ---- ---- NET REVENUES $ 2,179,293 $ 5,630,992 COST OF REVENUES 1,770,903 4,139,161 --------------- --------------- Gross profit 408,390 1,491,831 --------------- --------------- OPERATING EXPENSES: Sales and marketing 535,570 1,043,672 Research and development 243,429 353,576 General and administrative 588,076 241,372 Bridging Data Technology venture - 249,108 --------------- --------------- Total operating expenses 1,367,075 1,887,728 --------------- --------------- Operating loss (958,685) (395,897) INTEREST EXPENSE, NET 14,690 93,538 --------------- --------------- Loss before income taxes (973,375) (489,435) INCOME TAX BENEFIT - (154,172) --------------- --------------- Net loss $ (973,375) $ (335,263) =============== =============== BASIC AND DILUTED LOSS PER SHARE $ (.16) $ (.06) =============== ============== Weighted average number of shares used in basic and diluted loss per share computation 6,264,158 5,760,820 =============== =============== The accompanying notes are an integral part of these financial statements. Page 4 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months Ended September 30, ------------------------------ 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss income $ (973,375) $ (335,263) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Depreciation and amortization 163,030 220,396 Amortization of deferred compensation 13,026 13,025 Changes in operating assets and liabilities- (Increase) decrease in: Accounts receivable 2,458,221 355,731 Inventories 278,881 (624,212) Recoverable income taxes (154,172) Prepaid expenses and other (4,195) 489,374 Increase (decrease) in: Accounts payable (964,897) (1,612,500) Accrued expenses (128,348) (149,041) Deferred revenue (8,000) (1,785) ------------- ------------- Net cash provided by (used in) operating activities 834,343 (1,798,447) ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (936) (98,082) Capitalized software (60,551) (100,075) ------------- ------------- Net cash used in investing activities (61,487) (198,157) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (1,652,000) 1,762,000 Increase in note receivable - (700,000) ------------- ------------- Net cash provided by (used in) financing activities (1,652,000) 1,062,000 ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS (879,144) (934,604) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,302,984 1,452,409 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 423,840 $ 517,805 ============= ============= SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 27,505 $ 93,538
The accompanying notes are an integral part of these financial statements. Page 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 conformity with generally accepted accounting principles. The interim financial information, while unaudited, reflects all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of financial position and operating results for the interim periods presented. The results of operations for the three month period ended September 30, 1998 are not necessarily indicative of results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. REVENUE RECOGNITION AND MAJOR CUSTOMERS: Product revenue is recognized at the time of title transfer, which ordinarily occurs at the time of shipment. From time to time, customers request delayed shipment, usually because of customer scheduling for systems integration and lack of storage space at customers' facility during the implementation. In such "bill and hold" transactions, the Company recognizes revenues when the following conditions are met: the equipment is complete, ready for shipment and segregated from other inventory; the Company has no further significant performance obligations in connection with the completion of the transaction; the commitment and delivery schedule is fixed; the customer requested the transaction be completed on this basis; and the risks of ownership have passed to the customer. Revenues recognized from "bill and hold" transactions for products which had not shipped by September 30, 1998 and 1997 were $505,000, and $4,792,000, respectively. Accounts receivable relating to "bill and hold" transactions were $626,000 and $6,181,000 at September 30, 1998 and 1997, respectively. Service contract revenue is recognized ratably over the contract period. Product warranty costs and an allowance for sales returns are accrued at the time revenues are recognized. Net revenues from one customer represented 12% of total net revenues for the three months ended September 30, 1998. Net revenues from another customer represented 30% of total net revenues for the three months ended September 30, 1997. At September 30, 1998 and 1997, the Company had receivables from these customers of approximately $231,000 and$1,649,000, respectively. Page 6 3. INVENTORIES: Inventories are stated at the lower of cost or market (first-in, first-out method) and consisted of the following:
September 30, June 30, 1998 1998 --------------- --------------- Purchased components and subassemblies $ 1,547,367 $ 1,599,136 Work-in-process 274,571 283,587 Finished goods 1,018,224 1,236,320 --------------- --------------- $ 2,840,162 $ 3,119,043 =============== ===============
4. NOTE RECEIVABLE: In October 1997, the Company merged Information Technology Consulting, Inc., a wholly-owned subsidiary, into Broadreach Consulting, Inc. ("Broadreach") (formerly The Reohr Group, Inc.) in exchange for a 2% stock interest in Broadreach and the reimbursement of $1 million of expenses incurred by the Company in connection with its efforts to make certain acquisitions in the information technology consulting and staffing field. Of the total reimbursement, $300,000 was paid in cash and the remaining $700,000 is due on the earlier of three years or upon the completion of an initial public offering of Broadreach. The note bears interest at 8%. Of the total reimbursement, $292,000 was offset against general and administrative expenses during the three months ended September 30, 1997 for costs previously incurred and charged to expense. 5. LINE OF CREDIT: The Company has a $5,000,000 revolving line of credit ($3,578,000 available at September 30, 1998) with a bank which expires on November 30, 1998, subject to annual renewal. Borrowings under the line are at the bank's prime rate. Under the line, the Company is required to maintain specified ratios of working capital and debt to net worth, as defined. 6. EARNINGS PER SHARE Effective December 31, 1997 the Company adopted SFAS No. 128, "Earnings per Share", which supersedes APB Opinion No. 15, "Earnings per Share". SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) for complex capital structures on the face of the income statement. Basic EPS is computed by dividing income (loss) 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. For the three month periods ended September 30, 1998 and 1997, there were no dilutive effects of stock options or warrants as the Company incurred a net loss. Options and warrants to purchase 7,455,079 shares of Common Stock at prices ranging from $1.06 to $8.75 per share were outstanding at September 30, 1998. In accordance with the provisions of SFAS 128, EPS for prior periods have been restated. Page 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Introduction Neoware Systems, Inc. (the "Company") designs, manufactures and markets a family of Windows-based terminals and thin client computers that are designed to allow users to access Windows-based applications from a multi-user Windows(R) NT server, plus connect to mainframes, minicomputers and the Internet. The Company's NeoStationTM family of Windows-based terminals and related software allows users to utilize all of their existing computer systems and applications running on Windows platforms, UNIX, mainframes and minicomputers, and access them across a network. Unlike Java network computers, an alternative type of thin client, Neoware's products do not require customers to rewrite their applications in the Java language or to use Java emulators to access their existing systems. Unlike personal computers, the Company's products are designed primarily to run applications on a server, not on the desktop. This offers a number of significant advantages compared to an architecture based upon personal computers. Windows-based terminals and thin clients such as the Company's NeoStation line of products are designed to be easier to install, maintain and administer than traditional personal computers. Such lower administration costs are designed to lower the total cost of ownership of systems utilizing the Company's products when compared to personal computers. The Company's current strategy is to become a leader in the Windows-based terminal and thin client computers market by focusing on expanding its software products and its thin client computer hardware. The Company also plans to continue to develop strategic partnerships and acquire strategic technologies, products or businesses complementary to its current business. The Company sells its products in North America directly to end users, resellers, system integrators and OEMs. International sales are generally made through distributors. In October 1997, the Company merged Information Technology Consulting, Inc. ("ITC"), a wholly owned subsidiary, with Broadreach Consulting, Inc. ("Broadreach") and Global Consulting Group ("Global"). Under the merger, ITC and Global merged into Broadreach, and Neoware received stock that represents a 2% ownership of Broadreach. The Company was also reimbursed for the expenses incurred by the Company and ITC in connection with ITC's efforts to make these acquisitions, $300,000 of which was paid in cash. The remainder of the expenses in the amount of $700,000 is repayable by Broadreach on the earlier of three years or the consummation of an initial public offering of Broadreach. The note bears interest at 8% per annum. In February 1997, the Company formed a new subsidiary, Bridging Data Technology, Inc. ("BDT"). BDT acquired and further developed a software product, SmartBridge(TM), which utilizes the "intelligent bridging" approach to upgrading programs and data for Year 2000 compliance. The Company entered into an agreement effective January 1, 1998 which reduced the Company's ownership position in Bridging Data Technology, Inc. and eliminated the Company's requirement to fund future operations. In addition, effective March 31, 1998, the Company wrote off the full amount of its investment in BDT. The write-off reflects the Company's evaluation that recovery, if any, of its investment in BDT will not occur in the near future. Future cash distributions, if any, from BDT will be recorded as income in the period during which the transaction occurs. Page 8 In June 1998, the Company entered into a joint marketing and development agreement and an equity purchase agreement with Motorola, Inc., under which Motorola purchased approximately 6% of the Company's outstanding Common Stock. Under the joint marketing and development agreement, the two companies agreed to collaborate on technology for the Windows-based terminal market, and to jointly promote this technology to OEM customers. Although the Company believes that its agreements with Motorola allow it to compete more effectively in the market for customers who wish to create Windows-based terminals under their own brand names, there can be no assurance that the Company will generate significant revenue from this agreement. Results of Operations The following table sets forth, for the periods indicated, certain items from the Company's consolidated statements of operations as a percentage of net revenues. Three Months Ended September 30, 1998 1997 ------ ------ Gross Profit 18.7% 26.5% Operating expenses Sales and marketing 24.5 18.5 Research and development 11.2 6.3 General and administrative 27.0 4.3 Bridging Data Technology venture - 4.4 ----- ---- Operating loss (44.0) (7.0) Interest expense, net (0.7) (1.7) ----- ----- Loss before taxes (44.7) (8.7) Income tax benefit - (2.7) ----- ---- Net loss (44.7)% (6.0)% ===== ==== Net revenues for the three months ended September 30, 1998 decreased to $2,179,293 from $5,630,992 for the comparable period in the prior fiscal year. The decrease in net revenues was attributable to the continuation of the transition to the NeoStation family of products which have lower average selling prices ("ASPs") than older products, and the delay in the full scale implementation of thin client computers by corporate customers as they awaited the deployment of Windows NT 4.0. Terminal Server Edition from Microsoft. The impact of declining ASPs is highlighted by the fact that revenues for the three months ended September 30, 1998 were 61% lower than the comparable period in the prior year while unit volume declined 22% during the same period. Revenues for the three months ended September 30, 1997 included sales to one of the Company's major customers which have declined significantly as a result of completing delivery of products under existing purchase orders during the quarter ended December 31, 1997. The Company is subject to significant variances in its quarterly operating results because of the fluctuations in the timing of the receipt of large orders. The Company's gross profit as a percentage of net revenues decreased to 18.7% for the three months ended September 30, 1998 from 26.5% for the comparable period of the prior fiscal year. The change in gross profit percentage was a result of fixed overhead costs representing a higher percentage of revenue and, to a lesser extent, the impact of reduced ASPs which were not offset by lower manufacturing costs. The Company anticipates that its gross margin percentage will vary from quarter to quarter depending on the mix of business, including the mix of hardware and software revenues. 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 the Company competes remains very competitive and although the Company intends to continue its efforts to reduce the cost of its products, there can be no certainty that the Company will not be required to reduce prices of its products without compensating reductions in the cost to produce its products in order to increase its market share or to meet competitors' price reductions. Page 9 Operating expenses for the three months ended September 30, 1998 were $1,367,075, a decrease of $520,653 from operating expenses of $1,887,728 in the comparable period of the prior fiscal year. Sales and marketing expenses decreased by $508,102 to $535,570 for the three months ended September 30, 1998 as compared to $1,043,672 for the prior year as a result of restructuring the international and US sales force and reduced commissions attributable to the lower revenues. During the three months ended September 30, 1998, the Company terminated its relationship with its US distributor. The Company believes that the elimination of a level of distribution will allow it to price its products competitively without a negative impact on gross margin. The Company is developing a low cost telesales channel to complement its current sales efforts and is selling to Value Added Resellers ("VARs"). Research and development expenses for the three months ended September 30, 1998 decreased by $110,147 to $243,429 from $353,576 in the prior year as the Company completed the introduction of the NeoStation family of products in fiscal 1998 and due to the elimination of the use of outside consultants. General and administrative expenses increased by $346,704 to $588,076 for the three months ended September 30, 1998 from $241,372 in the prior year due primarily to the reduction in prior year expenses attributable to the reimbursement of expenses related to ITC totaling $292,000. General and administrative expenses during the three months ended September 30, 1998 also include provisions for increased legal costs and bad debt expenses. The reduction of BDT expenses for the three months ended September 30, 1998 as compared to the comparable period in the prior year reflects the impact of an agreement which reduced the Company's ownership position and eliminated the Company's requirement to fund future operations of BDT effective January 1, 1998. Net interest expense decreased in the three month period ended September 30, 1998 due to decreased borrowings under the Company's line of credit resulting from the availability of the proceeds from the sale of stock to Motorola during June 1998 and the benefit of reduced inventory and accounts receivable balances. The effective income tax rates was approximately 31.5% for the three-month period ended September 30, 1997. No benefit was recognized for the net operating loss during the three months ended September 30, 1998. The tax benefit for the three months ended September 30, 1997 reflects a recovery of taxes paid in prior years. For the three months ended September 30, 1998, the Company's net loss was $973,375 as compared to a net loss of $335,263 for the comparable period in the prior year. The increase in net loss was attributable to reduced revenues, a lower gross margin and the lack of an income tax benefit from the net operating loss which were partially offset by reduced operating and interest expense. In addition, during the three months ended September 30, 1997, the Company was reimbursed for net expenses of approximately $292,000 previously incurred in connection with its investment in ITC. Liquidity and Capital Resources At September 30, 1998, the Company had net working capital of approximately $3,822,518 composed primarily of cash and cash equivalents, accounts receivable and recoverable income taxes. The Company's principal sources of liquidity included approximately $424,000 of cash and cash equivalents and a $5,000,000 bank line of credit facility, $3,578,000 of which was available as of September 30, 1998. The bank line of credit, which is subject to annual renewal, expires on November 30, 1998. Management is currently negotiating an extension of its credit facility; however, there is no assurance that management will be successful in negotiating terms and conditions as favorable as its current line of credit facility. Page 10 Cash and cash equivalents decreased by approximately $879,000 during the three-month period ended September 30, 1998, primarily due to the loss from operations, repayments under the line of credit and a decrease in accounts payable and accrued expenses, which were offset by a decrease in accounts receivable. The Company generated cash from operations of approximately $834,000 during the three months ended September 30, 1998 compared to using cash from operations of approximately $1,798,000 during the comparable period in the prior fiscal year. 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, possible new debt sources and the sale of its securities. In addition, the Company recorded a benefit for its fiscal 1998 net operating loss carryback and expects to recover approximately $1,122,000 of federal income taxes paid in prior years. However, the Company must achieve profitable operations in order to provide adequate funding for the long term. Year 2000 Compliance The Company has made a preliminary evaluation of its Year 2000 exposures. The following areas were evaluated: internal management information and embedded systems, products, vendors and customers. The Company utilizes various computer software programs and systems as part of its internal management information systems which are primarily off-the-shelf products purchased from commercial sources with minor customization. Updates to these products are routinely installed by the Company to upgrade the systems and correct known defects in the software. All major systems have been reviewed for Year 2000 issues. The Company's financial accounting software is not Year 2000 compliant. The Company is testing an upgrade to the current software, which is Year 2000 compliant and will cost approximately $30,000 for the software and training. Conversion to the updated software is scheduled for early calendar 1999. The Company's engineering department utilizes UNIX based systems, which are not Year 2000 compliant; however, the nature of the utilization is not date sensitive. The operating systems can be upgraded for less than $5,000. The Company is in the process of implementing a contact management and service data base software application which is Year 2000 compliant. Total cost is expected to be less than $15,000. All other significant internal systems are either compliant or not critical to ongoing operations. The Company does not utilize any significant systems with embedded technology. All of the Company's products sold after March 1997 were tested and found to be compliant with Year 2000. None of the Company's vendors provide more than 20% of the Company's annual raw material requirements and alternative sources are generally available. The Company will evaluate the Year 2000 readiness of its sole source vendors by June 30, 1999. Contingency plans will be developed to ensure continued supply in the event a vendor expects to incur difficulties achieving Year 2000 compliance. In addition, customers which represent more than 10% of the Company's annual revenues will be surveyed for compliance with Year 2000 by June 30, 1999 in an effort to identify possible interruptions to the Company's revenue streams. There can be no assurance that the Company will not be adversely affected by the failure of distributors, suppliers, customers and vendors with which it interacts to become Year 2000 compliant. Page 11 The Company estimates that the total cost to complete its Year 2000 evaluation and remediation, including normal planned system upgrades, of all internal systems will be less than $100,000. Funding for these costs is expected to be provided by cash flows from operations. The Company has not deferred any significant system projects due to its Year 2000 efforts. Forward-Looking Statements Certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and relate to the development of the Company's products and future operating results that are subject to certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Forward-looking statements include anticipated purchases by customers, future margins and margin trends, future revenues and operating losses, the Company's competitive position, lower cost of ownership of the Company's systems, expansion of software products and thin client computer hardware products and statements regarding year 2000 compliance. The words "believe," "expect," "intend," "anticipate," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Factors that could affect the Company's actual results include the ability of the Company to market its products with Motorola to OEM customers, market acceptance of products utilizing the Windows CE operating system, customers' acceptance of Neoware's line of thin clients and newly introduced options, pricing pressures, rapid technological changes in the industry, growth of the thin client computer market and increased competition. Additional factors which could affect the Company's actual results include, quarterly fluctuations in operating results, general economic conditions affecting the demand for computer products, the timing of significant orders, failure to reduce product costs or maintain quality, delays in the receipt of key components, seasonal patterns of spending by customers and the outcome of various litigation. The Company does not undertake to update any forward-looking statements made herein. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On March 11, 1998, a complaint entitled Cerrato, Inc. v. Neoware Systems, Inc., 98 Civ. 1748 (JSM), was filed in the United States District Court for the Southern District of New York, naming as defendants the Company, its Chairman, and its former CFO. The Complaint asserts claims under ss. 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 promulgated thereunder, and common law. The complaint, which was filed as a purported class action on behalf of purchasers of the Company's common stock during the period from June 15, 1996 through August 15, 1997, alleges, among other things, that the defendants made misrepresentations related to plans for various potential acquisitions by a subsidiary of the company and a spin-off. A First Amended Complaint ("FAC") was filed on or about May 1, 1998. The FAC adds claims on behalf of a second purported class -- purchasers of the Company's stock from November 13, 1997 through May 1, 1998 -- related to the Company's announcement, on April 30, 1998, that it would be restating certain financial results previously reported for the first two quarters of fiscal year 1998. Page 12 Thereafter, four separate purported securities class actions: Galitzer v. Neoware Systems, Inc., 98CV2582 (BWK), Pollison v. Neoware Systems, Inc., 98CV2879 (BWK), Tuchman v. Neoware Systems, Inc., 98CV2868 (BWK), and Grubin v. Neoware Systems, Inc., 98CV3651 (BWK), were filed in the United States District Court for the Eastern District of Pennsylvania (the "Pennsylvania actions"). The Pennsylvania actions name some of the same individual defendants as the FAC, as well as certain additional directors and officers, and alleges violations of ss.ss. 10(b) and 20(a) of the Exchange Act and Rule 10b-5 based on factual allegations similar to those added to the New York action in the FAC on behalf of a purported class of purchasers of the Company's securities between October 30, 1997 and April 30, 1998. The Pennsylvania actions have been consolidated under the heading In re Neoware Systems, Inc. Securities Litigations, Master File No. 98-CV-2582, lead co-plaintiffs and counsel have been appointed, and the consolidated complaint and motion for class certification have been filed. On October 15, 1998, a Stipulation and Order was entered by the United States District Court for the Southern District of New York appointing lead counsel and counsel for the two purported classes identified in the FAC, and reflecting plaintiffs' intent to consolidate the action with the cases pending in Pennsylvania. Defendants' time to respond to the complaints in the actions and the class certification motion filed in Pennsylvania has not yet expired. The Company disputes the validity of these claims and intends to defend the cases vigorously. In May 5, 1998, a complaint was filed in the Court of Common Pleas of Montgomery County against the Company by Development Concepts, Inc. The complaint asserts claims for common law breach of contract, fraud, misrepresentation, breach of warranty and violations of the federal Lanham Act arising primarily from the parties' contractual relationships. The complaint seeks an indeterminate amount of monetary damages in excess of $1,500,000. On October 29, 1998, the Company filed its Answer and Counterclaim to the Complaint asserting claims for breach of contract, unjust enrichment, unfair competition and misappropriation of trade secrets. The Counterclaim demands injunctive and monetary relief in excess of $180,000. The Company disputes the validity of Development Concepts, Inc.'s claims and intends to both defend these claims and pursue its own counterclaims vigorously. Management does not anticipate that resolution of the pending litigation, either separately or in the aggregate, will have a material effect on the Company's financial position or results of operations. This is a forward-looking assessment, which may change as the cases develop. While management may reassess this from time to time, it does not undertake to do so on any regular basis. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.2 Bylaws (Amended as of October 16, 1998) (b) Reports on Form 8-K: None Page 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. NEOWARE SYSTEMS, INC. Date: November 16, 1998 By: /S/ EDWARD C. CALLAHAN, JR. ----------------------------- Edward C. Callahan, Jr., President and Chief Executive Officer Date: November 16, 1998 By: /S/ EDWARD T. LACK, JR. ------------------------------------ Edward T. Lack, Jr., Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) Page 14 EX-3 2 EXHIBIT 3.2 Exhibit 3.2 BYLAWS OF NEOWARE SYSTEMS, INC. ARTICLE ONE STOCKHOLDERS SECTION 1.1 Annual Meetings. An annual meeting of stockholders to elect directors and transact such other business as may properly be presented to the meeting shall be held on such date and at such place as the Board of Directors may from time to time fix, and if that day shall be a legal holiday in the jurisdiction in which the meeting is to be held, then on the next day not a legal holiday or as soon thereafter as may be practical as determined by the Board of Directors. SECTION 1.2 Special Meetings. A special meeting of stockholders may be called at any time by the Chairman of the Board, by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board (as defined below) or by the Secretary at the direction of a majority of the voting power of all the then outstanding shares of the voting stock, voting together as a single class upon receipt of a written request to do so specifying the matter or matters, appropriate for action at such a meeting. Any such meeting shall be held at such time and at such place, within or without the State of Delaware, as shall be determined by the body or person calling such meeting and as shall be stated in the notice of such meeting. The Whole Board shall mean the total number of directors which the Corporation would have if there were no vacancies. SECTION 1.3 Notice of Meeting. For each meeting of stockholders written notice shall be given stating the place, date and hour and, in the case of a special meeting, the purpose or purposes for which the meeting is called and, if the list of stockholders required by Section 1.9 is not to be at such place at least 10 days prior to the meeting, the place where such list will be. Except as otherwise provided by Delaware law, written notice of any meeting shall be given not less than 10 or more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice shall be deemed to be given when deposited in United States mail, postage prepaid, directed to stockholder at his address as it appears on the records of the Corporation. SECTION 1.4 Quorum. Except as otherwise required by Delaware law or the Certificate of Incorporation, the holders of record of a majority of the shares of stock entitled to be voted present in person or represented by proxy at a meeting shall constitute a quorum for the transaction of business at the meeting, but in the absence of a quorum the holders of record present or represented by proxy at such meeting may vote to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is obtained. At any such adjourned session of the meeting at which there shall be present or represented the holders of record of the requisite number of shares, any business 'nay be transacted that might have been transacted at the meeting as originally called. SECTION 1.5 Chairman and Secretary at Meeting. At each meeting of stockholders the President, or in his absence the person designated in writing by the President, or if no person is designated, then a person designated by the Board of Directors, shall preside as chairman of the meeting; if no person is so designated, then the meeting shall choose a chairman by plurality vote. The Secretary, or in his absence a person designated by the chairman of the meeting, shall act as secretary of the meeting. SECTION 1.6 Voting; Proxies. Except as otherwise provided by Delaware law or the Certificate of Incorporation, and subject to the provisions of Section 1.10: (a) Each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of capital stock held by him. (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. (c) Directors shall be elected by a plurality vote. (d) Each matter, other than election of directors, properly presented to any meeting shall be decided by a majority of the votes cast on the matter. (e) Election of directors and the vote on any other matter presented to a meeting shall be by written ballot only if so ordered by the chairman of the meeting or if so requested by any stockholder present or represented by proxy at the meeting entitled to vote in such election or on such matter, as the case may be. SECTION 1.7 Adjourned Meetings. A meeting of stockholders may be adjourned to another time or place as provided in Section 1.4 or 1.6(d). Unless the Board of Directors fixes a new record date, stockholders of record for an adjourned meeting shall be as originally determined for the meeting from which the adjournment was taken. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote. At the adjourned meeting any business may be transacted that might have been transacted at the meeting as originally called. SECTION 1.8 Consent of Stockholders in Lieu of Meeting. Any action that may be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Notice of the taking of such action shall be given promptly to each stockholder that would have been entitled to vote thereon at a meeting of stockholders and that did not consent thereto in writing. SECTION 1.9 List of Stockholders Entitled to Vote. At least 10 days before every meeting of stockholders a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared and shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. Such list shall be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. 2 SECTION 1.10 Fixing of Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 or less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and the record date for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 1.11 Stockholder Proposals. Nominations by stockholders of persons for election to the Board of Directors of the Corporation may be made at an annual meeting in compliance with Section 2.12 hereof. To be properly brought before an annual meeting, all other business must: (a) have been specified in the written notice of the annual meeting (or any supplement thereto) given by the Corporation; (b) be brought before the annual meeting at the direction of the Board of Directors; or (c) have been specified in a written notice (a "Stockholder Notice") given to the Corporation, in accordance with all of the following requirements, by or on behalf of any stockholder of the Corporation. Each Stockholder Notice must be delivered personally to, or be mailed to and received by, the Corporation, addressed to the attention of the Secretary at the principal executive offices of the Corporation no later than the close of business on the date that is forty-five (45) days before the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of stockholders (or, if during the prior year, the Corporation did not hold an annual meeting of stockholders, or if the date of the annual meeting of stockholders has changed more than thirty (30) days from the prior year, then the Stockholder Notice must be received a reasonable time before the Corporation mails its proxy materials for the current year). Each Stockholder Notice shall set forth a general description of each item of business proposed to be brought before the annual meeting of stockholders, the name and address of the stockholder proposing to bring such item of business before the meeting, the number of shares of the Corporation which are beneficially owned by the stockholder, and any material interest of the stockholder in such business. ARTICLE TWO DIRECTORS SECTION 2.1 Number; Term of Office; Qualifications; Vacancies. The number of directors that shall constitute the whole Board of Directors shall be five, which number may be changed from time to time as determined by action of the Board of Directors taken by the affirmative vote of a majority of the whole Board of Directors. Directors shall be elected at the annual meeting of stockholders to hold office, subject to Sections 2.2 and 2.3, until the next annual meeting of stockholders and until their respective successors are elected and qualified. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director, and the directors so chosen shall hold office, subject to Sections 2.2 and 2.3, until the next annual meeting of stockholders and until their respective successors are elected and qualified. 3 SECTION 2.2 Resignation. Any director of the Corporation may resign at any time by giving written notice of such resignation to the Board of Directors, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if no time be specified, upon receipt thereof by the Board of Directors or one of the above-named officers; and, unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. When one or more directors shall resign from the Board of Directors effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in these Bylaws in the filling of other vacancies. SECTION 2.3 Removal. Any one or more directors may be removed, with or without cause, by the vote or written consent of the holders of a majority of the shares entitled to vote at an election of directors, or by the Board of Directors. SECTION 2.4 Regular and Annual Meetings; Notice. Regular meetings of the Board of Directors shall be held at such time and at such place, within or without the State of Delaware, as the Board of Directors may from time to time prescribe. No notice need be given of any regular meeting, and a notice, if given, need not specify the purposes thereof. A meeting of the Board of Directors may be held without notice immediately after an annual meeting of stockholders at the same place as that at which such meeting was held. SECTION 2.5 Special Meetings; Notice. A special meeting of the Board of Directors may be called at any time by the Board of Directors, its Chairman, the Executive Committee, the President or any person acting in the place of the President and shall be called by any one of them or by the Secretary upon receipt of a written request to do so specifying the matter or matters, appropriate for action at such a meeting, proposed to be presented at the meeting and signed by at least two directors. Any such meeting shall be held at such time and at such place, within or without the State of Delaware, as shall be determined by the body or person calling such meeting. Notice of such meeting stating the time and place thereof shall be given (a) by deposit of the notice in the United States mail, first class, postage prepaid, at least two days before the day fixed for the meeting addressed to each director at his address as it appears on the Corporation's records or at such other address as the director may have furnished the Corporation for that purpose, or (b) by delivery of the notice similarly addressed for dispatch by telegraph, cable or radio or by delivery of notice by telephone or in person, in each case at least 24 hours before the time fixed for the meeting. SECTION 2.6 Chairman of the Board; Presiding Officer and Secretary at Meetings. The Board of Directors may elect one of its members to serve at its pleasure as Chairman of the Board. Each meeting of the Board of Directors shall be presided over by the Chairman of the Board or in his absence by the President, if a director, or if neither is present by such member of the Board of Directors as shall be chosen at the meeting. The Secretary, or in his absence an Assistant Secretary, shall act as secretary of the meeting, or if no such officer is present, a secretary of the meeting shall be designated by the person presiding over the meeting. SECTION 2.7 Quorum. A majority of the whole Board of Directors shall constitute a quorum for the transaction of business, but in the absence of a quorum a majority of those present (or if only one be present, then that one) may adjourn the meeting, without notice other than announcement at the meeting, until such time as a quorum is present. Except as otherwise required by the Certificate of Incorporation or the Bylaws, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. 4 SECTION 2.8 Meeting by Telephone. Members of the Board of Directors or any committee thereof may participate in meetings of the Board of Directors or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 2.9 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of such committee. SECTION 2.10 Executive and Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate an Executive Committee and one or more other committees, each such committee to consist of one or more directors as the Board of Directors may from time to time determine. Any such committee, to the extent provided in such resolution or resolutions, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, including the power to authorize the seal of the Corporation to be affixed to all papers that may require it but no such committee shall have such power of authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws; and unless the resolution shall expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Each such committee other than the Executive Committee shall have such name as may be determined from time to time by the Board of Directors. SECTION 2.11 Compensation. Directors shall receive such compensation, including fees and expenses, for their services as directors or as members of a committee of the Board of Directors as shall be determined by a majority of the entire Board. SECTION 2.12 Nomination of Directors. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder of record entitled to vote in the election of directors generally at the record date of the Meeting who complies with the notice procedures set forth in this Section 2.12 may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intention to make such nomination or nominations has been delivered personally to, or been mailed to and received by the Corporation at the principal executive offices of the Corporation addressed to the attention of the Secretary, no later than the close of business on the date that is forty-five (45) days before the date on which the Corporation first mailed its proxy materials for the prior year's annual meeting of stockholders (or, if during the prior year the Corporation did not hold an annual meeting of stockholders or if the date of the meeting has been changed more than thirty (30) days from the prior year, the notice must have been received a reasonable time before the Corporation mails its proxy materials for the current year). Each such notice shall set forth: (a) the name and address of the stockholder intending to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder intends to appear in person or by proxy at the annual meeting of stockholders to nominate the person or person or persons specified in the notice; (c) the address and principal occupation for the past five (5) years of each nominee and such other information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, had proxies been solicited with respect to such nominee by management of the Corporation; and (d) the written consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the Meeting may declare invalid any nomination not made in com7pliance with the foregoing procedure. 5 ARTICLE THREE OFFICERS SECTION 3.1 Election; Qualification. The officers of the Corporation shall be a Chairman of the Board, President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall be selected by the Board of Directors. The Board of Directors may elect a Controller, one or more Assistant Secretaries, one or more Assistant Treasurers, one or more Assistant Controllers and such other officers as it may from time to time determine. Two or more offices may be held by the same person. SECTION 3.2 Term of Office. Each officer shall hold office from the time of his election and qualification to the time at which his successor is elected and qualified, unless he shall die or resign or shall be removed pursuant to Section 3.4 at any time sooner. SECTION 3.3 Resignation. Any officer of the Corporation may resign at any time by giving written notice of such resignation to the Board of Directors, the President or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if no time be specified, upon receipt thereof by the Board of Directors or one of the above-named officers; and, unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.4 Removal. Any officer may be removed at any time, with or without cause, by the vote of a majority of the Whole Board. SECTION 3.5 Vacancies. Any vacancy however caused in any office of the Corporation may be filled by the Board of Directors. SECTION 3.6 Compensation. The compensation of each officer shall be such as the Board of Directors may from time to time determine. SECTION 3.7 Chairman of the Board. The Chairman of the Board shall be the chairman of all meetings of the Board of Directors. SECTION 3.8 President. The President shall be the chief executive officer of the Corporation and shall have general charge of the business and affairs of the Corporation, subject however to the right of the Board of Directors to confer specified powers on officers and subject generally to the direction of the Board of Directors and the Executive Committee, if any. SECTION 3.9 Vice President. Each Vice President shall have such powers and duties as generally pertain to the office of Vice President and as the Board of Directors or the President may from time to time prescribe. During the absence of the President or his inability to act, the Vice President, or if there shall be more than one Vice President, then that one designated by the Board of Directors, shall exercise the powers and shall perform the duties of the President, subject to the direction of the Board of Directors and the Executive Committee, if any. 6 SECTION 3.10 Secretary. The Secretary shall keep the minutes of all meetings of stockholders and of the Board of Directors. He shall be custodian of the corporate seal and shall affix it or cause it to be affixed to such instruments as require such seal and attest the same and shall exercise the powers and shall perform the duties incident to the office of Secretary, subject to the direction of the Board of Directors and the Executive Committee, if any. SECTION 3.11 Other Officers. Each other officer of the Corporation shall exercise the powers and shall perform the duties incident to his office, subject to the direction of the Board of Directors and the Executive Committee, if any. ARTICLE FOUR CAPITAL STOCK SECTION 4.1 Stock Certificates. The interest of each holder of stock of the Corporation shall be evidenced by a certificate or certificates in such form as the Board of Directors may from time to time prescribe. Each certificate shall be signed by or in the name of the Corporation by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. Any or all the signatures appearing on such certificate or certificates may be a facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 4.2 Transfer of Stock. Shares of stock shall be transferable on the books of the Corporation pursuant to applicable law and such rules and regulations as the Board of Directors shall from time to time prescribe. SECTION 4.3 Holders of Record. Prior to due presentment for registration of transfer the Corporation may treat the holder of record of a share of its stock as the complete owner thereof exclusively entitled to vote, to receive notifications and otherwise entitled to all rights and powers of a complete owner thereof, notwithstanding notice to the contrary. SECTION 4.4 Lost, Stolen, Destroyed or Mutilated Certificates. The Corporation shall issue a new certificate of stock to replace a certificate theretofore issued by it alleged to have been lost, destroyed or wrongfully taken, if the owner or his legal representative (i) requests replacement, before the Corporation has notice that the stock certificate has been acquired by a bona fide purchaser; (ii) files with the Corporation a bond sufficient to indemnify the Corporation against any loss or destruction of any such stock certificate or the issuance of any such new stock certificate; and (iii) satisfies such other terms and conditions as the Board of Directors may from time to time prescribe. 7 ARTICLE FIVE MISCELLANEOUS SECTION 5.1 Indemnity. (a) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation, as a director, officer or employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) and in the manner provided in the Certificate of Incorporation of the Corporation and as otherwise permitted by the Delaware General Corporation Law. SECTION 5.2 Waiver of Notice. Whenever notice is required by the Certificate of Incorporation, the Bylaws or any provision of the Delaware General Corporation Law, a written waiver thereof, signed by the person entitled to notice, whether before or after the time required for such notice, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver or notice. SECTION 5.3 Fiscal Year. The fiscal year of the Corporation shall start on such date as the Board of Directors shall from time to time prescribe. SECTION 5.4 Corporate Seal. The corporate seal shall be in such form as the Board of Directors may from time to time prescribe, and the same may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE SIX AMENDMENT OF BYLAWS SECTION 6.1 Amendment. The Bylaws may be altered, amended or repealed by the stockholders or by the Board of Directors by a majority vote. 8 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 3-MOS JUN-30-1999 JUN-30-1998 JUL-01-1998 JUL-01-1997 SEP-30-1998 SEP-30-1997 423,840 1,302,984 0 0 2,538,750 4,945,667 219,014 168,710 2,840,162 3,119,043 7,249,592 10,861,643 1,750,203 1,749,268 1,178,631 1,112,854 9,307,799 13,021,393 3,427,074 6,180,319 0 0 0 0 0 0 6,264 6,264 5,874,461 6,834,810 9,307,799 13,021,393 2,179,293 5,630,992 2,179,293 5,630,992 1,770,903 4,139,161 1,770,903 4,139,161 1,367,075 1,887,728 0 0 14,690 93,538 (973,375) (489,435) 0 (154,172) 0 0 0 0 0 0 0 0 (973,375) (335,263) (.16) (.06) (.16) (.06)
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