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 December 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- --------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number: 000-21240
---------------------------------
NEOWARE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2705700
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
400 Feheley Drive
King of Prussia, Pennsylvania 19406
(Address of principal executive offices)
(610) 277-8300
(Registrant's telephone number including area code)
-----------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------
As of February 5, 2001, there were 10,275,913 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:
December 31, 2000 and June 30, 2000 3
Consolidated Statements of Operations:
Three and Six Months Ended December 31, 2000 and 1999 4
Consolidated Statements of Cash Flows:
Six Months Ended December 31, 2000 and 1999 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)
December 31, 2000 June 30, 2000
----------------- -------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 12,954,733 $ 13,831,792
Accounts receivable, net 1,680,634 2,068,230
Inventories 1,056,451 1,119,844
Prepaid expenses and other 274,974 249,196
Notes receivable 14,386 726,072
------------ ------------
Total current assets 15,981,178 17,995,134
Property and equipment, net 191,273 231,933
Notes receivable 890,216 78,216
Capitalized and purchased software, net 280,111 363,096
------------ ------------
$ 17,342,778 $ 18,668,379
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 327,684 $ 1,153,972
Accrued expenses 734,955 602,641
Deferred revenue 366,272 434,686
------------ ------------
Total current liabilities 1,428,911 2,191,299
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 10,276 10,275
Additional paid-in capital 24,370,506 24,369,648
Treasury stock (100,000) --
Accumulated deficit (8,366,915) (7,902,843)
------------ ------------
Total stockholders' equity 15,913,867 16,477,080
------------ ------------
$ 17,342,778 $ 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 Six Months Ended
---------------------------------- -----------------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
-------------- ------------ ------------- -------------
Net revenues $ 3,389,070 $ 2,679,851 $ 7,422,407 $ 5,319,367
Cost of revenues 2,388,884 2,151,551 5,250,640 4,180,455
------------ ------------ ------------ ------------
Gross profit 1,000,186 528,300 2,171,767 1,138,912
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 761,500 259,411 1,475,776 620,621
Research and development 195,723 158,266 360,550 341,205
General and administrative 529,135 439,714 1,048,846 875,690
Acquisition costs -- 406,045 161,038 406,045
------------ ------------ ------------ ------------
Operating expenses 1,486,358 1,263,436 3,046,210 2,243,561
------------ ------------ ------------ ------------
Operating (loss) income (486,172) (735,136) (874,443) (1,104,649)
Interest income (expense), net 209,646 25,353 410,371 46,763
------------ ------------ ------------ ------------
Net (loss) income $ (276,526) $ (709,783) $ (464,072) $ (1,057,886)
============ ============ ============ ============
Basic and diluted loss per share $ (0.03) $ (0.11) $ (0.05) $ (0.17)
============ ============ ============ ============
Weighted average number of
shares used in basic and diluted loss per
share computation 10,275,652 6,292,615 10,275,409 6,289,199
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
NEOWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
December 31, December 31,
2000 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (464,072) $ (1,057,886)
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities-
Depreciation and amortization 172,544 262,483
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable 387,596 1,175,290
Inventories 63,393 353,844
Prepaid expenses and other 2,824 190,887
Increase (decrease) in:
Accounts payable (826,288) (445,110)
Accrued expenses 132,314 (347,000)
Deferred revenue (68,414) (23,565)
------------ ------------
Net cash (used in) provided by operating activities (600,103) 108,943
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (40,505) (15,356)
Purchase of treasury stock (100,000) --
Capitalized software (36,996) (109,205)
------------ ------------
Net cash (used in) provided by investing activities (177,501) (124,561)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes receivable (100,314) --
Exercise of stock options 859 3,100
Borrowings under line of credit -- (143,000)
------------ ------------
Net cash (used in) provided by financing activities (99,455) (139,900)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (877,059) (155,518)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,831,792 1,470,906
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,954,733 $ 1,315,388
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 4,735 $ 12,459
============ ============
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 six-month period ended December 31, 2000 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 December 31, 2000 and 1999 were $43,000 and $253,000, respectively.
Accounts receivable relating to "bill and hold" transactions were $43,000 and
zero at December 31, 2000 and 1999, 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 12.5 % and 11.4% of total net revenues for
the three months ended December 31, 2000 and net revenues from one customer were
16.7% of total net revenues for the six months ended December 31, 2000. At
December 31, 2000, the Company had receivables from these customers of
approximately $60,000 and $ 387,000, respectively. Net revenues from one
customer amounted to 10% of total net revenues for the three months ended
December 31, 1999. No individual customer accounted for 10% or more of revenues
for the six months ended December 31, 1999.
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:
December 31, June 30,
2000 2000
------------ ----------
Purchased components and subassemblies $ 197,131 $ 584,303
Finished goods 859,320 535,541
---------- ----------
$1,056,451 $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
and the reimbursement of $1,000,000 of expenses incurred by the Company in
connection with its efforts to make certain acquisitions in the information
technology consulting and staffing field. Of the total reimbursement, $300,000
was paid in cash and the remaining $700,000 under a note with interest at 8%
which was due on the earlier of three years or upon the completion of an initial
public offering of Broadreach. During fiscal 1999, the Company sold its 2%
interest in Broadreach for $406,930. The Company and Broadreach have entered
into negotiations to amend the terms of the original note.
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 March 31, 2001. Borrowings under the agreement bear
interest at the bank's prime rate plus 1/2% (10.0% at December 31, 2000). At
December 31, 2000 and June 30, 2000, there was $2,000,000 available for
borrowing 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.
For the six months ended December 31, 2000 and 1999, there were no dilutive
effects of stock options or warrants as the Company incurred a net loss. Options
to purchase 1,630,750 shares of Common Stock at prices ranging from $.84 to
$7.13 per share were outstanding at December 31, 2000.
7
7. ACQUISITION COSTS
During the six months ended December 31, 2000 and the three months ended
December 31, 1999, the Company incurred costs of $161,038 and $406,045,
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 infrastructure
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, the Internet and Windows-based applications running
multi-user Windows servers. Computing appliances that run and are managed by the
Company's software offer the cost benefits of industry-standard hardware, 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 Six Months Ended
December 31, 2000 December 31, 2000
-------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Gross profit 29.5% 19.7% 29.3% 21.4%
Operating expenses
Sales and marketing 22.5 9.7 19.9 11.7
Research and development 5.8 5.9 4.9 6.4
General and administrative 15.6 16.4 14.1 16.5
Acquisition costs -- 15.1 2.2 7.6
----- ----- ----- -----
Operating loss (14.4) (27.4) (11.8) (20.8)
Interest income, net 6.2 .9 5.5 .9
----- ----- ----- -----
Net loss (8.2)% (26.5)% (6.3)% (19.9)%
===== ===== ===== =====
Net revenues for the three and six month periods ended December 31, 2000
increased to $3,389,070 and $7,422,407 from $2,679,851 and $5,319,367 for the
comparable periods in the prior fiscal year. The increase in net revenues was
attributable to a substantial increase in the number of units shipped resulting
from the greater acceptance of the Company's computing appliances. The Company
is subject to significant variances in its quarterly operating results because
of the fluctuations in the timing of the receipt of large orders.
8
The Company's gross profit as a percentage of net revenues for the three and six
month periods ended December 31, 2000 increased to 29.5% and 29.3% from 19.7%
and 21.4% 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 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 six month periods ended December 31, 2000 than in the prior year.
The Company anticipates that its gross margin percentage will vary from quarter
to quarter depending on the mix of business, including the mix of hardware and
software revenues. The gross profit margin also varies in response to
competitive market conditions as well as periodic fluctuations in the cost of
memory and other significant components. The market in which the Company
competes remains very competitive and although the Company intends to continue
its efforts to reduce the cost of its products, there can be no certainty that
the Company will not be required to reduce prices of its products without
compensating reductions in the cost to produce its products in order to increase
its market share or to meet competitors' price reductions.
Operating expenses for the three and six month periods ended December 31, 2000
were $1,486,358 and $3,046,210, an increase from operating expenses of
$1,263,436 and $2,243,561 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 six month periods ended December
31, 2000 increased to $761,500 and $1,475,776 from $259,411 and $620,621 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, increased marketing activities and higher commission expenses due to
increased sales.
Research and development expenses for the three and six month periods ended
December 31, 2000 increased to $195,723 and $360,550 from $158,266 and $341,205
in the comparable periods in the prior year primarily as a result of an increase
in personnel dedicated to R&D activities.
General and administrative expenses for the three and six month periods ended
December 31, 2000 increased to $529,135 and $1,048,846 from $439,714 and
$875,690 in the comparable periods in the prior year due to increased personnel
costs and higher expenditures for investor relations services.
Acquisition costs of $161,038 and $406,045 were incurred during the six months
ended December 31, 2000 and the three months ended December 31, 1999,
respectively, which related primarily to professional fees incurred in
connection with two separate proposed acquisitions that were not consummated.
Net interest income for the three month and six month periods ended December 31,
2000 increased to $209,646 and $410,371 as compared to $25,353 and $46,763 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 six month periods ended
December 31, 2000 or 1999 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 December 31 2000, the Company's net loss was $276,526
as compared to a net loss of $709,783 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.
9
Liquidity and Capital Resources
As of December 31, 2000, the Company had net working capital of $14,552,267
composed primarily of cash and cash equivalents, accounts receivable and
inventory. The Company's principal sources of liquidity include $12,954,733 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 December 31, 2000.
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 March 31, 2001.
Cash and cash equivalents decreased by $877,059 during the six months ended
December 31, 2000, primarily as a result of the net loss and a decrease in
accounts payable offset by a decrease in accounts receivable.
The Company used cash in operations of $600,103 for the six months ended
December 31, 2000 versus generating cash of $108,943 for the six months ended
December 31, 1999. The increase in cash used in operations is primarily due to a
smaller decrease in accounts receivable and inventories offset by a smaller loss
in the current six month period compared to the prior year. 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 achieve profitable operations 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 $464,000 and $1.8 million for the six months ended December 31, 2000 and the
year ended June 30, 2000, respectively. In addition, we had an accumulated
deficit of $8.4 million as of December 31, 2000. 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 six months ended December 31, 2000 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 implement our business plan.
As a result, we will need to generate significant revenues to achieve
profitability. We cannot be certain that we will achieve profitability in the
future or, if we achieve profitability, whether we will be able to sustain it.
If we do not achieve and maintain profitability, the market price for our common
stock may decline, perhaps substantially.
10
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.
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 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 computing appliance market;
o the quality, price, performance and total cost of ownership of our products;
o the availability, price, quality and performance of competing products and
technologies; and
o the successful development of our relationships with software providers,
original equipment 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 computing appliance market in which we seek to 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.
11
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.
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.
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.
12
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
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 effectively compete against other providers as a result of
their greater financial resources and brand awareness.
In the market for computing appliances, we face significant competition
from larger companies 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.
13
We may not be able to attract software developers to bundle their products with
our information appliances.
Our computing appliances include our own software, plus software from
other companies for specific vertical markets. If we are unable to attract
software developers, and are unable to include their software in our products,
we may not be able to offer our computing appliances for certain important
target markets, and our financial results will suffer.
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 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, and especially
Michael Kantrowitz, our President and Chief Executive Officer, and Edward Parks,
our Vice President of Engineering. 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 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.
Errors in our products could harm our business and our operating results.
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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 or the versions of our
products that support operating systems other than Linux. 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 10K for the year ended
June 30, 2000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 6. Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
NEOWARE SYSTEMS, INC.
Date: February 13, 2001 By: /S/ MICHAEL G. KANTROWITZ
-----------------------------
Michael G. Kantrowitz
President and Chief Executive Officer
Date: February 13, 2001 By: /S/ VINCENT T. DOLAN
------------------------
Vincent T. Dolan
Vice President-Finance/Administration
(Principal Accounting Officer and
Principal Financial Officer)
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