UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
-----------------------
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1998
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number: 000-21240
--------------------------------
NEOWARE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2705700
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
400 Feheley Drive
King of Prussia, Pennsylvania 19406
(Address of principal executive offices)
(610) 277-8300
(Registrant's telephone number including area code)
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of November 6, 1998, there were outstanding 6,285,773 shares of the
Registrant's Common Stock.
Page 1 of 14 pages
Exhibit Index is on page 13
NEOWARE SYSTEMS, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets:
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Operations:
Three Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows:
Three Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
NEOWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
ASSETS 1998 1998
------ --------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 423,840 $ 1,302,984
Accounts receivable, net of allowance for
doubtful accounts of $219,014 and $168,710 2,319,736 4,777,957
Inventories 2,840,162 3,119,043
Recoverable income taxes 1,121,554 1,121,554
Prepaid expenses and other 127,770 123,575
Deferred income taxes 416,530 416,530
--------------- ---------------
Total current assets 7,249,592 10,861,643
PROPERTY AND EQUIPMENT, net 571,573 636,414
NOTE RECEIVABLE 700,000 700,000
CAPITALIZED AND PURCHASED SOFTWARE, net 772,768 809,470
DEFERRED INCOME TAXES 13,866 13,866
--------------- ---------------
$ 9,307,799 $ 13,021,393
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,422,000 $ 3,074,000
Accounts payable 869,503 1,834,400
Accrued expenses 978,259 1,106,607
Deferred revenue 157,312 165,312
--------------- ---------------
Total current liabilities 3,427,074 6,180,319
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.001 par value, 50,000,000 shares authorized,
6,264,158 shares issued and outstanding 6,264 6,264
Additional paid-in capital 10,154,052 10,154,052
Accumulated deficit (4,275,249) (3,301,874)
Deferred compensation (4,342) (17,368)
--------------- ---------------
Total stockholders' equity 5,880,725 6,841,074
--------------- ---------------
$ 9,307,799 $ 13,021,393
=============== ===============
The accompanying notes are an integral part of these financial statements.
Page 3
NEOWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
---------------------------------
1998 1997
---- ----
NET REVENUES $ 2,179,293 $ 5,630,992
COST OF REVENUES 1,770,903 4,139,161
--------------- ---------------
Gross profit 408,390 1,491,831
--------------- ---------------
OPERATING EXPENSES:
Sales and marketing 535,570 1,043,672
Research and development 243,429 353,576
General and administrative 588,076 241,372
Bridging Data Technology venture - 249,108
--------------- ---------------
Total operating expenses 1,367,075 1,887,728
--------------- ---------------
Operating loss (958,685) (395,897)
INTEREST EXPENSE, NET 14,690 93,538
--------------- ---------------
Loss before income taxes (973,375) (489,435)
INCOME TAX BENEFIT - (154,172)
--------------- ---------------
Net loss $ (973,375) $ (335,263)
=============== ===============
BASIC AND DILUTED LOSS PER SHARE $ (.16) $ (.06)
=============== ==============
Weighted average number of shares
used in basic and diluted
loss per share computation 6,264,158 5,760,820
=============== ===============
The accompanying notes are an integral part of these financial statements.
Page 4
NEOWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss income $ (973,375) $ (335,263)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities-
Depreciation and amortization 163,030 220,396
Amortization of deferred compensation 13,026 13,025
Changes in operating assets and liabilities- (Increase) decrease in:
Accounts receivable 2,458,221 355,731
Inventories 278,881 (624,212)
Recoverable income taxes (154,172)
Prepaid expenses and other (4,195) 489,374
Increase (decrease) in:
Accounts payable (964,897) (1,612,500)
Accrued expenses (128,348) (149,041)
Deferred revenue (8,000) (1,785)
------------- -------------
Net cash provided by
(used in) operating activities 834,343 (1,798,447)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (936) (98,082)
Capitalized software (60,551) (100,075)
------------- -------------
Net cash used in investing activities (61,487) (198,157)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (1,652,000) 1,762,000
Increase in note receivable - (700,000)
------------- -------------
Net cash provided by (used in) financing activities (1,652,000) 1,062,000
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (879,144) (934,604)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,302,984 1,452,409
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 423,840 $ 517,805
============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 27,505 $ 93,538
The accompanying notes are an integral part of these financial statements.
Page 5
NEOWARE SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Neoware Systems,
Inc. and Subsidiaries (the "Company") have been prepared in conformity with
generally accepted accounting principles. The interim financial information,
while unaudited, reflects all normal recurring adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position and operating results for the interim periods presented. The results of
operations for the three month period ended September 30, 1998 are not
necessarily indicative of results expected for the full year. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
2. REVENUE RECOGNITION AND MAJOR CUSTOMERS:
Product revenue is recognized at the time of title transfer, which ordinarily
occurs at the time of shipment. From time to time, customers request delayed
shipment, usually because of customer scheduling for systems integration and
lack of storage space at customers' facility during the implementation. In such
"bill and hold" transactions, the Company recognizes revenues when the following
conditions are met: the equipment is complete, ready for shipment and segregated
from other inventory; the Company has no further significant performance
obligations in connection with the completion of the transaction; the commitment
and delivery schedule is fixed; the customer requested the transaction be
completed on this basis; and the risks of ownership have passed to the customer.
Revenues recognized from "bill and hold" transactions for products which had not
shipped by September 30, 1998 and 1997 were $505,000, and $4,792,000,
respectively. Accounts receivable relating to "bill and hold" transactions were
$626,000 and $6,181,000 at September 30, 1998 and 1997, respectively. Service
contract revenue is recognized ratably over the contract period. Product
warranty costs and an allowance for sales returns are accrued at the time
revenues are recognized.
Net revenues from one customer represented 12% of total net revenues for the
three months ended September 30, 1998. Net revenues from another customer
represented 30% of total net revenues for the three months ended September 30,
1997. At September 30, 1998 and 1997, the Company had receivables from these
customers of approximately $231,000 and$1,649,000, respectively.
Page 6
3. INVENTORIES:
Inventories are stated at the lower of cost or market (first-in, first-out
method) and consisted of the following:
September 30, June 30,
1998 1998
--------------- ---------------
Purchased components and subassemblies $ 1,547,367 $ 1,599,136
Work-in-process 274,571 283,587
Finished goods 1,018,224 1,236,320
--------------- ---------------
$ 2,840,162 $ 3,119,043
=============== ===============
4. NOTE RECEIVABLE:
In October 1997, the Company merged Information Technology Consulting, Inc., a
wholly-owned subsidiary, into Broadreach Consulting, Inc. ("Broadreach")
(formerly The Reohr Group, Inc.) in exchange for a 2% stock interest in
Broadreach and the reimbursement of $1 million of expenses incurred by the
Company in connection with its efforts to make certain acquisitions in the
information technology consulting and staffing field. Of the total
reimbursement, $300,000 was paid in cash and the remaining $700,000 is due on
the earlier of three years or upon the completion of an initial public offering
of Broadreach. The note bears interest at 8%. Of the total reimbursement,
$292,000 was offset against general and administrative expenses during the three
months ended September 30, 1997 for costs previously incurred and charged to
expense.
5. LINE OF CREDIT:
The Company has a $5,000,000 revolving line of credit ($3,578,000 available at
September 30, 1998) with a bank which expires on November 30, 1998, subject to
annual renewal. Borrowings under the line are at the bank's prime rate. Under
the line, the Company is required to maintain specified ratios of working
capital and debt to net worth, as defined.
6. EARNINGS PER SHARE
Effective December 31, 1997 the Company adopted SFAS No. 128, "Earnings per
Share", which supersedes APB Opinion No. 15, "Earnings per Share". SFAS 128
requires dual presentation of basic and diluted earnings per share (EPS) for
complex capital structures on the face of the income statement. Basic EPS is
computed by dividing income (loss) by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise or conversion of securities into common stock, such as stock
options. For the three month periods ended September 30, 1998 and 1997, there
were no dilutive effects of stock options or warrants as the Company incurred a
net loss. Options and warrants to purchase 7,455,079 shares of Common Stock at
prices ranging from $1.06 to $8.75 per share were outstanding at September 30,
1998. In accordance with the provisions of SFAS 128, EPS for prior periods have
been restated.
Page 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
Neoware Systems, Inc. (the "Company") designs, manufactures and markets a family
of Windows-based terminals and thin client computers that are designed to allow
users to access Windows-based applications from a multi-user Windows(R) NT
server, plus connect to mainframes, minicomputers and the Internet. The
Company's NeoStationTM family of Windows-based terminals and related software
allows users to utilize all of their existing computer systems and applications
running on Windows platforms, UNIX, mainframes and minicomputers, and access
them across a network. Unlike Java network computers, an alternative type of
thin client, Neoware's products do not require customers to rewrite their
applications in the Java language or to use Java emulators to access their
existing systems. Unlike personal computers, the Company's products are designed
primarily to run applications on a server, not on the desktop. This offers a
number of significant advantages compared to an architecture based upon personal
computers. Windows-based terminals and thin clients such as the Company's
NeoStation line of products are designed to be easier to install, maintain and
administer than traditional personal computers. Such lower administration costs
are designed to lower the total cost of ownership of systems utilizing the
Company's products when compared to personal computers.
The Company's current strategy is to become a leader in the Windows-based
terminal and thin client computers market by focusing on expanding its software
products and its thin client computer hardware. The Company also plans to
continue to develop strategic partnerships and acquire strategic technologies,
products or businesses complementary to its current business. The Company sells
its products in North America directly to end users, resellers, system
integrators and OEMs. International sales are generally made through
distributors.
In October 1997, the Company merged Information Technology Consulting, Inc.
("ITC"), a wholly owned subsidiary, with Broadreach Consulting, Inc.
("Broadreach") and Global Consulting Group ("Global"). Under the merger, ITC and
Global merged into Broadreach, and Neoware received stock that represents a 2%
ownership of Broadreach. The Company was also reimbursed for the expenses
incurred by the Company and ITC in connection with ITC's efforts to make these
acquisitions, $300,000 of which was paid in cash. The remainder of the expenses
in the amount of $700,000 is repayable by Broadreach on the earlier of three
years or the consummation of an initial public offering of Broadreach. The note
bears interest at 8% per annum.
In February 1997, the Company formed a new subsidiary, Bridging Data Technology,
Inc. ("BDT"). BDT acquired and further developed a software product,
SmartBridge(TM), which utilizes the "intelligent bridging" approach to upgrading
programs and data for Year 2000 compliance. The Company entered into an
agreement effective January 1, 1998 which reduced the Company's ownership
position in Bridging Data Technology, Inc. and eliminated the Company's
requirement to fund future operations. In addition, effective March 31, 1998,
the Company wrote off the full amount of its investment in BDT. The write-off
reflects the Company's evaluation that recovery, if any, of its investment in
BDT will not occur in the near future. Future cash distributions, if any, from
BDT will be recorded as income in the period during which the transaction
occurs.
Page 8
In June 1998, the Company entered into a joint marketing and development
agreement and an equity purchase agreement with Motorola, Inc., under which
Motorola purchased approximately 6% of the Company's outstanding Common Stock.
Under the joint marketing and development agreement, the two companies agreed to
collaborate on technology for the Windows-based terminal market, and to jointly
promote this technology to OEM customers. Although the Company believes that its
agreements with Motorola allow it to compete more effectively in the market for
customers who wish to create Windows-based terminals under their own brand
names, there can be no assurance that the Company will generate significant
revenue from this agreement.
Results of Operations
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations as a percentage of net
revenues.
Three Months Ended
September 30,
1998 1997
------ ------
Gross Profit 18.7% 26.5%
Operating expenses
Sales and marketing 24.5 18.5
Research and development 11.2 6.3
General and administrative 27.0 4.3
Bridging Data Technology venture - 4.4
----- ----
Operating loss (44.0) (7.0)
Interest expense, net (0.7) (1.7)
----- -----
Loss before taxes (44.7) (8.7)
Income tax benefit - (2.7)
----- ----
Net loss (44.7)% (6.0)%
===== ====
Net revenues for the three months ended September 30, 1998 decreased to
$2,179,293 from $5,630,992 for the comparable period in the prior fiscal year.
The decrease in net revenues was attributable to the continuation of the
transition to the NeoStation family of products which have lower average selling
prices ("ASPs") than older products, and the delay in the full scale
implementation of thin client computers by corporate customers as they awaited
the deployment of Windows NT 4.0. Terminal Server Edition from Microsoft. The
impact of declining ASPs is highlighted by the fact that revenues for the three
months ended September 30, 1998 were 61% lower than the comparable period in the
prior year while unit volume declined 22% during the same period. Revenues for
the three months ended September 30, 1997 included sales to one of the Company's
major customers which have declined significantly as a result of completing
delivery of products under existing purchase orders during the quarter ended
December 31, 1997. The Company is subject to significant variances in its
quarterly operating results because of the fluctuations in the timing of the
receipt of large orders.
The Company's gross profit as a percentage of net revenues decreased to 18.7%
for the three months ended September 30, 1998 from 26.5% for the comparable
period of the prior fiscal year. The change in gross profit percentage was a
result of fixed overhead costs representing a higher percentage of revenue and,
to a lesser extent, the impact of reduced ASPs which were not offset by lower
manufacturing costs. The Company anticipates that its gross margin percentage
will vary from quarter to quarter depending on the mix of business, including
the mix of hardware and software revenues. The gross profit margin also varies
in response to competitive market conditions as well as periodic fluctuations in
the cost of memory and other significant components. The market in which the
Company competes remains very competitive and although the Company intends to
continue its efforts to reduce the cost of its products, there can be no
certainty that the Company will not be required to reduce prices of its products
without compensating reductions in the cost to produce its products in order to
increase its market share or to meet competitors' price reductions.
Page 9
Operating expenses for the three months ended September 30, 1998 were
$1,367,075, a decrease of $520,653 from operating expenses of $1,887,728 in the
comparable period of the prior fiscal year. Sales and marketing expenses
decreased by $508,102 to $535,570 for the three months ended September 30, 1998
as compared to $1,043,672 for the prior year as a result of restructuring the
international and US sales force and reduced commissions attributable to the
lower revenues. During the three months ended September 30, 1998, the Company
terminated its relationship with its US distributor. The Company believes that
the elimination of a level of distribution will allow it to price its products
competitively without a negative impact on gross margin. The Company is
developing a low cost telesales channel to complement its current sales efforts
and is selling to Value Added Resellers ("VARs"). Research and development
expenses for the three months ended September 30, 1998 decreased by $110,147 to
$243,429 from $353,576 in the prior year as the Company completed the
introduction of the NeoStation family of products in fiscal 1998 and due to the
elimination of the use of outside consultants. General and administrative
expenses increased by $346,704 to $588,076 for the three months ended September
30, 1998 from $241,372 in the prior year due primarily to the reduction in prior
year expenses attributable to the reimbursement of expenses related to ITC
totaling $292,000. General and administrative expenses during the three months
ended September 30, 1998 also include provisions for increased legal costs and
bad debt expenses. The reduction of BDT expenses for the three months ended
September 30, 1998 as compared to the comparable period in the prior year
reflects the impact of an agreement which reduced the Company's ownership
position and eliminated the Company's requirement to fund future operations of
BDT effective January 1, 1998.
Net interest expense decreased in the three month period ended September 30,
1998 due to decreased borrowings under the Company's line of credit resulting
from the availability of the proceeds from the sale of stock to Motorola during
June 1998 and the benefit of reduced inventory and accounts receivable balances.
The effective income tax rates was approximately 31.5% for the three-month
period ended September 30, 1997. No benefit was recognized for the net
operating loss during the three months ended September 30, 1998. The tax benefit
for the three months ended September 30, 1997 reflects a recovery of taxes paid
in prior years.
For the three months ended September 30, 1998, the Company's net loss was
$973,375 as compared to a net loss of $335,263 for the comparable period in the
prior year. The increase in net loss was attributable to reduced revenues, a
lower gross margin and the lack of an income tax benefit from the net operating
loss which were partially offset by reduced operating and interest expense. In
addition, during the three months ended September 30, 1997, the Company was
reimbursed for net expenses of approximately $292,000 previously incurred in
connection with its investment in ITC.
Liquidity and Capital Resources
At September 30, 1998, the Company had net working capital of approximately
$3,822,518 composed primarily of cash and cash equivalents, accounts receivable
and recoverable income taxes. The Company's principal sources of liquidity
included approximately $424,000 of cash and cash equivalents and a $5,000,000
bank line of credit facility, $3,578,000 of which was available as of September
30, 1998. The bank line of credit, which is subject to annual renewal, expires
on November 30, 1998. Management is currently negotiating an extension of its
credit facility; however, there is no assurance that management will be
successful in negotiating terms and conditions as favorable as its current line
of credit facility.
Page 10
Cash and cash equivalents decreased by approximately $879,000 during the
three-month period ended September 30, 1998, primarily due to the loss from
operations, repayments under the line of credit and a decrease in accounts
payable and accrued expenses, which were offset by a decrease in accounts
receivable.
The Company generated cash from operations of approximately $834,000 during the
three months ended September 30, 1998 compared to using cash from operations of
approximately $1,798,000 during the comparable period in the prior fiscal year.
The Company expects to fund current operations and other cash expenditures
through the use of available cash, cash from operations, funds available under
its credit facility, possible new debt sources and the sale of its securities.
In addition, the Company recorded a benefit for its fiscal 1998 net operating
loss carryback and expects to recover approximately $1,122,000 of federal income
taxes paid in prior years. However, the Company must achieve profitable
operations in order to provide adequate funding for the long term.
Year 2000 Compliance
The Company has made a preliminary evaluation of its Year 2000 exposures. The
following areas were evaluated: internal management information and embedded
systems, products, vendors and customers.
The Company utilizes various computer software programs and systems as part of
its internal management information systems which are primarily off-the-shelf
products purchased from commercial sources with minor customization. Updates to
these products are routinely installed by the Company to upgrade the systems and
correct known defects in the software. All major systems have been reviewed for
Year 2000 issues. The Company's financial accounting software is not Year 2000
compliant. The Company is testing an upgrade to the current software, which is
Year 2000 compliant and will cost approximately $30,000 for the software and
training. Conversion to the updated software is scheduled for early calendar
1999. The Company's engineering department utilizes UNIX based systems, which
are not Year 2000 compliant; however, the nature of the utilization is not date
sensitive. The operating systems can be upgraded for less than $5,000. The
Company is in the process of implementing a contact management and service data
base software application which is Year 2000 compliant. Total cost is expected
to be less than $15,000. All other significant internal systems are either
compliant or not critical to ongoing operations. The Company does not utilize
any significant systems with embedded technology.
All of the Company's products sold after March 1997 were tested and found to be
compliant with Year 2000.
None of the Company's vendors provide more than 20% of the Company's annual raw
material requirements and alternative sources are generally available. The
Company will evaluate the Year 2000 readiness of its sole source vendors by June
30, 1999. Contingency plans will be developed to ensure continued supply in the
event a vendor expects to incur difficulties achieving Year 2000 compliance. In
addition, customers which represent more than 10% of the Company's annual
revenues will be surveyed for compliance with Year 2000 by June 30, 1999 in an
effort to identify possible interruptions to the Company's revenue streams.
There can be no assurance that the Company will not be adversely affected by the
failure of distributors, suppliers, customers and vendors with which it
interacts to become Year 2000 compliant.
Page 11
The Company estimates that the total cost to complete its Year 2000 evaluation
and remediation, including normal planned system upgrades, of all internal
systems will be less than $100,000. Funding for these costs is expected to be
provided by cash flows from operations. The Company has not deferred any
significant system projects due to its Year 2000 efforts.
Forward-Looking Statements
Certain statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and relate to
the development of the Company's products and future operating results that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those in such forward-looking statements. Forward-looking
statements include anticipated purchases by customers, future margins and margin
trends, future revenues and operating losses, the Company's competitive
position, lower cost of ownership of the Company's systems, expansion of
software products and thin client computer hardware products and statements
regarding year 2000 compliance. The words "believe," "expect," "intend,"
"anticipate," variations of such words, and similar expressions identify
forward-looking statements, but their absence does not mean that the statement
is not forward-looking. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Factors that could affect the Company's actual results
include the ability of the Company to market its products with Motorola to OEM
customers, market acceptance of products utilizing the Windows CE operating
system, customers' acceptance of Neoware's line of thin clients and newly
introduced options, pricing pressures, rapid technological changes in the
industry, growth of the thin client computer market and increased competition.
Additional factors which could affect the Company's actual results include,
quarterly fluctuations in operating results, general economic conditions
affecting the demand for computer products, the timing of significant orders,
failure to reduce product costs or maintain quality, delays in the receipt of
key components, seasonal patterns of spending by customers and the outcome of
various litigation. The Company does not undertake to update any forward-looking
statements made herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 11, 1998, a complaint entitled Cerrato, Inc. v. Neoware Systems, Inc.,
98 Civ. 1748 (JSM), was filed in the United States District Court for the
Southern District of New York, naming as defendants the Company, its Chairman,
and its former CFO. The Complaint asserts claims under ss. 10(b) of the
Securities and Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 promulgated
thereunder, and common law. The complaint, which was filed as a purported class
action on behalf of purchasers of the Company's common stock during the period
from June 15, 1996 through August 15, 1997, alleges, among other things, that
the defendants made misrepresentations related to plans for various potential
acquisitions by a subsidiary of the company and a spin-off. A First Amended
Complaint ("FAC") was filed on or about May 1, 1998. The FAC adds claims on
behalf of a second purported class -- purchasers of the Company's stock from
November 13, 1997 through May 1, 1998 -- related to the Company's announcement,
on April 30, 1998, that it would be restating certain financial results
previously reported for the first two quarters of fiscal year 1998.
Page 12
Thereafter, four separate purported securities class actions: Galitzer v.
Neoware Systems, Inc., 98CV2582 (BWK), Pollison v. Neoware Systems, Inc.,
98CV2879 (BWK), Tuchman v. Neoware Systems, Inc., 98CV2868 (BWK), and Grubin v.
Neoware Systems, Inc., 98CV3651 (BWK), were filed in the United States District
Court for the Eastern District of Pennsylvania (the "Pennsylvania actions"). The
Pennsylvania actions name some of the same individual defendants as the FAC, as
well as certain additional directors and officers, and alleges violations of
ss.ss. 10(b) and 20(a) of the Exchange Act and Rule 10b-5 based on factual
allegations similar to those added to the New York action in the FAC on behalf
of a purported class of purchasers of the Company's securities between October
30, 1997 and April 30, 1998. The Pennsylvania actions have been consolidated
under the heading In re Neoware Systems, Inc. Securities Litigations, Master
File No. 98-CV-2582, lead co-plaintiffs and counsel have been appointed, and the
consolidated complaint and motion for class certification have been filed.
On October 15, 1998, a Stipulation and Order was entered by the United States
District Court for the Southern District of New York appointing lead counsel and
counsel for the two purported classes identified in the FAC, and reflecting
plaintiffs' intent to consolidate the action with the cases pending in
Pennsylvania.
Defendants' time to respond to the complaints in the actions and the class
certification motion filed in Pennsylvania has not yet expired.
The Company disputes the validity of these claims and intends to defend the
cases vigorously.
In May 5, 1998, a complaint was filed in the Court of Common Pleas of Montgomery
County against the Company by Development Concepts, Inc. The complaint asserts
claims for common law breach of contract, fraud, misrepresentation, breach of
warranty and violations of the federal Lanham Act arising primarily from the
parties' contractual relationships. The complaint seeks an indeterminate amount
of monetary damages in excess of $1,500,000. On October 29, 1998, the Company
filed its Answer and Counterclaim to the Complaint asserting claims for breach
of contract, unjust enrichment, unfair competition and misappropriation of trade
secrets. The Counterclaim demands injunctive and monetary relief in excess of
$180,000. The Company disputes the validity of Development Concepts, Inc.'s
claims and intends to both defend these claims and pursue its own counterclaims
vigorously.
Management does not anticipate that resolution of the pending litigation, either
separately or in the aggregate, will have a material effect on the Company's
financial position or results of operations. This is a forward-looking
assessment, which may change as the cases develop. While management may reassess
this from time to time, it does not undertake to do so on any regular basis.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.2 Bylaws (Amended as of October 16, 1998)
(b) Reports on Form 8-K:
None
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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: November 16, 1998 By: /S/ EDWARD C. CALLAHAN, JR.
-----------------------------
Edward C. Callahan, Jr.,
President and Chief
Executive Officer
Date: November 16, 1998 By: /S/ EDWARD T. LACK, JR.
------------------------------------
Edward T. Lack, Jr.,
Chief Financial Officer
(Principal Accounting Officer
and Principal Financial Officer)
Page 14