-----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, CdyYRz3lxqgjXwRnHWQfa3v/rLjD0eEjsZ5lUJn9scJ/tkWhBroBDweIWilSq0fx rpeTZpRosuvEUnN+XbF01Q== 0000950116-01-500178.txt : 20010516 0000950116-01-500178.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950116-01-500178 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1635110 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 ten-q.txt 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 March 31, 2001 _____ 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 April 24, 2001, there were 10,276,163 outstanding shares of the Registrant's Common Stock. 1 NEOWARE SYSTEMS, INC. INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets: March 31, 2001 and June 30, 2000 3 Consolidated Statements of Operations: Three and Nine Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows: Nine Months Ended March 31, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2 NEOWARE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS March 31, 2001 June 30, 2000 -------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 13,672,352 $ 13,831,792 Accounts receivable, net 2,642,369 2,068,230 Inventories 475,584 1,119,844 Prepaid expenses and other 175,260 249,196 Notes receivable 14,286 726,072 ------------ ------------ Total current assets 16,979,951 17,995,134 Property and equipment, net 172,349 231,933 Notes receivable 78,216 78,216 Capitalized and purchased software, net 224,068 363,096 ------------ ------------ $ 17,454,584 $ 18,668,379 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 620,800 $ 1,153,972 Accrued expenses 1,081,391 602,641 Deferred revenue 333,930 434,686 ------------ ------------ Total current liabilities 2,036,121 2,191,299 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - - Common stock 10,277 10,275 Additional paid-in capital 24,370,849 24,369,648 Treasury stock (100,000) - Accumulated deficit (8,862,663) (7,902,843) ------------ ------------ Total stockholders' equity 15,418,463 16,477,080 ------------ ------------ $ 17,454,584 $ 18,668,379 ============ ============ 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, 2001 2000 2001 2000 --------- --------- --------- --------- Net revenues $ 4,911,167 $ 2,520,727 $ 12,333,573 $ 7,840,093 Cost of revenues 3,229,790 2,131,923 8,480,431 6,312,377 ----------- ----------- ------------ ------------ Gross profit 1,681,377 388,804 3,853,142 1,527,716 ----------- ----------- ------------ ------------ OPERATING EXPENSES: Sales and marketing 740,200 359,448 2,215,976 980,069 Research and development 258,293 138,860 618,843 480,065 General and administrative 574,561 454,232 1,623,406 1,329,921 Acquisition costs - 39,942 161,038 445,987 ----------- ----------- ------------ ------------ Operating expenses 1,573,054 992,482 4,619,263 3,236,042 ----------- ----------- ------------ ------------ Operating income (loss) 108,323 (603,678) (766,121) (1,708,326) Impairment charge (812,000) - (812,000) - Interest income, net 207,929 40,183 618,301 86,946 ----------- ----------- ------------ ------------ Net (loss) income $ (495,748) $ (563,495) $ (959,820) $ (1,621,380) =========== =========== ============ ============ Basic and diluted loss per share $ (0.05) $ (0.08) $ (0.09) $ (0.25) =========== =========== ============ ============ Weighted average number of shares used in basic and diluted loss per share computation 10,176,060 6,872,634 10,242,657 6,493,581 =========== =========== ============ ============
The accompanying notes are an integral part of these financial statements. 4 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended Nine Months Ended March 31, March 31, 2001 2000 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (959,820) $ (1,621,380) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities- Provision for inventory obsolescence - 130,000 Depreciation and amortization 262,101 434,340 Changes in operating assets and liabilities- (Increase) decrease in: Accounts receivable (574,139) 816,099 Inventories 644,260 213,218 Prepaid expenses and other 73,936 214,887 Increase (decrease) in: Accounts payable (533,172) (605,790) Accrued expenses 478,750 (283,332) Deferred revenue (100,756) (33,474) ------------ ------------ Net cash (used in) provided by operating activities (708,840) (735,432) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (61,966) (7,339) Purchase of treasury stock (100,000) - Capitalized software (1,523) (124,630) ------------ ------------ Net cash (used in) provided by investing activities (163,489) (131,969) CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in notes receivable 711,686 - Exercise of stock options 1,203 264,757 Exercise of warrants - 8,366,766 Repayments under line of credit - (143,000) ------------ ------------ Net cash provided by (used in) financing activities 712,889 8,488,523 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (159,440) 7,621,122 ------------ ------------ CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,831,792 1,470,906 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,672,352 $ 9,092,028 ============ ============ SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 5,555 $ 14,372 ============ ============
The accompanying notes are an integral part of these financial statements. 5 NEOWARE SYSTEMS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Neoware Systems, Inc. and Subsidiaries (the "Company") have been prepared in 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 nine-month period ended March 31, 2001 are not necessarily indicative of results expected for the full year. These financial statements 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. 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 March 31, 2001 and 2000 were $190,000 and $164,000, respectively. Accounts receivable relating to "bill and hold" transactions were $190,000 and zero at March 31, 2001 and 2000, respectively. The Company also licenses its software products to customers for installation on the customers' hardware platforms. Such license fee revenue is recognized when a formal arrangement exists, delivery of the product has occurred, the license fee is deemed fixed or determinable and collectibility is probable. Product warranty costs and an allowance for sales returns are accrued at the time revenues are recognized. The Company offers customers the opportunity to contract for extended warranty, upgrades and technical support at an additional cost. The revenue related to these services is recognized ratably over the service period, generally ranging from one to three years. Net revenues from two customers were 13.6 % and 12.5% of total net revenues for the three months ended March 31, 2001 and net revenues from one customer were 15.0% of total net revenues for the nine months ended March 31, 2001. At March 31, 2001, the Company had receivables from these two customers of approximately $500,000 and $ 350,000, respectively. Net revenues from one customer amounted to 11.3% of total net revenues for the three months ended March 31, 2000. No individual customer accounted for 10% or more of revenues for the nine months ended March 31, 2000. 6 3. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method and consisted of the following: March 31, June 30, 2001 2000 -------- ---------- Purchased components and subassemblies $155,636 $ 584,303 Finished goods 319,948 535,541 -------- ---------- $475,584 $1,119,844 ======== ========== 4. NOTES RECEIVABLE In October 1997, the Company merged ITC, a wholly-owned subsidiary, into Broadreach Consulting, Inc. in exchange for a 2% stock interest in Broadreach, $300,000 in cash and $700,000 under a note with interest at 8%. During fiscal 1999, the Company sold its 2% interest in Broadreach for $406,930. During the three months ended March 31, 2001, as a result of current conditions affecting Broadreach and Broadreach's industry (the technology consulting sector), the Company recorded an impairment reserve of $812,000 related to the note which represents the original note amount plus outstanding accrued interest. Any future collection of this outstanding obligation will be recorded as a gain in the period of collection. During April 2000, the Company entered into note agreements with two of its officers in the aggregate of $104,288 in order to provide a portion of funds required for the exercise by the officers of the warrants to purchase the Company's common stock which they held. The notes are repayable in equal installments over four years and bear interest at an annual rate of 8%. 5. LINE OF CREDIT The Company has a line of credit agreement with a bank which provides for borrowings up to $2,000,000 subject to certain limitations, as defined. The line of credit matures on June 30, 2001. Borrowings under the agreement bear interest at the bank's prime rate (8% at March 31, 2001) plus 1/2%. At March 31, 2001 and June 30, 2000, there were no borrowings under the line. The line of credit is collateralized by substantially all assets of the Company. The line of credit agreement requires the Company to maintain certain financial ratios and meet other financial conditions, as defined. 6. EARNINGS PER SHARE The Company applies SFAS No. 128, "Earnings per Share." SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing net 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. Options to purchase 1,625,250 shares of Common Stock at prices ranging from $.84 to $7.13 per share were outstanding at March 31, 2001. These options were not recorded in the diluted earnings per share computation as the effect would be anti-dilutive due to the net loss reported. 7 7. ACQUISITION COSTS During the nine months ended March 31, 2001 and 2000, the Company incurred costs of $161,038 and $445,987, respectively, in connection with two separate proposed acquisitions that were not consummated. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Introduction The Company provides software and solutions to enable Appliance Computing, a new Internet-based computing architecture that is designed to be simpler and easier than today's traditional PC-based computing. The Company's software and management tools power and manage a new generation of smart computing appliances that utilize the benefits of open, industry-standard technologies to create new alternatives to personal computers and a wide variety of proprietary business devices. The Company's products are designed to run local applications for specific vertical markets, plus allow access across a network to Linux servers, multi-user Windows servers running Windows-based applications and the Internet. Computing appliances that run and are managed by the Company's software offer the cost benefits of industry-standard hardware and software, easier installation and lower up-front and administrative costs than proprietary or PC-based alternatives. 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 Ended For the Nine Months Ended March 31 March 31 -------------------------- ------------------------- 2001 2000 2001 2000 ------- ------- ------ ------- Gross profit 34.2 % 15.4 % 31.2 % 19.5 % Operating expenses Sales and marketing 15.1 14.2 17.9 12.5 Research and development 5.2 5.5 5.0 6.1 General and administrative 11.7 18.0 13.2 17.0 Acquisition costs - 1.6 1.3 5.7 ----- ----- ---- ----- Operating income (loss) 2.2 (23.9) (6.2) (21.8) Impairment charge (16.5) - (6.6) - Interest income, net 4.2 1.5 5.0 1.1 ----- ----- ---- ----- Net loss (10.1)% (22.4)% (7.8)% (20.7)% ===== ===== ==== =====
Net revenues for the three and nine month periods ended March 31, 2001 increased to $4,911,167 and $12,333,573 from $2,520,727 and $7,840,093 for the comparable periods in the prior fiscal year. The increase in net revenues was attributable to a substantial increase in the number of computing appliance units shipped resulting from the greater acceptance of the Company's software and computing appliance products. The Company is subject to significant variances in its quarterly operating results because of fluctuations in the timing of the receipt of large orders. 8 The Company's gross profit as a percentage of net revenues for the three and nine month periods ended March 31, 2001 increased to 34.2% and 31.2% from 15.4% and 19.5% for the comparable periods of the prior fiscal year. The increase was attributable to the reduction in the cost of the Company's products resulting from the transition in the early part of the calendar year 2000 to installing its software products on standard hardware components as opposed to the costs associated with the custom manufacture of proprietary hardware products. In addition, fixed overhead costs represented a lower percentage of revenue during the three and nine month periods ended March 31, 2001 than in the prior year. The Company anticipates that its gross profit 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. Operating expenses for the three and nine month periods ended March 31, 2001 were $1,573,054 and $4,619,263, an increase from operating expenses of $992,482 and $3,236,042 in the comparable periods of the prior fiscal year. The increases in operating expenses are a result of the execution of the Company's expansion plan. Sales and marketing expenses for the three and nine month periods ended March 31, 2001 increased to $740,200 and $2,215,976 from $359,448 and $980,069 for the comparable periods in the prior fiscal year. These increases reflect additional sales and marketing personnel, including the opening of four regional sales offices in the US and one in France, increased marketing activities and higher commission expenses due to increased sales. Research and development expenses for the three and nine month periods ended March 31, 2001 increased to $258,293 and $618,843 from $138,860 and $480,065 in the comparable periods in the prior year primarily as a result of an increase in personnel dedicated to software development activities. General and administrative expenses for the three and nine month periods ended March 31, 2001 increased to $574,561 and $1,623,406 from $454,232 and $1,329,921 in the comparable periods in the prior year primarily due to increased personnel and professional services costs. Acquisition costs of $161,038 and $445,987 were incurred during the nine months ended March 31, 2001 and 2000, respectively, which related primarily to professional services fees incurred in connection with two separate proposed acquisitions that were not consummated. Net interest income for the three and nine month periods ended March 31, 2001 increased to $207,929 and $618,301 as compared to $40,183 and $86,946 for the comparable periods in the prior fiscal year. The increases were due to interest earned on the cash generated during the latter part of fiscal 2000 as a result of the exercise of the Company's warrants which amounted to approximately $14,000,000. No income tax benefit was recognized in the three and nine month periods ended March 31, 2001 or 2000 as a result of the net operating losses incurred during the periods since there is no assurance at this time that the benefit of the net operating loss carryforwards will be realized. For the three months ended March 31 2001, the Company's net loss, including the non-operating impairment charge of $812,000, was $495,748 as compared to a net loss of $563,495 for the comparable period in the prior year. The decrease in net loss was attributable to increased revenues, gross margin and interest income, offset by an increase in operating expenses and the non-operating impairment charge. 9 Liquidity and Capital Resources As of March 31, 2001, the Company had net working capital of $14,943,830 composed primarily of cash and cash equivalents, accounts receivable and inventory. The Company's principal sources of liquidity include $13,672,352 of cash and cash equivalents and a $2,000,000 bank line of credit facility with First Union National Bank, all of which was available as of March 31, 2001. The facility is secured by a first lien security interest on all tangible and intangible personal property of the Company and separate pledges of investment property owned by Neoware Investments, Inc. and Neoware Licensing, Inc., each of which is a wholly-owned subsidiary of the Company. The facility agreement requires the Company to maintain certain financial ratios and meet other financial conditions, as defined. Interest on the line of credit facility accrues at the bank's prime rate plus one-half percent (.5%) with all principal and interest due and payable on June 30, 2001. The Company had no borrowings under the line of credit as of March 31, 2001. Cash and cash equivalents decreased by $159,440 during the nine months ended March 31, 2001, primarily as a result of increases in accounts receivable and treasury stock, offset by a decrease in inventories. The Company used cash in operations of $708,840 and $735,432 for the nine months ended March 31, 2001 and 1999, respectively. Cash flow from operations can vary significantly from quarter to quarter depending on the timing of payments from, and shipments to, large customers. The Company expects to fund current operations and other cash expenditures through the use of available cash, cash from operations, funds available under its credit facility and possible new debt or equity sources. Management believes that there will be sufficient funds from current cash, operations and available financing to fund operations and cash expenditures for the foreseeable future, however, the Company must generate net income 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 have a history of losses and may experience losses in the future, which could result in the market price of our common stock declining. We have recently incurred significant net losses, including net losses of $960,000 and $1.8 million for the nine months ended March 31, 2001 and the year ended June 30, 2000, respectively. In addition, we had an accumulated deficit of $8.9 million as of March 31, 2001. We expect to continue to incur significant product development, sales and administrative expenses. Our expenses increased during the latter part of the fiscal year ended June 30, 2000 and during the nine months ended March 31, 2001 reflecting the hiring of additional key personnel and it is anticipated that costs will continue to increase during the year ending June 30, 2001 as we continue to implement our business plan. As a result, we will need to generate significant revenues to generate net income . We cannot be certain that we will be able to generate net income in the future or, if we do so, whether we will be able to sustain it. If we are unable to do so, the market price for our common stock may decline, perhaps substantially. Our financial resources, even with the proceeds raised from the exercise of our common stock purchase warrants, may not be enough for our capital needs, and we may not be able to obtain additional financing. A failure to derive new revenues from our new business plan would likely increase our losses and negatively impact the price of our common stock. 10 Our ability to accurately forecast our quarterly sales is limited, although our costs are relatively fixed in the short term. 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 embedded Linux and Windows-based computing appliances, our ability to accurately forecast our quarterly sales is limited, which makes it difficult to predict the quarterly revenues that we will recognize. In addition, we cannot forecast operating expenses based on historical results, and 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 significantly greater losses. We do not know whether our business will grow rapidly enough to absorb the costs of these employees and facilities. As a result, our quarterly operating results could fluctuate. 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 Appliance Computing 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 manufacturer customers and existing and potential channel partners. We may not succeed in developing and marketing our new computing appliance products, and our operating results may decline as a result. Our business is dependent on customer adoption of Linux and Windows-based computing appliances to perform discrete tasks for corporate and Internet-based computer networks and a decrease in their rates of adoption could adversely affect our ability to increase our revenues. We are dependent on the growing use of computing appliances to perform discrete tasks for corporate and Internet-based networks to increase our revenues. If the role of computing appliances does not increase as we anticipate, or if it in any way decreases, our revenues would not materialize. We believe that our expectations for the growth of the information appliance market may not be fulfilled if customers continue to use general-purpose personal computers. In addition, if corporate information technology organizations do not accept Linux-based or Windows-based operating systems, or if there is a wide acceptance of alternative operating systems that provide enhanced capabilities, our operating results could be harmed. The Appliance Computing 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. In addition, consolidation in this market could result in our clients being absorbed into larger organizations that might not be as receptive to our products. 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 major product upgrades and maintain market share. 11 We may not be able to release major upgrades of our 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 or if Mr. Torvalds or other prominent Linux developers were to no longer work on the Linux kernel, we would have to either rely on another party to further develop the kernel or develop it ourselves. To date, we have optimized our Linux-based operating system based on a version of Red Hat Linux. If we were unable to access Red Hat Linux, we would be required to spend additional time to obtain a tested, recognized version of the Linux kernel from another source or develop our own operating system internally. We cannot predict whether enhancements to the kernel would be available from reliable alternative sources. We could be forced to rely to a greater extent on our own development efforts, which would increase our development expenses and might delay our product release and upgrade schedules. In addition, any failure on the part of the kernel developers to further develop and enhance the kernel could stifle the development of additional Linux-based applications for use with our products. We may not succeed if Linux fragments, and application developers do not develop software for our products. 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 our information 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 and political instability. We have in the past experienced and may in the future experience shortages of, or difficulties in acquiring, these components. If we are unable to buy these components, we will not be able to deliver our products to our customers which will negatively impact our revenue and operating results. Because we rely on channel partners to sell our products, our revenues could be negatively impacted if our existing channel partners do not continue to purchase products from us. We cannot be certain that we will be able to attract channel partners that market our products effectively or provide timely and cost-effective customer support and service. None of our current channel partners is obligated to continue selling our products nor to sell our new products. We cannot be certain that any channel partner will continue to represent our products or that our channel partners will devote a sufficient amount of effort and resources to selling our products in their territories. We need to expand our direct and indirect sales channels, and if we fail to do so, our growth could be limited. We do not have a large consulting staff, and our revenues may suffer if customers demand extensive consulting or other support services. Many of our competitors offer extensive consulting services in addition to products. If we introduced a product that required extensive consulting services for installation and use or if our customers wanted to purchase from a 12 single vendor a menu of items that included extensive consulting services, we would be required to change our business model. We would be required to hire and train consultants, outsource the consulting services or enter into a joint venture with another company that could provide those services. If these events were to occur, our future profits would likely suffer because customers would choose another vendor or we would incur the added expense of hiring and retaining consulting personnel. We may not be able to compete effectively against other providers as a result of their greater financial resources and brand awareness. In the market for computing appliances, we face significant competition from larger companies who have greater financial resources and name recognition than we do. Increased competition may negatively affect our business and future operating results by leading to price reductions, higher selling expenses or a reduction in our market share. Our future competitive performance depends on a number of factors, including our ability to: o continually develop and introduce new products and services with better prices and performance than offered by our competitors; o offer a wide range of products; and o offer high-quality products and services. If we are unable to offer products and services that compete successfully with the products and services offered by our competitors, our business and our operating results would be harmed. In addition, if in responding to competitive pressures, we are forced to lower the prices of our products and services and we are unable to reduce our costs, our business and operating results would be harmed. Computing appliance products are subject to rapid technological change due to changing operating system software and network hardware and software configurations, and our products could be rendered obsolete by new technologies. The computing appliance market is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. Our products could be rendered obsolete if products based on new technologies are introduced or new industry standards emerge. We may not be able to preserve the value of our products' intellectual property because we do not have any patents and other vendors could challenge our other intellectual property rights. Our products will be differentiated from those of our competitors by our internally developed technology that is incorporated into our products. If we fail to protect our intellectual property, other vendors could sell products with features similar to ours, and this could reduce demand for our products, which would harm our operating results. We may not be able to attract software developers to bundle their products with our information appliances. 13 Our computing appliances include our own software, plus software from other companies for specific vertical markets. If we are unable to attract software developers, and are unable to include their software in our products, we may not be able to offer our computing appliances for certain important target markets, and our financial results will suffer. Our embedded Linux software is based upon the open-sourced Linux operating system, and we do not expect to retain ownership of our enhancements to this operating system. The Linux operating system is freely available software that is provided under a software license requiring that modifications to the Linux operating system (as opposed to the Company's proprietary software) be made freely available to other software developers. As a result, we do not intend to attempt to protect the intellectual property related to changes that we make to the Linux operating system. Providing these changes to other software developers may allow other companies to offer products which are similar to ours, increasing competition for our products. In order to grow our revenues, we will need to hire additional personnel, including software engineers. In order to develop and market our line of computing appliances, we must hire additional software engineers as well as marketing and sales personnel. Competition for employees with these skills is severe and we may experience difficulty in attracting suitably qualified people. Any future growth we 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 slow our product development processes. If our expanded European operations are not successful, our business could be substantially harmed. We have recently expanded our European operations and expect that those operations will grow to account for a significant amount of sales. Our European operations may be affected by general economic and political conditions in those countries and currency exchange rate fluctuations, which could affect demand for our products. In addition, changes to and compliance with foreign laws may increase our cost of doing business in these jurisdictions. 14 Errors in our products could harm our business and our operating results. Because our computing appliance products are complex, they could contain errors or bugs that can be detected at any point in a product's life cycle. Although many of these errors may prove to be immaterial, any of these errors could be significant. Detection of any significant errors may result in: o the loss of or delay in market acceptance and sales of our products; o diversion of development resources; o injury to our reputation; or o increased maintenance and warranty costs. These problems could harm our business and future operating results. Product errors or delays could be material, including any product errors or delays associated with the introduction of new products. Occasionally, we have warranted that our products will operate in accordance with specified customer requirements. If our products fail to conform to these specifications, customers could demand a refund for the purchase price or assert claims for damages. Moreover, because our products are used in connection with critical distributed computing systems services, we may receive significant liability claims if our products do not work properly. Our agreements with customers typically contain provisions intended to limit our exposure to liability claims. However, these limitations may not preclude all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any such claims, whether or not successful, could seriously damage our reputation and our business. 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 acceptance of the Company's appliance computing products, the ease and simplicity of the Company's products, future revenues and operating results, the Company's competitive position, the reduction of the cost of producing the Company's products, the funding of future operations, the Company's growth strategy and the development of new software 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" 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 appliance computing market, risks associated with foreign operations, and increased competition. These and other risks are detailed from time to time in Neoware's periodic reports filed with the Securities and Exchange Commission, including, but not limited to its Annual Report on Form 10-K for the year ended June 30, 2000. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 6. Exhibits and Reports on Form 8-K None 16 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 14, 2001 By: /S/ MICHAEL G. KANTROWITZ ------------------------------------- Michael G. Kantrowitz President and Chief Executive Officer Date: May 14, 2001 By: /S/ VINCENT T. DOLAN ------------------------------------- Vincent T. Dolan Vice President-Finance/Administration (Principal Accounting Officer and Principal Financial Officer) 17 ARTICLE 5 QUARTERLY 9 MOS. 9 MOS. FISCAL YEAR END JUN-30-2001 JUN-30-2000 PERIOD END MARCH 31, 2001 MARCH 31, 2000 CASH 13,672,352 13,831,792 SECURITIES 0 0 RECEIVABLES 2,801,417 2,193,639 ALLOWANCES (159,048) (125,409) INVENTORY 475,584 1,119,844 CURRENT-ASSETS 16,979,951 17,995,134 PP&E 172,349 231,933 DEPRECIATION 262,101 434,340 TOTAL ASSETS 17,454,584 18,668,379 CURRENT-LIABILITIES 2,036,121 2,191,299 BONDS 0 0 PREFERRED-MANDATORY 0 0 PREFERRED 0 0 COMMON 10,277 10,275 OTHER-SE 15,408,186 16,466,805 TOTAL-LIABILITY-AND-EQUITY 17,454,584 18,668,379 SALES 12,333,573 7,840,093 TOTAL-REVENUES 12,333,573 7,840,093 CGS 8,480,431 6,312,377 TOTAL-COSTS 0 0 OTHER-EXPENSES 4,619,263 3,236,042 LOSS-PROVISION 812,000 0 INTEREST-EXPENSES (618,301) (86,946) INCOME-PRETAX (959,820) (1,621,380) INCOME-TAX 0 0 INCOME-CONTINUING 0 0 DISCONTINUED 0 0 EXTRAORDINARY 0 0 CHANGES 0 0 NET-INCOME (959,820) (1,621,380) EPS-PRIMARY 0 0 EPS-DILUTED 0 0 -----END PRIVACY-ENHANCED MESSAGE-----