UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) November 16, 2005
NEOWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 000-21240 23-2705700
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
3200 Horizon Drive
King of Prussia, Pennsylvania 19406
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(Address of Principal Executive Offices) (Zip Code)
(610) 277-8300
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(Registrant's Telephone Number, Including Area Code)
Not applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE
This Form 8-K/A amends Item 9.01 of the Current Report on Form 8-K
filed by Neoware, Inc. (Neoware or Company) on November 22, 2005 to include
consolidated financial statements and pro forma financial information that were
not available at the time of the filing of the initial report. This amendment is
filed to provide the required financial information.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired
1. Maxspeed Corporation and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheet as of December 31, 2004
Consolidated Statement of Operations for the year ended December 31,
2004
Consolidated Statement of Shareholders' Equity and Comprehensive Loss
for the year ended December 31, 2004
Consolidated Statement of Cash Flows for the year ended December 31,
2004
Notes to Consolidated Financial Statements as of and for the year ended
December 31, 2004
2. Maxspeed Corporation and Subsidiaries (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004
Notes to Condensed Consolidated Financial Statements
(b) Unaudited Pro Forma Condensed Combined Financial Information
Pro Forma Condensed Combined Balance Sheet as of September 30, 2005
Pro Forma Condensed Combined Statement of Operations for the three
months ended September 30, 2005
Pro Forma Condensed Combined Statements of Operations for the year
ended June 30, 2005
Notes to Unaudited Pro Forma Condensed Combined Financial Information
(c) Exhibits
Exhibit 23. Consent of Independent Auditor
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Maxspeed Corporation
We have audited the accompanying consolidated balance sheet of Maxspeed
Corporation and subsidiaries (the "Company") as of December 31, 2004, and the
related consolidated statements of operations, shareholders' equity and
comprehensive loss, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Maxspeed Corporation and
subsidiaries at December 31, 2004, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Jose, California
April 27, 2005
MAXSPEED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2004
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ASSETS
CURRENT ASSETS:
Cash and equivalents $ 4,893,931
Short-term investments 4,900,033
Accounts receivable (net of allowance of $65,643) 1,093,954
Inventories 2,994,986
Other current assets 53,139
------------
Total current assets 13,936,043
PROPERTY AND EQUIPMENT--Net 234,442
INVESTMENTS 529,718
OTHER ASSETS 68,210
------------
TOTAL $ 14,768,413
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 592,536
Accrued warranty 198,405
Accrued compensation 192,522
Other accrued liabilities 332,469
Deferred rent 25,813
Current portion of long-term debt 10,147
------------
Total current liabilities 1,351,892
LONG-TERM DEBT 31,083
------------
Total liabilities 1,382,975
------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value--20,000,000 shares authorized:
Series A--2,250,000 shares designated and outstanding (liquidation value--$1,035,000) 1,024,988
Series B--12,030,075 shares designated; 8,947,383 shares outstanding (liquidation value--$11,900,019) 11,399,940
Series C--1,600,000 shares designated and outstanding (liquidation value--$14,208,000) 13,788,731
Common stock, no par value--30,000,000 shares authorized; shares outstanding--2004: 7,878,009 1,414,072
Deferred stock compensation -
Accumulated other comprehensive loss (199,052)
Accumulated deficit (14,043,241)
------------
Total shareholders' equity 13,385,438
------------
TOTAL $ 14,768,413
============
See notes to consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
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NET SALES $ 12,759,868
------------
COSTS AND EXPENSES:
Cost of sales 8,970,774
Sales and marketing 2,125,480
Research and development 1,277,048
General and administrative 1,892,267
------------
Total costs and expenses 14,265,569
------------
LOSS FROM OPERATIONS (1,505,701)
INTEREST INCOME--Net 127,426
OTHER EXPENSE--Net
(2,242)
------------
NET LOSS $ (1,380,517)
============
See notes to consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2004
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SERIES A, B, AND C
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK DEFERRED OTHER
------------------------ --------------------- STOCK COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT COMPENSATION LOSS
BALANCE--January 1, 2004 12,797,383 $26,213,659 7,878,009 $1,414,072 $ (296) $ (199,360)
Components of comprehensive loss:
Net loss
Cumulative translation adjustment 605
Change in unrealized loss on investments (297)
Total comprehensive loss
Amortization of deferred stock compensation 296
------------------------ --------------------- ------------ -------------
BALANCE--December 31, 2004 12,797,383 $26,213,659 7,878,009 $1,414,072 $ - $ (199,052)
========== =========== ========= ========== ============ =============
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ACCUMULATED
DEFICIT TOTAL
BALANCE--January 1, 2004 $(12,662,724) $14,765,351
Components of comprehensive loss:
Net loss (1,380,517) (1,380,517)
Cumulative translation adjustment 605
Change in unrealized loss on investments (297)
-----------
Total comprehensive loss (1,380,209)
Amortization of deferred stock compensation 296
------------ -----------
BALANCE--December 31, 2004 $(14,043,241) $13,385,438
============ ===========
See notes to consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,380,517)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 214,932
Gain on disposal of property and equipment
Amortization of deferred stock compensation 296
Cumulative translation adjustment 605
Net change in unrealized depreciation on investments (297)
Changes in assets and liabilities:
Accounts receivable 309,462
Inventories 232,198
Other current assets 50,430
Other assets (49,646)
Accounts payable (1,077,092)
Accrued warranty 10,523
Accrued compensation (40,784)
Other accrued liabilities 128,632
Deferred rent 25,813
-----------
Net cash used in operating activities (1,575,445)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (4,624,921)
Sale and maturity of investments 3,390,521
Purchase of property and equipment (89,473)
-----------
Net cash used in investing activities (1,323,873)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -
Repayment of long-term debt (9,738)
-----------
Net cash (used in) provided by financing activities (9,738)
-----------
NET DECREASE IN CASH AND EQUIVALENTS (2,909,056)
CASH AND EQUIVALENTS--Beginning of year 7,802,987
-----------
CASH AND EQUIVALENTS--End of year $ 4,893,931
===========
OTHER CASH FLOW INFORMATION:
Cash paid for interest $ 1,893
===========
Cash paid for income taxes $ 800
===========
See notes to consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2004
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1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Maxspeed Corporation was incorporated in 1988. Its wholly owned subsidiary,
Maxspeed International, was incorporated in 2001. In 2002, the Company
established two subsidiaries in Shanghai and Beijing, China, both of which
are wholly owned by Maxspeed International. Maxspeed and its subsidiaries
(the "Company") develop, manufacture, and market computer hardware which
creates multi-user capability and enhances overall performance of
microcomputers.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions are eliminated on
consolidation.
SIGNIFICANT ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Such estimates include allowances for doubtful accounts, inventory
reserves, and accruals for product warranty. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--At December 31, 2004, the carrying
amount of cash and equivalents, short-term investments, and accounts
receivable approximate fair value because of the short maturity of these
instruments.
CASH EQUIVALENTS--The Company considers all highly-liquid debt instruments
with a remaining maturity of three months or less at the purchase date to be
cash equivalents.
SHORT-TERM INVESTMENTS--The Company classifies its short-term investments as
available-for-sale. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, investments are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of shareholders' equity.
INVENTORIES--Inventories are stated at the lower of cost or market with cost
determined using the average cost method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method
over estimated useful lives of the assets ranging from three to five years,
or the lease term, as appropriate.
LONG-LIVED ASSETS--The Company evaluates the carrying value of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of the asset may be impaired. An impairment loss is recognized when
the sum of the undiscounted future net cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying
amount.
REVENUE--The Company recognizes revenue when (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the price is substantially fixed or determinable, and (4) collectibility
is reasonably assured. The Company also allows the customers the right to
return product within 90 days of sale. The Company has established a basis
through historical experience for estimating future returns.
SOFTWARE DEVELOPMENT COSTS--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with SFAS
No. 86, Computer Software To Be Sold, Leased or Otherwise Marketed. Because
the Company believes its current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility, no costs have been capitalized to date.
INCOME TAXES--The Company accounts for income taxes using an asset and
liability approach. Deferred tax liabilities are recognized for future
taxable amounts and deferred tax assets are recognized for future deductions
net of a valuation allowance to reduce deferred tax assets to the amounts
that are more likely than not to be realized.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash and
cash equivalents, short-term investments, and accounts receivable. The
Company places its cash and equivalents and short-term investments with high
credit quality financial institutions. The Company performs ongoing credit
evaluations of its customers. The Company maintains reserves for estimated
potential credit losses. One customer accounted for 52 percent of the
Company's revenues in 2004. At December 31, 2004, accounts receivable from
one customer represented 49 percent of the total accounts receivable balance.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and to non-employees using the fair value method in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
requires the disclosure of pro forma net loss and loss per share had the
Company adopted the fair value method. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions regarding the
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life equal to the
vesting period; risk free interest rates ranging from 3.13 percent to 3.54
percent in 2004; no dividends during the expected term; and no volatility.
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair value of
the awards had been amortized to expense over the vesting period of the
awards, pro forma net loss at December 31, 2004, would have been as follows:
Net loss as reported $(1,380,517)
Less: Stock-based employee compensation expenses included
in reported net loss 296
Add: Total stock-based employee compensation expense
determined under fair value based method for all
awards (48,353)
-----------
Pro forma net loss $(1,428,574)
===========
FOREIGN CURRENCY--The reporting currency of the Company and its subsidiaries
is the U.S. dollar. All of the subsidiaries use their local currency as their
functional currency. For those entities using their non-U.S. dollar currency
as their functional currency, local currency financial statements are
translated into the U.S. dollar in accordance with SFAS No. 52, Foreign
Currency Translation. Assets and liabilities are translated into the U.S.
dollar at the closing rate at the balance sheet date, and revenues and
expenses are translated at the weighted average exchange rates during the
year. Translation adjustments arising upon consolidation are accumulated
within shareholders' equity as a translation adjustment within other
comprehensive income. Translation adjustments have not been material to date.
Transactions involving currency other than the functional currency generate a
gain or loss and are recorded in the statements of operations during the
respective period.
COMPREHENSIVE LOSS--The Company follows the provisions of SFAS No. 130,
Reporting Comprehensive Income, which requires an enterprise to report, by
major components and as a single total, the change in net assets during the
period from nonowner sources. Total comprehensive loss is shown in the
statement of shareholders' equity and comprehensive loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--The Financial Accounting Standards
Board ("FASB") issued Interpretation No. ("FIN") 46, Consolidation of
Variable Interest Entities, in January 2003, and a revised interpretation of
FIN 46 ("FIN 46R") in December 2003. FIN 46 requires certain variable
interest entities ("VIEs") to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN 46
are effective immediately for all arrangements entered into after January 31,
2003. The Company has no contractual relationship or other business
relationship with a VIE and therefore the adoption did not have an effect on
its consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
an asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This statement was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. For mandatorily redeemable financial instruments of a
nonpublic entity, this statement shall be effective for existing or new
contracts for fiscal periods beginning after December 15, 2003. The adoption
of SFAS No.150 will not have a material effect on the Company's financial
statements.
In December 2003, the Security Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 104, Revenue Recognition ("SAB No. 104"). SAB No. 104
updates portions of existing interpretative guidance in order to make this
guidance consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The adoption of SAB No. 104 did not
have a material effect on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment, which
is effective for the Company on January 1, 2006. This statement requires the
expensing of the computed fair value of all equity awards over the related
vesting period. The Company has not yet determined the effect the adoption of
this statement will have on its financial statements.
2. INVESTMENTS
Marketable securities are classified as "available for sale" and are reported
at their fair market value at the balance sheet date. Unrealized gains and
losses are included as a separate component of shareholders' equity. Realized
gains or losses are computed based on specific identification of the
securities sold.
Investments at December 31, 2004, consist of the following:
Short-term investments:
Fair Unrealized
Cost Value Gain/(Loss)
Certificates of deposit $4,899,513 $4,899,513 $ -
Marketable equity securities 200,000 520 (199,480)
--------------------------------------
Debt securities mutual funds 177 - (177)
-----------------------------------
Total $5,099,690 $4,900,033 $ (199,657)
===================================
Long-term investments:
Initial Carrying
Cost Value
Investment in Aetas $475,000 $475,000
Certificates of deposit (Note 6) 54,718 54,718
---------------------
Total $529,718 $529,718
=====================
In 2003, the Company made a strategic investment in a privately held company
which is involved in the development of color laser printer engines to
support the personal computer market. This investment was accounted for using
the cost method. As of December 31, 2004, the Company's ownership of this
investment was less than 20 percent, and the Company does not have the
ability to exercise significant influence.
Cost basis investments are evaluated for other than temporary declines in
fair value, which are reported in earnings. No impairment was recorded during
2004.
3. INVENTORIES
Inventories at December 31, 2004, consist of the following:
Finished goods $ 408,578
Work in process 1,213,653
Raw material 1,372,755
----------
Total $2,994,986
==========
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004, consist of the following:
Vehicles $ 57,564
Computer hardware 635,821
Computer software 272,243
Furniture and fixtures 208,791
Equipment 68,910
Leasehold improvements 281,618
-----------
1,524,947
Accumulated depreciation and amortization (1,290,505)
-----------
Property and equipment--net $ 234,442
===========
5. ACCRUED WARRANTY
The Company provides warranties on product sales (generally three years) and
estimated warranty costs are recorded at the time of the sale. The
determination of such costs requires management to make estimates of product
return rates and expected costs to repair or to replace the products under
warranty. The Company establishes warranty reserves based on historical
warranty costs for each product line combined with liability estimates based
on the prior three years' sales activities. The activities in accrued
warranty are summarized as follows:
Accrued warranty balance--January 1, 2004 $187,882
Warranty costs incurred (59,954)
Additions related to current period sales 101,387
Adjustments to accruals related to prior period
sales (30,910)
--------
Accrued warranty balance--December 31, 2004 $198,405
========
6. LONG-TERM DEBT
In October 2003, the Company entered into a car loan agreement with a lender
for $52,564. The loan agreement bears interest at 4 percent and expires in
October 2008. The loan agreement was collateralized by a certificate of
deposit, which was recorded in investments at December 31, 2004. At December
31, 2004, the outstanding balance under this loan was $41,229. As of December
31, 2004, the loan is due as follows:
Year Ended
December 31
2005 $10,147
2006 10,566
2007 11,002
Thereafter 9,514
7. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK--Significant terms of Series A, Series B, and
Series C convertible preferred stock are as follows:
o Each share of preferred stock is convertible at the option of the
holder into one share of common stock (subject to adjustments for
events of dilution). Shares will automatically be converted upon an
underwritten public offering of the Company's common shares meeting
certain criteria.
o Each share of preferred stock has voting rights equivalent to the
number of shares of common stock into which it is convertible.
o Dividends may be declared at the discretion of the Board of
Directors and are noncumulative. Dividends of $0.046, $0.133, and
$0.888 per share for Series A, Series B, and Series C convertible
preferred stock, respectively, must be declared and paid before
payment of any common stock dividends. No dividends were declared in
2004 or 2003.
o In the event of liquidation, dissolution, merger, or winding up of
the Company, the Series A, Series B, and Series C convertible
preferred shareholders are entitled to receive $0.46, $1.33, and
$8.88 per share, respectively (subject to adjustments for events of
dilution), plus all declared and unpaid dividends prior to any
distribution to the common shareholders After the preferred
shareholders receive the above, any remaining assets would be shared
by all preferred and common shareholders on a pro rata basis.
DEFERRED STOCK COMPENSATION--In connection with the grant of certain stock
options to employees, the Company records deferred stock compensation as the
difference between the exercise price and the estimated fair value of the
underlying common stock as determined by the Board of Directors at the date
of grant. Such amount is presented as a reduction of shareholders' equity and
is amortized over the 48-month vesting period of the related stock options.
Amortization of deferred stock compensation for the year ended December 31,
2004 was $296. No options were canceled during 2004.
STOCK OPTION PLANS--The Company's 1990 and 1997 stock option plans authorized
the granting of incentive and nonqualified stock options to purchase up to
3,300,679 shares of common stock by employees, officers, directors,
independent contractors, and consultants of the Company. Options are
generally granted at values determined by the Board of Directors, vest over
four years, and expire in ten years. Stock option activities are summarized
as follows:
Outstanding Options
-----------------------------
Weighted
Average
Exercise
Price
Number of Per
Shares Share
Balance--January 1, 2004 (570,649 options exercisable at a
weighted average exercise price of $0.74) 1,295,059 $1.20
Granted (weighted average fair value of $0.19) 586,500 1.50
Canceled (511,900) 1.34
--------------------------
Balance--December 31, 2004 (587,220 options exercisable at a
weighted average exercise price of $0.98) 1,369,659 1.28
==========================
At December 31, 2004, 1,341,820 options are available for future grant.
Additional information regarding options outstanding as of December 31, 2004
is as follows:
Options Outstanding Options Exercisable
------------------------------ ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ 0.04 175,000 2.40 $ 0.04 175,000 $ 0.04
$ 0.8 70,459 4.47 $ 0.80 70,459 $ 0.80
$ 1.5 1,124,200 8.81 $ 1.50 341,761 $ 1.50
--------- ------ ------- ------
1,369,659 $ 1.28 587,220 $ 0.98
========= ------ ------- ======
ADDITIONAL STOCK PLAN INFORMATION--As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations.
8. INCOME TAXES
The Company's net deferred tax asset for federal and state income taxes at
December 31, 2004, consist of the following:
Net operating loss carryforwards $ 4,509,946
Capitalized research and development 616,228
Research and development tax credits 915,650
Bad debt, inventory, and warranty reserves 526,261
Depreciation 53,670
Other 188,233
-----------
Deferred tax assets 6,809,988
Valuation allowance (6,809,988)
-----------
Net deferred tax asset $ -
===========
During 2004, the Company has provided a full valuation allowance against its
deferred tax assets due to management's assessment of the likelihood of
realizing future benefits from these assets. At December 31, 2004, the
Company had net operating loss carryforwards and research credit
carryforwards for federal income tax purposes of $12,032,990 and $523,160,
respectively, which begin to expire in 2019. In addition, the Company had net
operating loss carryforwards for state income tax purposes of $2,968,263,
research credit carryforwards of $350,933, and manufacturing investment
credit carryforwards of $41,557 available to offset future state taxable
income. The state net operating loss carryforwards begin to expire in 2006,
while the research credit carryforwards do not expire. The Company also has a
capital loss of $1,768,485 for federal and state tax purposes. This loss can
be carried forward for both federal and state and begins to expire in 2008.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facility under a noncancelable operating lease which
expires in December 2008. Future minimum lease payments are as follows:
Year Ended
December 31
2005 $ 418,426
2006 282,207
2007 228,480
2008 228,480
----------
Total $1,157,593
==========
Rent expense was $393,279 for 2004.
The Company is occasionally involved in legal proceedings arising in the
normal course of its business. While it is not feasible to predict or
determine the outcome of these matters, the Company believes that the
ultimate resolution of these claims will not have a material adverse effect
on its consolidated financial position or results of operations.
10. EMPLOYEE 401(K) PLAN
The Company sponsors a 401(k) plan in which most employees are eligible to
participate. The Company is not obligated to make contributions to the plan.
The Company contributed $12,324 to the plan in 2004.
******
MAXSPEED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
ASSETS
Current assets:
Cash and equivalents $ 8,164 $ 4,894
Short-term investments 827 4,900
Accounts receivable, net of allowances of $58 and $66 798 1,094
Inventories 3,359 2,995
Other 33 53
-------- --------
Total current assets 13,181 13,936
Property and equipment, net 188 234
Investments and other assets 597 598
-------- --------
Total assets $ 13,966 $ 14,768
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 995 $ 593
Accrued warranty 201 198
Accrued compensation and benefits 265 193
Other accrued expenses 172 368
-------- --------
Total current liabilities 1,633 1,352
Other long-term liabilities 52 31
-------- --------
Total liabilities 1,685 1,383
-------- --------
Convertible preferred stock 26,214 26,214
Common stock 1,414 1,414
Accumulated deficit and other comprehensive loss (15,347) (14,243)
-------- --------
Total shareholders' equity 12,281 13,385
-------- --------
Total liabilities and shareholders' equity $ 13,966 $ 14,768
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2005 2004
------- -------
Revenue $ 8,760 $11,144
Costs and Expenses:
Cost of revenue 5,477 7,629
Research and development 937 941
Sales and marketing 1,888 1,464
General and administrative 1,694 1,264
------- -------
Total costs and expenses 9,996 11,298
------- -------
Operating loss (1,236) (154)
Other income and expense-net 136 60
------- -------
Loss before income taxes (1,100) (94)
Provision for income taxes 12 1
------- -------
Net loss $(1,112) $ (95)
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
CONDENSED CASH FLOWS STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
------------------
2005 2004
------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used in operating activities $ (693) $ (106)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (106) (50)
Sales and maturities of investments 5,410 3,391
Purchases of investments (1,336) (4,593)
------- -------
Net cash provided by (used in) investing
activities 3,968 (1,252)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (5) -
------- -------
Net cash used in financing activities (5) -
Net change in cash and equivalents 3,270 (1,358)
Cash and equivalents, beginning of period 4,894 7,803
------- -------
Cash and equivalents, end of period $ 8,164 $ 6,445
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
MAXSPEED CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
balance sheets and related condensed consolidated interim statements of
operations and cash flows include all adjustments, consisting only of normal
recurring items, necessary for their fair presentation in conformity with
accounting principles generally accepted in the United States of America (U.S.
GAAP). Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. Actual results and outcomes may differ from management's estimates
and assumptions. Certain information and footnote disclosures included in annual
financial statements have been condensed or omitted pursuant to such rules and
regulations relating to interim financial statements. The condensed consolidated
financial statements included herein should be read in conjunction with the
audited consolidated financial statements and notes thereto included in this
filing.
NOTE 2. SUBSEQUENT EVENT
In October 2005, the Company entered into an Agreement and Plan of Merger under
which it would merge with a subsidiary of Neoware, Inc., a provider of software,
services and solutions to enable thin client computing, which is a computing
architecture for business customers that is designed to be easer to manage, more
secure, more reliable, and more cost-effective solution than traditional
PC-based, client server computing. The merger agreement contained customary
warranties, representations, covenants and indemnifications. As part of the
transaction, two of the Company's shareholders will enter into noncompetition
agreements with Neoware. The merger was completed on November 16, 2005 and the
Company became a wholly owned subsidiary of Neoware, Inc.
The financial statements included herein were prepared without giving effect to
purchase accounting for the transaction with Neoware.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. 143-1, Accounting for Electronic Waste Obligations" (FSP No.
143-1), which requires an entity to recognize an asset retirement liability for
its obligation to dispose of electronic equipment. FSP No. 143-1 is effective
for fiscal years ending after June 8, 2005. The Company has no obligations with
respect to historical waste at September 30, 2005 unless it replaces equipment
in the future. The European Union ("EU") has adopted two directives to
facilitate the recycling of electrical and electronic equipment sold in the EU.
The first of these is the Waste Electrical and Electronic Equipment ("WEEE")
directive, which directs EU member states to enact laws, regulations and
administrative provisions to ensure that producers of electrical and electronic
equipment are financially responsible for specified collection, recycling,
treatment, and environmentally sound disposal of products placed on the market
after August 13, 2005, and from products in use prior to that date that are
being replaced. All but a few of the 25 EU member countries have transposed the
directive into law but implementation in certain countries may be delayed until
later in 2005 or, potentially, into 2006. The EU has also adopted the
Restriction on the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment ("RoHS") directive. The RoHS directive restricts the use of
lead, mercury, and certain other substances in electrical and electronic
products placed on the market in the European Union after July 1, 2006. The
Company is currently evaluating the impact of these directives. To date, the
impact of these directives has not had a material impact on the Company's
financial statements. Similar legislation has been or may be enacted in other
areas, including in the United States, the cumulative impact of which could be
significant in the future if the Company is unable to recover these costs in the
price of our products.
In December 2004, the FASB issued FSP No. FAS 109-1, "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004." The American Jobs Creation Act includes a tax deduction of up to 9
percent (when fully phased-in) of the lesser of (a) "qualified production
activities income," as defined in the Act, or (b) taxable income (after the
deduction for the utilization of any net operating loss carry forwards). This
tax deduction is limited to 50 percent of W-2 wages paid by the taxpayer.
Pursuant to FSP No. 109-1, the deduction should be accounted for as a special
deduction in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109 rather than as a tax rate reduction. FSP No. 109-1 is effective upon
issuance. The Company does not expect that this will have an effect on its
results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154") which replaces Accounting Principles Board (APB)
Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements--An Amendment of APB Opinion No. 28."
SFAS No. 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application, or the
latest practicable date, as the required method for reporting a change in
accounting principle and the reporting of a correction of an error. SFAS No. 154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005 and is required to be adopted by the
Company in the first quarter of fiscal 2007. The Company is currently evaluating
the effect that the adoption of SFAS No. 154 will have on its consolidated
results of operations and financial condition but does not expect it to have a
material impact.
In December 2004, the FASB issued FSP No. FAS 109-2,"Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." The American Jobs Creation Act introduces special
one-time dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer provided certain criteria are met. FASB Statement
No. 109, Accounting for Income Taxes, left intact the provisions of APB Opinion
No. 23, Accounting for Income Taxes--Special Areas, that relate to the
accounting treatment for unremitted earnings in a foreign investment. Opinion 23
provides an exception to the requirement of accruing income taxes payable by the
investor on the unremitted earnings in a foreign investment if the investor can
overcome the presumption of repatriation of the foreign earnings. FSP No. 109-02
provided disclosure guidance while enterprises evaluate the impact of the
American Jobs Creation Act of 2004 on its ability to repatriate foreign
earnings. The Company does not have a significant amount of deferred tax
liability related to the potential repatriation of foreign earnings and thus
does not have additional disclosures related to the FSP.
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment, which is
effective for the Company on January 1, 2006. This statement requires the
expensing of the computed fair value of all equity awards over the related
vesting period. The Company has not yet determined the effect the adoption of
this statement will have on its financial statements.
NOTE 4. INVENTORIES
Inventories at September 30, 2005 and December 31, 2004, consisted of the
following:
September December
30, 2005 31, 2004
---------- --------
Finished goods $567 $408
Work in process 1,506 1,214
Raw material 1,286 1,373
---------- --------
Total $3,359 $2,995
========== ========
NOTE 5. EQUITY-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board ("APB") opinion No.
25. Accounting for Stock Issued to Employees, and to non-employees using the
fair value method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company is required to disclose the pro forma net loss had
the Company adopted the fair-value method. The Company determined that the
impact of such adoption would not have a material impact on the reported net
loss.
NOTE 6. INVESTMENTS
Marketable securities are classified as "available for sale" and are reported at
their fair market value at the balance sheet date. Unrealized gains and losses
are included as a separate component of shareholders' equity. Realized gains or
losses are computed based on specific identification of the securities sold.
At September 30, 2005 and December 31, 2004, the Company had an unrealized loss
of $200 on its investment in marketable equity securities. The unrealized loss
was included as part of Other Comprehensive Loss and is included within
shareholders' equity.
Cost basis investments are evaluated for other than temporary declines in fair
value, which are reported in net loss. No impairment was recorded during 2005 or
2004.
NOTE 7. ACCRUED WARRANTY
The Company provides warranties on product sales (generally three years) and
estimated warranty costs are recorded at the time of the sale. The determination
of such costs requires management to make estimates of product return rates and
expected costs to repair or to replace the products under warranty. The Company
establishes warranty reserves based on historical warranty costs for each
product line combined with liability estimates based on the prior three years'
sales activities
The activities in accrued warranty are summarized as follows:
Nine months ended
September 30
2005 2004
---------- --------
Accrued warranty balance beginning of period $198 $188
Warranty costs incurred (71) (45)
Additions related to current period sales 89 167
Adjustments to accruals related to prior period sales (15) -
---------- --------
Accrued warranty balance at September 30, 2005 and 2004 $201 $310
========== ========
NEOWARE, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
THE FOLLOWING PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION IS PRESENTED
FOR ILLUSTRATIVE PURPOSES ONLY. THE PRO FORMA COMBINED FINANCIAL INFORMATION IS
BASED UPON THE OPERATING RESULTS AND FINANCIAL CONDITION OF MAXSPEED DURING THE
PERIOD WHEN IT WAS NOT UNDER THE CONTROL, INFLUENCE, OR MANAGEMENT OF NEOWARE.
AS A RESULT, THE INFORMATION PRESENTED IS NOT INTENDED TO REPRESENT OR TO BE
INDICATIVE OF THE FINANCIAL POSITION OR RESULTS OF OPERATIONS OF THE COMPANY
AFTER THE MERGER, OR OF THE FINANCIAL POSITION OR RESULTS OF OPERATION OF THE
COMPANY THAT WOULD HAVE ACTUALLY OCCURRED HAD THE MERGER BEEN EFFECTED AS OF THE
DATES DESCRIBED. THE UNAUDITED PRO FORMA FINANCIAL INFORMATION ALSO DOES NOT
INCLUDE THE EFFECTS OF THE RESTRUCTURING OF PRE-MERGER MAXSPEED OPERATIONS
UNDERTAKEN BY NEOWARE MANAGEMENT OR OTHER CHANGES EXPECTED TO BE MADE AFTER THE
MERGER.
THE ESTIMATED PRO FORMA ADJUSTMENTS ARE BASED UPON AVAILABLE INFORMATION AND
CERTAIN ASSUMPTIONS THAT THE COMPANY BELIEVES ARE REASONABLE UNDER THE
CIRCUMSTANCES. THE PRO FORMA ADJUSTMENTS DO NOT REFLECT ANY POTENTIAL
CANCELLATION OF MAXSPEED PRODUCTS, WHICH WOULD REDUCE REVENUES, OR ANY OPERATING
EFFICIENCIES, OR COST SAVINGS THAT MAY BE ACHIEVABLE WITH RESPECT TO THE
COMBINED BUSINESS OF NEOWARE AND MAXSPEED.
On November 16, 2005, Neoware, Inc. (the "Company" or "Neoware") completed its
previously announced merger (the "Merger") of a wholly owned subsidiary of the
Company with and into Maxspeed Corporation ("Maxspeed"), with Maxspeed surviving
as a wholly owned subsidiary of the Company. Maxspeed, a provider of customized
thin client solutions, was headquartered in Palo Alto, California, and had
research, development and sales offices in Beijing and Shanghai, China. The
acquisition supports Neoware's strategy to develop or acquire distribution
channels and engineering centers in major markets around the world in order to
provide customized thin client software solutions to large global enterprises,
as well as small and medium sized business customers.
The merger agreement contained customary representations, warranties, covenants
and indemnifications. As part of the transaction, the Company also entered into
noncompetition agreements with two of Maxspeed's shareholders. The preliminary
purchase price was approximately $19.1 million reflecting an adjustment based
upon cash and working capital excluding cash at closing. In addition, the
Company held back $1.4 million (not included in the preliminary purchase rice)
for estimated restructuring costs that were identified as of the closing date,
which will be held for up to 12 months following the closing date to cover any
severance, contract termination or other costs related to Neoware's transition
plan. Any amount not used for restructuring costs will be distributed to the
former shareholders of Maxspeed. The final cash and working capital adjustment
is subject to a post-closing review by Neoware. In addition to the preliminary
purchase price, the Maxspeed common shareholders will be eligible to receive a
potential earnout of up to $4,000,000, based on defined revenues through
December 31, 2006. To the extent such earnout is paid the preliminary purchase
price will be adjusted.
The consideration was paid with cash on hand (including the receipt of an
aggregate of $8.0 million of cash on hand and marketable securities from
Maxspeed as of closing). The amount and type of consideration was determined on
the basis of arm's length negotiations between the Company and Maxspeed. Neither
the Company nor any of its affiliates has any material relationship to Maxspeed
or any of the shareholders of Maxspeed other than in respect of the Merger
Agreement and the transactions contemplated thereby.
The unaudited pro forma condensed combined financial statements have been
prepared from and should be read in conjunction with the financial statements
and notes thereto for Maxspeed included in this current report on Form 8-K/A,
the consolidated financial statements and notes thereto of the Company as of and
for the year ended June 30, 2005, which are included in the Company's annual
Report on Form 10-K for the year ended June 30, 2005, and the consolidated
financial statements and notes thereto of the Company as of and for the three
months ended September 30, 2005, which are included in the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005.
The pro forma condensed combined balance sheet assumes that the merger took
place on September 30, 2005 and combines the Company's unaudited consolidated
balance sheet at September 30, 2005 and Maxspeed's unaudited balance sheet at
September 30, 2005.
The unaudited pro forma condensed combined statements of operations assume that
the merger took place at the beginning of the periods presented. The condensed
combined statement of operations for the three months ended September 30, 2005
combines the Company's unaudited consolidated statement of operation for the
three months ended September 30, 2005 and Maxspeed's unaudited consolidated
statement of operations for the three months ended September 30, 2005. The
unaudited pro forma condensed combined statement of operations for the year
ended June 30, 2005 combines the Company's audited consolidated statement of
operations for the year ended June 2005, and Maxspeed's unaudited consolidated
statement of operations for the twelve months ended June 30, 2005.
Neoware's fiscal year ends on June 30 and Maxspeed's fiscal year ends on
December 31. For the purposes of the pro forma information, Maxspeed's results
for the twelve months ended June 30, 2005 were derived from the unaudited
quarterly information of Maxspeed for the twelve months ended June 30, 2005 in
order to conform Maxspeed's results to a date within 93 days of Neoware's fiscal
year end.
A final determination of fair values relating to the Merger may differ
materially from the preliminary estimates and will include the final valuation
of the fair values of assets acquired and liabilities assumed. Neoware has
engaged an independent valuation specialist to assist management in determining
the fair value of the assets acquired and liabilities assumed. The final
valuation may change the allocations of the purchase price, which could affect
the fair value assigned to the assets and liabilities and could result in a
change to the pro forma condensed combined financial information. These
adjustments are more fully described in the notes to the unaudited pro forma
combined financial information. The preliminary purchase price and the pro forma
adjustments do not give effect to the contingent consideration of up to $4.0
million, which may be paid to the former common shareholders of Maxspeed based
upon future combined defined revenues through December 31, 2006. The contingent
consideration will be recorded when and if the contingency is resolved. When the
contingency is resolved to the extent such additional consideration is paid, the
fair value of the consideration paid will be an additional cost of acquiring
Maxspeed.
The merger of Maxspeed will be accounted for in accordance with FAS 141,
"Business Combinations" using purchase accounting. Accordingly, effective
November 16, 2005, the financial results associated with Maxspeed will be
included in the Company's consolidated statements of operations and cash flows,
and the assets and liabilities of Maxspeed will be included on the consolidated
balance sheet.
NEOWARE, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2005
(in thousands)
(unaudited)
HISTORICAL
----------------------------- PRO FORMA PRO FORMA
REGISTRANT MAXSPEED ADJUSTMENTS COMBINED
------------- ---------- ------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 12,550 $ 8,164 $ (19,148)(1) $ 1,566
Short-term investments 31,524 827 -- 32,351
Accounts receivable, net 17,565 798 -- 18,363
Inventories 3,638 3,359 304 (5) 7,301
Prepaid expenses and other current assets 2,021 33 -- 2,054
Deferred income taxes 1,015 -- -- 1,015
------------- ---------- ------------- -------------
Total current assets 68,313 13,181 (18,844) 62,650
Property and equipment, net 497 188 -- 685
Intangibles, net 8,767 -- 4,700 (3) 13,467
Goodwill 33,087 -- 7,263 (4) 40,350
Other -- 597 -- 597
------------- ---------- ------------- -------------
Total Assets $ 110,664 $ 13,966 $ (6,881) $ 117,749
============= ========== ============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,234 $ 995 $ -- $ 9,229
Accrued compensation and benefits 1,065 265 -- 1,330
Other accrued expenses 5,355 373 3,700 (1) 9,428
Income taxes payable 991 -- -- 991
Deferred revenue 762 -- -- 762
------------- ---------- ------------- -------------
Total current liabilities 16,407 1,633 3,700 21,740
Deferred income taxes 1,151 -- 1,700 (4) 2,851
Deferred revenues 280 -- -- 280
Other long-term liabilities -- 52 -- 52
Stockholders' equity 92,826 12,281 (12,281)(2) 92,826
------------- ---------- ------------- -------------
$ 110,664 $ 13,966 $ (6,881) $ 117,749
============= ========== ============= =============
See notes to unaudited pro forma combined financial information.
NEOWARE, INC
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Three Months ended September 30, 2005
(In thousands except per share data)
(unaudited)
HISTORICAL
----------------------------- PRO FORMA PRO FORMA
REGISTRANT MAXSPEED ADJUSTMENTS COMBINED
------------- ---------- ------------- -------------
Net Revenues $ 26,543 $ 1,586 $ -- $ 28,129
Cost of revenues 15,842 992 311 (6,7) 17,145
------------- ---------- ------------- -------------
Gross profit 10,701 594 (311) 10,984
Sales and marketing 4,473 663 217 (7) 5,353
Research and development 1,295 341 -- 1,636
General and administrative 2,298 685 -- 2,983
------------- ---------- ------------- -------------
Operating expenses 8,066 1,689 217 9,972
Operating income (loss) 2,635 (1,095) (528) 1,012
Other income, net 253 47 (180)(8) 120
------------- ---------- ------------- -------------
Income (loss) before income tax expense 2,888 (1,048) (708) 1,132
Income tax expense 1,047 9 (643)(9) 413
------------- ---------- ------------- -------------
Net income (loss) $ 1,841 $ (1,057) $ (65) $ 719
============= ========= ============ =============
Earnings per share
Basic $ 0.11 $ 0.04
Diluted $ 0.11 $ 0.04
Weighted average shares outstanding:
Basic 16,271 16,271
Diluted 16,434 16,434
See notes to unaudited pro forma combined financial information.
NEOWARE, INC
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year ended June 30, 2005
(In thousands except per share data)
(unaudited)
HISTORICAL
----------------------------- PRO FORMA PRO FORMA
REGISTRANT MAXSPEED ADJUSTMENTS COMBINED
------------- ---------- ------------- -------------
Net Revenues $ 78,784 $ 11,254 $ -- $ 90,038
Cost of revenues 44,570 7,523 759 (6,7) 52,852
------------- ---------- ------------- -------------
Gross profit 34,214 3,731 (759) 37,186
------------- ---------- ------------- -------------
Sales and marketing 13,176 2,312 867 (7) 16,355
Research and development 3,850 1,279 -- 5,129
General and administrative 6,900 2,050 -- 8,950
------------- ---------- ------------- -------------
Operating expenses 23,926 5,641 867 30,434
Operating income (loss) 10,288 (1,910) (1,626) 6,752
Other income, net 576 165 (719)(8) 22
------------- ---------- ------------- -------------
Income (Loss) before income tax expense 10,864 (1,745) (2,345) 6,774
Income tax expense 3,425 2 (1,497)(9) 1,930
------------- ---------- ------------- -------------
Net income (loss) $ 7,439 $ (1,747) $ (848) $ 4,844
============= ========== ============ =============
Earnings per share
Basic $ 0.47 $ 0.30
Diluted $ 0.46 $ 0.30
Weighted average shares outstanding:
Basic 15,931 15,931
Diluted 16,202 16,202
See notes to unaudited pro forma combined financial information.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
---------------------------------------------------------------------
(In thousands)
1. THE FOLLOWING ADJUSTMENTS GIVE PRO FORMA EFFECT TO THE TRANSACTION:
(1) Represents the estimated preliminary purchase price as follows:
Cash paid at closing to Maxspeed shareholders $13,848
Cash paid to escrow 4,800
Estimated transaction costs 500
-------
Preliminary purchase price $19,148
=======
The Company held back $1.4 million (not included in the preliminary
purchase price) for estimated restructuring costs that were identified
at the closing, which will be held for up to 12 months following the
closing to cover any severance, contract termination or other costs
related to Neoware's transition plan. Any amount not used for
restructuring costs will be distributed to the former shareholders of
Maxspeed. The $1.4 million holdback amount is reflected within accrued
expenses in the accompanying unaudited pro forma condensed combined
balance sheet. The preliminary purchase price and the unaudited pro
forma condensed balance sheet exclude up to $4.0 million of potential
contingent consideration that may be paid to the former common
shareholders of Maxspeed based on defined revenues through December
31, 2006.
(2) Represents the elimination of Maxspeed's shareholders' equity.
(3) Represents the preliminary valuation of intangibles with a finite life
based upon preliminary appraisal information. Neoware engaged third
party valuation specialists to assist in valuing the acquired assets.
Until completion of the third party valuations, which are currently in
progress, the estimated fair values, the related amortization periods
and amortization expense are subject to change. The preliminary
appraisal indicated the following amounts attributable to intangibles
with finite lives and the intended amortization periods.
INTANGIBLES OTHER THAN GOODWILL AMORTIZATION PRELIMINARY
PERIOD IN YEARS VALUATION
Customer relationships (contractual and non-contractual) 5 $2,500
Developed technology and know-how 4 1,100
Employment/non-compete Agreements 3 1,100
------------
Preliminary fair value of intangibles $4,700
============
(4) The allocation of the preliminary purchase price based upon fair value
of assets acquired and liabilities assumed is as follows:
Preliminary Purchase Price $19,148
Less allocation to net assets acquired:
Cash 8,164
Short-term investments 827
Accounts receivable, net 798
Inventories including fair value step up of $484 3,663
Prepaid expenses 33
Property and equipment, net of depreciation and amortization 188
Investments and other assets 597
Customer relationships 2,500
Developed technology and know-how 1,100
Employment/non-compete agreements 1,100
---------
(18,970)
Plus fair value of liabilities assumed (including deferred taxes of $1.7 7,085
million, restructuring holdback amount of $1.4 million and Maxspeed
accrued bonus and transaction cost accruals of $2.3 million)
-------
Goodwill (Preliminary) $7,263
=======
The Company has not determined the tax treatment of the transaction.
The pro forma balance sheet includes an adjustment to reflect an
increase in deferred tax liability of $1,700 to provide taxes on
non-deductible intangibles other than goodwill and assumes the
transaction will be accounted for as a stock purchase.
(5) Represents the preliminary step up in inventory carrying amounts to
reflect inventory at fair value.
(6) Represents an additional charge to cost of revenues related to the
preliminary step up in inventory carrying amounts assuming that the
step up is charged to pro forma earnings over one inventory turn or
approximately six months. The total step up amount of $484 was charged
to pro forma earnings for the twelve months ended June 30, 2005, and
$242 was charged to pro forma earnings for the three months ended
September 30, 2005.
(7) Represents additional amortization costs resulting from the fair value
adjustments to intangibles based upon preliminary appraisal
information. Amortization of the developed technology and know-how is
charged to cost of revenues and assumes a four-year amortization
period. Amortization of customer relationships and
employment/non-compete agreements is charged to operating expenses and
assumes a five and three-year amortization period, respectively. The
amortization included in cost of revenues is $275 annually and $69 per
quarter. The amortization included in sales and marketing is $867
annually and $267 per quarter.
(8) Represents the reduction in interest income that was earned on the
$19.1 million purchase price at an assumed blended interest rate of
3.5% and assuming the cash was paid out at the beginning of the
periods presented.
(9) Represents the adjustment of income tax expense to provide tax benefit
on the Maxspeed historical pre tax loss and the pro forma pre tax loss
using an estimated statutory tax rate of 36.6%.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1034, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: January 17, 2006 Neoware, Inc.
(Registrant)
/s/ Keith D. Schneck
--------------------------------
Keith D. Schneck
Executive Vice President and
Chief Financial Officer