10-Q 1 tenq.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, 2003 ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________. Commission File Number: 000-21240 --------- 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 --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes X No --- --- As of May 7, 2003, there were 13,911,447 outstanding shares of the Registrant's Common Stock.
NEOWARE SYSTEMS, INC. INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Consolidated Financial Statements: Consolidated Balance Sheets: March 31, 2003 (unaudited) and June 30, 2002 3 Consolidated Statements of Operations: Three and Nine Months Ended March 31, 2003 and 2002 (unaudited) 4 Consolidated Statements of Cash Flows: Three and Nine Months Ended March 31, 2003 and 2002 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Certifications 24
2 NEOWARE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2003 June 30, 2002 (Unaudited) --------------- ------------- CURRENT ASSETS: Cash and cash equivalents $26,829,821 $17,031,422 Marketable securities - 183,333 Accounts receivable, net 9,315,627 9,520,558 Inventories 1,127,061 1,040,851 Prepaid expenses and other 954,156 551,598 Deferred income taxes 570,455 1,394,864 ----------- ----------- Total current assets 38,797,120 29,722,626 Property and equipment, net 562,542 622,235 Goodwill and other intangibles 11,240,494 11,568,940 Note receivable 254,269 263,732 Deferred income taxes 387,651 173,648 Capitalized software, net 25,679 47,779 ----------- ----------- $51,267,755 $42,398,960 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $3,430,942 $3,111,164 Accrued expenses 2,149,628 2,136,776 Capital lease obligations 67,065 63,037 Deferred revenue 628,331 582,290 ----------- ----------- Total current liabilities 6,275,966 5,893,267 ----------- ----------- Capital lease obligations, non-current portion 151,368 204,131 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - - Common stock 13,870 12,936 Additional paid-in capital 44,114,915 40,291,861 Treasury stock (100,000) (100,000) Accumulated other comprehensive income (13,338) (116,672) Retained earnings (deficit) 824,974 (3,786,563) ----------- ----------- Total stockholders' equity 44,840,421 36,301,562 ----------- ----------- $51,267,755 $42,398,960 =========== ===========
The accompanying notes are an integral part of these financial statements. 3 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended ------------------------------- ------------------------------- March 31, March 31, March 31, March 31, 2003 2002 2003 2002 ----------- --------- ----------- ----------- Net revenues $13,468,117 $8,368,580 $41,698,573 $20,228,442 Cost of revenues 7,227,380 5,061,893 23,216,958 11,862,736 ----------- ---------- ----------- ----------- Gross profit 6,240,737 3,306,687 18,481,615 8,365,706 ----------- ---------- ----------- ----------- Sales and marketing 2,410,840 1,547,448 6,937,260 4,072,802 Research and development 491,981 352,570 1,300,430 1,027,421 General and administrative 1,119,780 761,656 3,002,480 1,945,930 ----------- ---------- ----------- ----------- Operating expenses 4,022,601 2,661,674 11,240,170 7,046,153 ----------- ---------- ----------- ----------- Operating income 2,218,136 645,013 7,241,445 1,319,553 Impairment charge (300,000) - (300,000) - Interest income, net 83,146 60,045 264,081 255,746 ----------- ---------- ----------- ----------- Income before income taxes 2,001,282 705,058 7,205,526 $1,575,299 Income tax expense 720,461 - 2,593,989 - ----------- ---------- ----------- ----------- Net income $1,280,821 $705,058 $4,611,537 $1,575,299 =========== ========== =========== =========== Basic income per share $0.09 $0.06 $0.34 $0.15 =========== ========== =========== =========== Diluted income per share $0.09 $0.06 $0.31 $0.14 =========== ========== =========== =========== Weighted average number of common shares used in basic earnings per share computation 13,724,625 11,175,240 13,485,220 10,573,863 =========== ========== =========== =========== Weighted average number of common shares used in diluted earnings per share computation 14,704,171 12,509,099 14,712,321 11,326,706 =========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. 4 NEOWARE SYSTEMS, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Nine Months Ended Ended March 31, 2003 March 31, 2002 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $4,611,537 $1,575,299 Adjustments to reconcile net income to net cash provided by (used in) operating activities- Impairment of investment 300,000 - Deferred income taxes 2,578,950 - Depreciation and amortization 563,399 331,405 Changes in operating assets and liabilities- (Increase) decrease in: Accounts receivable 204,931 (2,271,440) Inventories (86,210) (127,521) Prepaid expenses and other (415,890) 151,978 Increase (decrease) in: Accounts payable 319,778 635,305 Accrued expenses 12,852 4,790 Deferred revenue 46,041 (96,911) ----------- ---------- Net cash provided by operating activities 8,135,388 202,905 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of NCD ThinSTAR - (4,143,236) Purchase of ACTIV-e Solutions - (194,986) Purchase of intangible assets (46,538) (49,623) Purchases of property and equipment, net (106,623) (88,744) ----------- ---------- Net cash used in investing activities (153,161) (4,476,589) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of bank debt assumed in acquisition - (388,213) Repayments of capital leases (48,735) (18,299) Payment of costs for prior issuance of common stock (122,410) - Exercise of stock options and warrants 1,977,854 135,275 Decrease in note receivable 9,463 30,644 ----------- ---------- Net cash provided by financing activities 1,816,172 (240,593) ----------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 9,798,399 (4,514,777) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,031,422 11,712,535 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $26,829,821 $7,198,258 =========== ========== SUPPLEMENTAL DISCLOSURES: Cash paid for income taxes $79,947 $27,200 Cash paid for interest 25,963 16,190
The accompanying notes are an integral part of these financial statements. 5 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Neoware Systems, Inc. and Subsidiaries (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America. These statements, while unaudited, reflect all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements. The interim results of operations for the three and nine month periods ended March 31, 2003 are not necessarily indicative of results expected for the full year or for any other interim period. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. NEW ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS No. 146, companies will record exit or disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flow. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002. In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 requires companies to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Guarantees in existence at December 31, 2002 are grandfathered for the purposes of recognition and would only need to be disclosed. The Company had no such guarantees as of December 31, 2002 and plans to adopt the initial recognition and measurement provisions of FIN No. 45 for guarantees, if any, issued or modified after December 31, 2002. The Company does not expect the provisions of FIN No. 45 to have a material impact on its consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This Issue addresses the appropriate accounting by vendors for arrangements that will result in the delivery of multiple products, services and/or rights to assets that may occur over a period of time. The Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the provisions of this consensus to have a material impact on its consolidated financial statements. 3. STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" which amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 related to the disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are applicable to interim or annual periods that end after December 15, 2002, and as such have been incorporated below. 6 SFAS No. 123, as amended by SFAS No. 148, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, and provide pro forma net income and earnings per share disclosures for employee stock option grants as if the fair value based method defined in SFAS No. 123 had been applied. The Company continues to apply the provisions of APB No. 25 and provides the pro forma disclosures in accordance with the provisions of SFAS Nos. 123 and 148 to its stock option plans. Under APB Opinion No. 25, the Company has not recorded any stock-based employee compensation cost associated with the Company's stock option plans, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on the net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plans:
Three Months Ended Nine Months Ended March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002 -------------------------------------------------------------------------- Net income As reported $ 1,280,821 $ 705,058 $ 4,611,537 $ 1,575,299 Pro forma $ 829,621 $ 596,898 $ 3,661,137 $ 1,056,899 Basic EPS As reported $ 0.09 $ 0.06 $ 0.34 $ 0.15 Pro forma $ 0.06 $ 0.05 $ 0.27 $ 0.10 Diluted EPS As reported $ 0.09 $ 0.06 $ 0.31 $ 0.14 Pro forma $ 0.06 $ 0.05 $ 0.25 $ 0.09
The fair value of the Company's stock-based awards to employees was estimated at the date of grant using the Black-Scholes option pricing model, assuming an estimated life of five to ten years, no dividends, volatility of 70%, and risk-free interest rates of 3.4%. 4. ACQUISITIONS AND ALLIANCE On December 4, 2001, the Company acquired all of the assets and assumed substantially all of the liabilities of Telcom Assistance Center Corporation, d/b/a ACTIV-e Solutions, a full service Information Technology consulting company in the server-based computing marketplace. The acquisition was accounted for using the purchase method of accounting. The purchase price was payable in cash of $75,000 and, after the adjustments as provided for in the acquisition agreement, an aggregate of 569,727 shares of the Company's newly issued common stock with a market value of $3.24 per share at the date of acquisition. In addition, the Company assumed net liabilities, exclusive of cash acquired of $9,774, of $1,185,693. The aggregate cost of the acquisition was $3,250,913 (including transaction costs of $154,079), which is equal to the excess of the purchase price over the value of the net assets acquired. The entire purchase price has been allocated to goodwill based on management's assessment as required by SFAS No. 141, "Business Combinations". The results of operations subsequent to December 4, 2001 have been included in the accompanying consolidated statement of operations. 7 The following is a summary of the net cash paid for the ACTIV-e Solutions transaction: Cash $ 9,774 Accounts receivable 348,192 Prepaids and other 128,893 Property and equipment 469,034 Goodwill 3,250,913 Bank debt (388,213) Accounts payable (1,124,370) Accrued expenses (164,944) Capital leases (300,485) Deferred revenue (153,800) Fair value of stock issued (1,845,915) ---------- Net cash paid $ 229,079 ============ On January 8, 2002, the Company entered into a worldwide alliance with IBM Corporation under which the Company is the preferred provider of thin client appliance products to IBM and its customers. In addition, the Company licensed from IBM the intellectual property associated with its thin client appliance products. As consideration for these agreements, the Company issued to IBM 375,000 newly issued shares of common stock with a fair market value of $6.26 per share. The fair value of the shares issued of $2,347,500, plus transaction costs of $58,115, has been allocated to intangible assets. Of the total consideration, $1,900,000 has been allocated to acquired distribution agreements, with the remainder of $505,615 allocated to acquired technology. Amortization of the distribution agreements and technology acquired is being recorded on a straight-line basis over five and ten years, respectively. Amortization of $107,500 and $322,500 respectively has been recorded in the accompanying consolidated statements of operations for the three and nine months ended March 31, 2003. A registration statement covering the shares issued in connection with the ACTIV-e acquisition and the IBM alliance was filed on April 3, 2002, and declared effective on June 24, 2002. The agreements with ACTIV-e and IBM provide for limitations on the number of shares which may be sold within the first twelve months after effectiveness of the registration statement for the shares granted to ACTIV-e and within fifteen months of issuance for the shares granted to IBM. On March 26, 2002, the Company acquired the ThinSTAR product line of Network Computing Devices, Inc. (NCD). In addition, the Company entered into an alliance with NCD to grow the worldwide thin client appliance market. The acquisition was accounted for using the purchase method of accounting. The purchase price was payable in cash of $4,189,590 including transaction costs of $189,590, and was allocated to intangible assets. The entire purchase price was allocated to goodwill based on management's assessment as required by SFAS No. 141, "Business Combinations." The results of operations of the ThinSTAR product line have been included in the accompanying consolidated statement of operations from the date of the acquisition. 5. MARKETABLE SECURITIES The Company's marketable equity securities have been classified as "available-for-sale" under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and are reported at their estimated fair value. Unrealized gains or losses are included as a component of accumulated other comprehensive loss, which is reported as a separate component of stockholders' equity. For the three months ended March 31, 2003, the Company recorded an impairment charge of $300,000 in the accompanying consolidated statement of operations to write-off the full cost of its investment in Boundless Corporation, which filed for Chapter 11 bankruptcy protection in March 2003. 8 Accumulated other comprehensive loss includes an unrealized loss on marketable securities of zero and $116,667 at March 31, 2003 and June 30, 2002, respectively. 6. REVENUE RECOGNITION The Company's products include both a hardware and software component. In accordance with Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), software revenue recognition should be followed for products or services where a software element exists, unless the software is incidental to the product being sold. The software has been deemed to be essential to the functionality of the hardware and, therefore, SOP 97-2 has been followed for revenue recognition. Revenue is recognized on product sales when a formal arrangement exists, delivery of the product has occurred or title has transferred, the fee is fixed or determinable and collection is probable. Revenue related to post contract services is recognized with the initial sale as the fee is included with the initial licensing fee, post-contract services are typically for one year or less, the estimated cost of providing such services during the arrangement is deemed insignificant, and unspecified upgrades/enhancements offered during the period historically have been and are expected to continue to be minimal and infrequent. Post contract services for periods in excess of one year sold subsequent to the initial sale are recognized as revenue ratably over the contract period. Revenue from consulting services is recognized upon performance. Product warranty costs and an allowance for sales returns are accrued at the time revenues are recognized. From time to time, customers request delayed shipment, usually because of customer scheduling for systems integration and lack of storage space at a customer's facility during the implementation. In such "bill and hold" transactions, the Company recognizes revenues when the following conditions are met: the equipment is complete, ready for shipment and segregated from other inventory; the Company has no further performance obligations in connection with the completion of the transaction; the commitment and delivery schedule is fixed; the customer requested the transaction be completed on this basis; and the risks of ownership have passed to the customer. For the three months ended March 31, 2003 and 2002, revenues recognized from "bill and hold" transactions for products which had not shipped by March 31, 2003 and 2002 were $114,600 and $142,661, respectively. Accounts receivable relating to "bill and hold" transactions were $114,600 and $142,661 at March 31, 2003 and 2002, respectively. 7. MAJOR CUSTOMERS For the three months ended March 31, 2003, aggregate sales to IBM and one other customer constituted 29% of net revenues. Accounts receivable from these two customers as of March 31, 2003 amounted to $3,391,426. Each of these customers resells the Company's products to individual resellers and/or end-users, none of which contributed sales of more than 10% of the Company's net revenues for the three months ended March 31, 2003. No customer contributed sales exceeding 10% of net revenues for the three months ended March 31, 2002. The percentage of revenue derived from individual distributors, resellers or end-users can vary significantly from quarter to quarter. 9 8. INVENTORIES, NET Inventories, net are stated at the lower of cost or market. Cost is determined by the first-in, first-out method and consists of the following:
March 31, June 30, 2003 2002 ----------- ---------- Purchased components and subassemblies $284,160 $211,131 Finished goods 842,901 829,720 ----------- ---------- $1,127,061 $1,040,851 =========== ==========
9. LINE OF CREDIT The Company has a line of credit agreement with a bank, which provides for borrowing up to $2,000,000 subject to certain limitations, as defined. The line of credit matures on December 31, 2004. Borrowings under the credit agreement bear interest at the Libor Market Index rate plus 2.5% (3.8% at March 31, 2003). At March 31, 2003 and June 30, 2002, there was $2,000,000 available for borrowing under the line. During the three and nine months ended March 31, 2003 and 2002, there were no borrowings under the line. The line of credit is unsecured and requires the Company to maintain a minimum balance of $3,000,000 in cash and cash equivalents with the bank. The Company is in compliance with this condition at March 31, 2003. 10. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the asset-and-liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. During the three and nine months ended March 31, 2003, deferred income taxes increased $214,003 and $1,968,544, respectively, as a result of the income tax benefit realized from the exercise of employee and director stock options. This benefit was recorded as an increase in additional paid-in capital in the accompanying consolidated balance sheet. 11. EARNINGS PER SHARE The Company applies SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities, such as stock options and warrants, into common stock. 10 The following table sets forth the computation of basic and diluted earnings per share:
For the three months ended For the three months ended March 31, March 31, ---------------------------- ---------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net income $1,280,821 $705,058 $4,611,537 $1,575,299 ========== ========== ========== ========== Weighted average shares outstanding: Basic 13,724,625 11,175,240 13,485,220 10,573,863 Effect of dilutive employee stock options 979,546 1,333,859 1,211,691 752,843 Effect of dilutive warrants - - 15,410 - ---------- ---------- ---------- ---------- Diluted 14,704,171 12,509,099 14,712,321 11,326,706 Earnings per common share: Basic $0.09 $0.06 $0.34 $0.15 ========== ========== ========== ========== Diluted $0.09 $0.06 $0.31 $0.14 ========== ========== ========== ==========
For the three and nine months ended March 31, 2003, aggregate stock options of 327,354 and 166,118, respectively, were excluded from the calculation of dilutive earnings per share because their inclusion would have been anti-dilutive. For the three and nine months ended March 31, 2002, aggregate stock options of 103,500 and 367,669, respectively, were so excluded. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Introduction The Company provides software, services and solutions to enable Appliance Computing, a proven Internet-based computing architecture targeted at business customers that is designed to be simpler and easier than traditional PC-based computing. The Company's software and management tools power and manage a new generation of smart thin client appliances that utilize the benefits of open, industry-standard technologies to create new alternatives to personal computers used in business and a wide variety of proprietary business devices. The Company's Eon, Capio and Voyager products are thin client appliances, which are cost-effective alternatives to personal computers used by businesses, and powerful replacements for green-screen terminals. The Company's ThinPC product is software that enables a PC to function as a thin client appliance. Used in conjunction with Citrix MetaFrame or Microsoft Terminal Services, the Company's software and thin client appliances allow users to run Windows-based applications from a server, plus connect to mainframes, midrange systems and the Internet. Unlike personal computers, thin client appliances can be centrally managed and remotely configured, which greatly simplifies administration. The Company has identified critical accounting policies with respect to revenue recognition, accounts receivable, inventories and income taxes. These policies are discussed in the Company's Form 10-K for the year ended June 30, 2002. 11 Results of Operations The following table sets forth, for the periods indicated, certain items from the Company's unaudited consolidated statements of operations as a percentage of net revenues.
For the Three Months For the Nine Months Ended Ended Ended March 31, 2003 March 31, 2002 --------------------- -------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Gross profit 46.3% 39.5% 44.3% 41.4% Operating expenses Sales and marketing 17.9 18.5 16.6 20.1 Research and development 3.6 4.2 3.1 5.1 General and administrative 8.3 9.1 7.2 9.6 ---- ---- ----- ---- Operating income 16.5 7.7 17.4 6.6 Impairment charge (2.3) - (0.7) - Interest income, net 0.6 0.7 0.6 1.2 Income tax expense (5.3) (6.2) ---- ---- ----- ---- Net income 9.5% 8.4% 11.1% 7.8% ===== ==== ===== ====
Net revenues for the three and nine months ended March 31, 2003 increased to $13,468,117 and $41,698,573, respectively, from $8,638,580 and $20,228,442, respectively, for the comparable periods in the prior fiscal year. The increase in net revenues was primarily attributable to increased sales of the Company's Eon, Capio and ThinSTAR computing appliance products, as well as increased sales of software products. The Company's gross profit as a percentage of net revenues for the three and nine months ended March 31, 2003 increased to 46.3% and 44.3%, respectively, compared to 39.5% and 41.4%, respectively, for the comparable periods of the prior fiscal year. The increase is attributable to reductions in the purchase costs of components and third party license fees, an increase in the number of higher margin units sold, and sales of software upgrades to IBM customers and others. In addition, fixed overhead costs represented a lower percentage of revenue during the three and nine months ended March 31, 2003 than in the prior fiscal year. Operating expenses for the three and nine months ended March 31, 2003 declined to 29.8% and 26.9% of net revenues, respectively, from 31.8% and 34.8%, respectively, in the comparable periods of the prior fiscal year as a result of increased sales and controlled increases in expenditures. Operating expenses for the three and nine months ended March 31, 2003 were $4,022,601 and $11,240,170, respectively, an increase of 51.1% and 59.5% from operating expenses of $2,661,674 and $7,046,153, respectively, in the comparable periods of the prior fiscal year as a result of the Company's execution of its growth strategy. These operating expenses consist of the following: Sales and marketing expenses for the three and nine months ended March 31, 2003 were 17.9% and 16.6% of net revenues, respectively, compared to 18.5% and 20.1%, respectively, for the comparable periods in the prior fiscal year. Sales and marketing expenses for the three and nine months ended March 31, 2003 were $2,410,840 and $6,937,260, respectively, an increase of 55.8% and 70.3% from $1,547,448 and $4,072,802, respectively, in the comparable periods in the prior fiscal year. This increase resulted from the hiring of additional sales and marketing personnel for recently opened domestic and international sales offices and from the retention of additional sales and marketing personnel as a result of the ACTIV-e Solutions, ThinSTAR, and IBM transactions, and from the payment of higher commissions due to increased sales. 12 Research and development expenses for the three and nine months ended March 31, 2003 were $491,981 and $1,300,430, respectively, an increase of 39.5% and 26.6% from $352,570 and $1,027,421, respectively, in the comparable periods in the prior year primarily as a result of an increase in personnel dedicated to software development activities resulting from the Company's growth. General and administrative expenses for the three and nine months ended March 31, 2003 were 8.3% and 7.2% of net revenues, respectively, versus 9.1% and 9.6%, respectively, for the comparable periods of the prior fiscal year. General and administrative expenses for the three and nine months ended March 31, 2003 were $1,119,780 and 3,002,480, respectively, an increase of 47.0% and 54.3% from $761,656 and $1,945,930, respectively for the comparable periods in the prior fiscal year due to increased staffing and additional costs as a result of the Company's growth strategy. Net interest income for the three and nine months ended March 31, 2003 was $83,146 and $264,081, respectively, an increase of 38.5% and 3.3% from $60,045 and $255,746, respectively, in the comparable periods in the prior fiscal year. The increase in interest income for the comparable three-month periods is due to the investment of higher cash balances, offset by the effect of lower interest rates. For the three and nine months ended March 31, 2003, the Company recorded income tax expense of $720,461 and $2,593,989, respectively, or 36% of net income. The Company did not record income tax expense for the comparable periods in the prior year due to the availability of net operating loss carryforwards. For the three and nine months ended March 31, 2003, the Company had net income of $1,280,821 and $4,611,537, respectively, including the effect of the non-operating impairment charge of $300,000, as compared to pre-tax net income of $705,058 and $1,575,299, respectively, for the comparable periods in the prior year primarily as a result of increased revenues and gross margin, offset by increases in operating expenses and income tax expense. Liquidity and Capital Resources As of March 31, 2003, the Company had net working capital of $32,521,154 consisting primarily of cash and cash equivalents and accounts receivable. The Company's principal sources of liquidity include $26,829,821 of cash and cash equivalents and a $2,000,000 bank line of credit facility, all of which was available as of March 31, 2003. Interest on the line of credit facility accrues at the Libor Market Index plus 2.5% (3.8% at March 31, 2003) with all principal and interest due and payable on December 31, 2004. The Company had no borrowings under the line of credit during the nine months ended March 31, 2003. Cash and cash equivalents increased by $9,798,399 during the nine months ended March 31, 2003, primarily as a result of net income and the exercise of stock options and warrants in addition to the increase in deferred income taxes, offset by changes in other working capital items due to the growth of the Company. The Company generated cash from operations of $8,135,388 for the nine months ended March 31, 2003, primarily as a result of higher revenues, improved gross margins and the increase in deferred income taxes assets generated from the exercise of stock options. The Company used cash from investing activities of $153,161 for the nine months ended March 31, 2003 primarily as a result of the purchase of property plant and equipment. 13 The Company generated cash from financing activities of $1,816,172 during the nine months ended March 31, 2003 primarily as a result of the exercise of warrants and employee and director stock options, offset by the payment of transaction costs related to the prior issuance of common stock. The Company expects to fund current operations and other cash expenditures through the use of available cash, cash from operations, funds available under its credit facility and other sources of debt or equity financing. Management believes that there will be sufficient funds from current cash, operations and available financing to fund operations and cash expenditures for the foreseeable future; however, the Company may seek additional sources of funding, including equity and/or debt financing, in order to fund potential acquisitions. Additionally, the Company must continue to maintain sustained profitability in order to provide adequate funding for the long term. Factors Affecting the Company and Future Operating Results Our future results may be affected by industry trends and specific risks in our business. Some of the factors that could materially affect our future results include those described below. We may not be able to successfully integrate the acquisitions we have completed and alliance we have entered into as part of our growth strategy, which may materially adversely affect our growth and our operating results. Within the last 24 months, we have made three acquisitions and entered into an alliance with IBM. We have not yet fully integrated some of these acquisitions or fully implemented the alliance. There is no assurance that we will successfully integrate these acquisitions into our business or successfully implement the alliance. In addition, we may be unable to retain key employees or key business relationships of the acquired businesses and integration of the businesses may divert the attention and resources of our management. We cannot assure that we will achieve anticipated revenue and earnings growth as a result of these transactions. Our failure to successfully integrate the acquired businesses into our operations or successfully implement the alliance could have a material adverse effect upon our business, operating results and financial condition. Even if the acquisitions and alliance are successfully integrated, we may not receive the expected benefits of the transactions if we find that the business or alliance does not further our business strategy or that we paid more than what the assets were worth. Managing acquisitions and alliances requires management resources, which may divert our attention from other business operations. As a result, the effects of any completed or future transactions on financial results may differ from our expectations. We experienced significant growth in our business in the past two years due to internal expansion and business acquisitions, and if we do not appropriately manage this growth and any future growth, including the integration of our newly hired employees and executive officers, our business will suffer. Our business has grown during the past two years through both internal expansion and business acquisitions, and has put pressure on our infrastructure, internal systems and managerial resources. The number of our employees increased from 51 employees at March 31, 2001 to 106 employees at March 31, 2003. Our new employees include a number of senior executive officers and other key managerial, technical, sales and marketing personnel. To manage our growth effectively, we must continue to improve and expand our infrastructure, including operating and administrative systems and controls, and continue managing and integrating our personnel in an efficient manner. Our business may be adversely affected if we do not integrate and train our new employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations and customer support organizations, all of which add to the complexity of our organization and increase our operating expenses, which may grow at a faster rate than our sales. In addition, because of the growth of our foreign operations, we now have facilities located in multiple locations, and we have limited experience coordinating a geographically separated organization. Although we have generated operating profits for the past two years, we have a prior history of losses and may experience losses in the future, which could result in the market price of our common stock declining. Although we have generated operating profits in the recent past, we have incurred net losses in prior periods. We expect to continue to incur significant operating expenses. Our operating expenses increased during the three and nine months ended March 31, 2003 reflecting the hiring of additional key personnel as we continue to implement our growth strategy. As a result, we will need to generate significant revenues to maintain profitability. If we do not maintain profitability, the market price for our common stock may decline. Our financial resources may not be enough for our capital and corporate development needs, and we may not be able to obtain additional financing. A failure to derive significant revenues would likely cause us to incur losses and negatively impact the price of our common stock. 14 Our ability to accurately forecast our quarterly sales is limited. although our costs are relatively fixed in the short term and we expect our business to be affected by rapid technological change, which may adversely affect our quarterly operating results. Because of the new and rapidly evolving market for our software and embedded Windows and Linux-based thin client appliances, our ability to accurately forecast our quarterly sales is limited, which makes it difficult to predict the quarterly revenues that we will recognize. In addition, most of our costs are for personnel and facilities, which are relatively fixed in the short term. If we have a shortfall in revenues in relation to our expenses, we may be unable to reduce our expenses quickly enough to avoid losses. As a result, our quarterly operating results could fluctuate. We expect our quarterly revenues and operating results to fluctuate for a number of reasons. Future operating results will continue to be subject to quarterly fluctuations based on a wide variety of factors, including: Linearity- Our quarterly sales have historically reflected a pattern in which a disproportionate percentage of sales occur in the last month of the quarter. This pattern makes prediction of revenues, earnings and working capital for each financial period especially difficult and uncertain and increases the risk of unanticipated variations in quarterly results and financial condition. Significant Orders- We are subject to significant variances in our quarterly operating results because of the fluctuations in the timing of our receipt of large orders. If even a small number of large orders are delayed until after a quarter ends, our operating results could vary substantially from quarter to quarter and net income could be substantially less than expected. There are factors that may affect the market acceptance of our products, some of which are beyond our control, including the following: o the growth and changing requirements of the thin client appliance market; o the quality, price, performance and total cost of ownership of our products; o the availability, price, quality and performance of competing products and technologies; and o the successful development of our relationships with software providers, original equipment manufacturers and existing and potential channel partners. We may not succeed in developing and marketing our software and thin client appliance products and our operating results may decline as a result. Our gross margins can vary significantly, based upon a variety of factors. If we are unable to sustain adequate gross margins we may be unable to reduce operating expenses in the short term, resulting in losses. Our gross margins can vary significantly from quarter to quarter depending on average selling prices, fixed costs in relation to revenue levels and the mix of our business, including the percentage of revenues derived from hardware, software and consulting services. The gross profit margin also varies in response to competitive market conditions as well as periodic fluctuations in the cost of memory and other significant components. The market in which we compete remains very competitive, and although we intend to continue our efforts to reduce the cost of our products, there can be no certainty that we will not be required to reduce prices of our products without compensating reductions in the cost to produce our products in order to increase our market share or to meet competitors' price reductions. 15 Our business is dependent on customer adoption of Windows and Linux-based thin client appliances to perform discrete tasks for corporate and Internet-based computer networks and a decrease in their rates of adoption could adversely affect our ability to increase our revenues. We are dependent on the growing use of thin client appliances to perform discrete tasks for corporate and Internet-based networks to increase our revenues. If the role of thin client appliances does not increase as we anticipate, or if it in any way decreases, our revenues would not materialize. If corporate information technology organizations do not accept Windows or Linux-based embedded operating systems, or if there is a wide acceptance of alternative operating systems that provide enhanced capabilities, our operating results could be harmed. The thin client appliance market in which we compete is new and unpredictable, and if this market does not develop and expand as we anticipate, our revenues may not grow. Because some of our products use embedded versions of Microsoft Windows as their operating system, an inability to license these operating systems on favorable terms could impair our ability to introduce new products and maintain market share. We may not be able to introduce new products on a timely basis because some of our products use embedded versions of Microsoft Windows as their operating system. Microsoft Corporation provides Windows to us, and we do not have access to the source code for certain versions of the Windows operating system. If Microsoft fails to continue to enhance and develop its embedded operating systems, or if we are unable to license these operating systems on favorable terms, our operations may suffer. Because some of our products use Linux as their operating system, the failure of Linux developers to enhance and develop the Linux kernel could impair our ability to release new products and maintain market share. We may not be able to release new products on a timely basis because some of our products use Linux as their operating system. The heart of Linux, the Linux kernel, is maintained by third parties. Linus Torvalds, the original developer of the Linux kernel, and a small group of independent engineers are primarily responsible for the development and evolution of the Linux kernel. If this group of developers fails to further develop the Linux kernel, we would have to either rely on another party to further develop the kernel or develop it ourselves. To date, we have optimized our Linux-based operating system based on a version of Red Hat Linux. If we were unable to access Red Hat Linux, we would be required to spend additional time to obtain a tested, recognized version of the Linux kernel from another source or develop our own operating system internally, which could significantly increase our costs. Because we depend on sole source, limited source and foreign source suppliers for key components, we are susceptible to supply shortages that could prevent us from shipping customer orders on time, if at all, and result in lost sales. We depend upon single source suppliers for some of our thin client appliance products and for several of the components in them. We also depend on limited sources to supply several other industry standard components. We also rely on foreign suppliers which subject us to risks associated with foreign operations such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs, political instability and currency fluctuations. A weakening dollar could result in greater costs to us for our components. 16 We have in the past experienced and may in the future experience shortages of, or difficulties in acquiring, these components. A significant portion of our revenues is derived from the sale of thin client appliances that are bundled with our software. These thin client appliances are produced for us by third parties. If we experience shortages of these products, or of their components, we may not be able to deliver our products to our customers, and our revenues would decline. The Recent Outbreak of SARS in the Asia-Pacific Region and Its Continued Spread Could Harm Our Business. The Asia-Pacific region is experiencing outbreaks of Severe Acute Respiratory Syndrome, or SARS. As a result of these outbreaks, businesses can be shut down temporarily and individuals can become ill or quarantined. A majority of the parts and products that we obtain from outside suppliers are obtained from suppliers in the Asia-Pacific region, and many of our products are manufactured and assembled in China. This could disrupt our ability to manufacture our products and important components for our products as well as cause interruptions and/or delays in our ability to ship components to other locations for continued manufacture and assembly. Any such delays or interruptions could result in delays in our ability to fill orders and have an adverse effect on our results of operation and financial condition. If our manufacturing operations are curtailed because of SARS, we may need to seek alternate sources of supply for manufacturing or other services and alternate sources may be more expensive. Alternate sources may result in delays in shipments to our customers, which would reduce our profitability. If we are unable to continue generating substantial revenues from international sales our business could be adversely affected. Currently, approximately 40 percent of our revenues are derived from international sales. Our ability to sell our products internationally is subject to a number of risks. General economic and political conditions in each country could adversely affect demand for our products and services in these markets. Currency exchange rate fluctuations could result in lower demand for our products or lower pricing resulting in reduced revenue and margins, as well as currency translation losses. Changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business in these jurisdictions. Trade protection measures and import and export licensing requirements subject us to additional regulation and may prevent us from shipping products to a particular market, and increase our operating costs. Because we rely on channel partners to sell our products, our revenues could be negatively impacted if our existing channel partners do not continue to purchase products from us. We cannot be certain that we will be able to attract channel partners that market our products effectively or provide timely and cost-effective customer support and service. None of our current channel partners, including IBM, is obligated to continue selling our products nor to sell our new products. We cannot be certain that any channel partner will continue to represent our products or that our channel partners will devote a sufficient amount of effort and resources to selling our products in their territories. We need to expand our direct and indirect sales channels, and if we fail to do so, our growth could be limited. As a result of our acquisition of the ThinSTAR product line from NCD, we rely on NCD for the distribution of our ThinSTAR products in Europe. If NCD were to discontinue sales of our products or reduce its sales efforts, it could adversely affect our operating results. In addition, there can be no assurance as to the continued viability and financial condition of NCD or our other channel partners, one of which has accounted for more than 10% of our net sales. 17 As a result of our alliance with IBM, we rely on IBM for distribution of our products to IBM's customers. If IBM were to discontinue sales of our products or reduce its sales efforts, it could adversely affect our operating results. We may not be able to effectively compete against other providers as a result of their greater financial resources and brand awareness. In the market for thin client appliances, we face significant competition from larger companies which have greater name recognition than we do. Increased competition may negatively affect our business and future operating results by leading to price reductions, higher selling expenses or a reduction in our market share. Our future competitive performance depends on a number of factors, including our ability to: o continually develop and introduce new products and services with better prices and performance than offered by our competitors; o offer a wide range of products; and o offer high-quality products and services. If we are unable to offer products and services that compete successfully with the products and services offered by our competitors, our business and our operating results would be harmed. In addition, if in responding to competitive pressures, we are forced to lower the prices of our products and services and we are unable to reduce our costs, our business and operating results would be harmed. Thin client appliance products are subject to rapid technological change due to changing operating system software and network hardware and software configurations, and our products could be rendered obsolete by new technologies. The thin client appliance market is characterized by rapid technological change, frequent new product introductions, uncertain product life cycles, changes in customer demands and evolving industry standards. Our products could be rendered obsolete if products based on new technologies are introduced or new industry standards emerge. We may not be able to preserve the value of our products' intellectual property because we do not have any patents and other vendors could challenge our other intellectual property rights. Our products will be differentiated from those of our competitors by our internally developed technology that is incorporated into our products. If we are unable to protect our intellectual property, other vendors could sell products with features similar to ours, and this could reduce demand for our products, which would harm our operating results. We may not be able to attract software developers to bundle their products with our thin client appliances. 18 Our thin client appliances include our own software, plus software from other companies for specific vertical markets. If we are unable to attract software developers, and are unable to include their software in our products, we may not be able to offer our computing appliances for certain important target markets, and our financial results will suffer. In order to continue to grow our revenues, we may need to hire additional personnel. In order to continue to develop and market our line of thin client appliances, we may need to hire additional personnel. Competition for employees is significant and we may experience difficulty in attracting suitably qualified people. Future growth that we may experience will place a significant strain on our management, systems and resources. To manage the anticipated growth of our operations, we may be required to: o improve existing and implement new operational, financial and management information controls, reporting systems and procedures; o hire, train and manage additional qualified personnel; and o establish relationships with additional suppliers and partners while maintaining our existing relationships. We rely on the services of certain key personnel, and those persons' knowledge of our business and technical expertise would be difficult to replace. Our products and technologies are complex and we are substantially dependent upon the continued service of our existing personnel. The loss of any of our key employees could adversely affect our business and profits and slow our product development processes. Errors in our products could harm our business and our operating results. Because our software and thin client appliance products are complex, they could contain errors or bugs that can be detected at any point in a product's life cycle. Although many of these errors may prove to be immaterial, any of these errors could be significant. Detection of any significant errors may result in: o the loss of or delay in market acceptance and sales of our products; o diversion of development resources; o injury to our reputation; or o increased maintenance and warranty costs. These problems could harm our business and future operating results. Occasionally, we have warranted that our products will operate in accordance with specified customer requirements. If our products fail to conform to these specifications, customers could demand a refund for the purchase price or assert claims for damages. 19 Moreover, because our products are used in connection with critical distributed computing systems services, we may receive significant liability claims if our products do not work properly. Our agreements with customers typically contain provisions intended to limit our exposure to liability claims. However, these limitations may not preclude all potential claims. Liability claims could require us to spend significant time and money in litigation or to pay significant damages. Any such claims, whether or not successful, could seriously damage our reputation and our business.. If our contracts with Citrix and other vendors of hardware components and software applications and hardware were terminated, our IT services business would be materially adversely affected. We depend on third-party suppliers to provide us with key hardware components and software applications in connection with our IT services business. If such contracts and relationships were terminated, our revenues would be negatively affected. Our stock price can be volatile. Our stock price, like that of other technology companies, can be volatile. For example, our stock price can be affected by many factors such as quarterly increases or decreases in our revenues or earnings, such as the recent volatility we have experienced; speculation in the investment community about our financial condition or results of operations and changes in revenue or earnings estimates, announcement of new products, technological developments, alliances, acquisitions or divestitures by us or one of our competitors or the loss of key management personnel. In addition, general macroeconomic and market conditions unrelated to our financial performance may also affect our stock price. Our prior use of Arthur Andersen LLP as our independent auditor may pose risks to us and limit our ability to seek potential recoveries from them related to their work. Our consolidated financial statements as of and for each of the three years in the period ended June 30, 2001 were audited by Arthur Andersen LLP (Andersen). On March 14, 2002, Andersen was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corporation. On June 15, 2002, a jury convicted Andersen of these charges. On July 23, 2002, we dismissed Andersen and retained KPMG LLP as our independent auditors for our fiscal year ended June 30, 2002. SEC rules require us to present historical audited financial statements in various SEC filings, such as registration statements, along with Andersen's consent to our inclusion of its audit report in those filings. Since our former engagement partner and audit manager have left Andersen and in light of the cessation of Andersen's SEC practice, we will not be able to obtain the consent of Andersen to the inclusion of its audit report in our relevant current and future filings. The SEC has provided regulatory relief designed to allow companies that file reports with the SEC to dispense with the requirement to file a consent of Andersen in certain circumstances, but purchasers of securities sold under our registration statements, which were not filed with the consent of Andersen to the inclusion of its audit report, will not be able to sue Andersen pursuant to Section 11(a)(4) of the Securities Act and, therefore, their right of recovery under that section may be limited as a result of the lack of our ability to obtain Andersen's consent. Forward-Looking Statements This quarterly report on Form 10-Q contains statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements regarding the cost benefits and other advantages of the Company's products, the acquisition of businesses and technologies, and the availability of cash or other financing sources to fund future operations, cash expenditures and acquisitions, the enhancement of the Company's technology, the investment of significant resources in software development activities, the growth in the thin client market, and the development of new products. These forward-looking statements involve risks and uncertainties. The factors set forth below, and those contained in "Factors Affecting the Company and Future Operating Results" and set forth elsewhere in this report, could cause actual results to differ materially from those predicted in any such forward-looking statement. Factors that could affect the Company's actual results include the Company's ability to lower its costs, customers' acceptance of Neoware's line of computing appliance products, pricing pressures, rapid technological changes in the industry, growth of the computing appliance market, increased competition, the Company's ability to attract and retain qualified personnel, the economic viability of the Company's channel partners, changes in general economic conditions, risks associated with the outbreak of SARS; and risks associated with foreign operations and political and economic uncertainties associated with current world events. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company earns interest income from its balances of cash and cash equivalents. This interest income is subject to market risk related to changes in interest rates which primarily affects the investment portfolio. The Company invests in instruments that meet high credit quality standards, as specified in its investment policy. As of March 31, 2003 and June 30, 2002, cash equivalents consisted primarily of certificates of deposit, commercial paper and money market funds maturing over the following three months. Due to the average maturity and conservative nature of the Company's investment portfolio, a sudden change in interest rates would not have a material effect on the value of the portfolio. Management estimates that if the average yield of the Company's investments decreased by 100 basis points, interest income for the three months ended March 31, 2003 would have decreased by less that $50,000. This estimate assumes that the decrease occurred on July 1, 2002 and reduced the yield of each investment instrument by 100 basis points. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. On a date that was within 90 days prior to the date of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as of such date the Company's disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the securities Exchange Act of 1934 is recorded, processed, summarized and reported in the periods specified in the SEC's rules and forms. (b) Changes in Internal Controls There have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation. 21 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits The following exhibits are being filed as part of this quarterly report on Form 10-Q: Exhibit No. ----------- 99.1 Certification of Michael G. Kantrowitz as Chairman, President and Chief Executive Officer of Neoware Systems, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Keith D. Schneck, Chief Financial Officer of Neoware Systems, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Report on Form 8-K On January 29, 2003, the Company filed a Form 8-K relating to a press release announcing earnings for the three months ended December 31, 2003. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. NEOWARE SYSTEMS, INC. Date: May 15, 2003 By: MICHAEL G. KANTROWITZ ----------------------------- Michael G. Kantrowitz Chairman, President and Chief Executive Officer Date: May 15, 2003 By: KEITH D. SCHNECK ------------------------ Keith D. Schneck Executive Vice President and Chief Financial Officer 23 I, Michael G. Kantrowitz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Neoware Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 Michael G. Kantrowitz ------------------------- Michael G. Kantrowitz Chairman, President and Chief Executive Officer (Principal Executive Officer) 24 I, Keith D. Schneck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Neoware Systems, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 Keith D. Schneck -------------------- Keith D. Schneck Executive Vice President and Chief Financial Officer (Principal Financial Officer) 25