UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
_______________________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the Quarter ended December 31, 1997
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: 0-21240
________________________________
NEOWARE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 23-2705700
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
400 Feheley Drive
King of Prussia, Pennsylvania 19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(610) 277-8300
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
_________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ___
As of February 13, 1997, there were outstanding 5,764,539 shares of the
Registrant's Common Stock.
Page 1 of 13 pages
Exhibit Index is on page 12
NEOWARE SYSTEMS, INC.
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INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets:
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations:
Three and Six Months Ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows:
Six Months Ended December 31, 1997 and 1996 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 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
December 31, June 30,
ASSETS 1997 1997
------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 818,319 $ 1,452,409
Accounts receivable, net of allowance for doubtful accounts of
$124,086 7,824,177 9,308,731
Inventories 4,186,081 4,035,202
Prepaid expenses and other 736,641 789,179
Deferred income taxes 416,530 416,530
----------- -----------
Total current assets 13,981,748 16,002,051
PROPERTY AND EQUIPMENT, net 747,338 680,859
NOTE RECEIVABLE 700,000 ---
CAPITALIZED AND PURCHASED SOFTWARE, net 1,727,582 1,630,339
DEFERRED INCOME TAXES 13,866 13,866
----------- -----------
$ 17,170,534 $ 18,327,115
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ 3,214,000 $ 3,071,000
Accounts payable 2,671,179 3,796,549
Accrued expenses 267,527 516,148
Deferred revenue 170,221 172,006
----------- -----------
Total current liabilities 6,322,927 7,555,703
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,000,000 shares authorized and
none issued and outstanding -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 5,760,820 shares issued and outstanding 5,761 5,761
Additional paid-in capital 9,168,171 9,168,171
Retained earnings 1,718,516 1,666,951
Deferred compensation (44,841) (69,471)
----------- -----------
Total stockholders' equity 10,847,607 10,771,412
----------- -----------
$ 17,170,534 $ 18,327,115
=========== ===========
The accompanying notes are an integral part of these financial statements.
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited) Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ----------------- ------------------- ------------------
NET REVENUES $6,980,500 $8,924,802 $12,611,492 $12,380,422
COST OF REVENUES 4,987,662 6,384,870 8,920,002 8,487,435
---------- ---------- ----------- -----------
Gross profit 1,992,838 2,539,932 3,691,490 3,892,987
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 925,336 993,681 1,834,738 1,782,490
General and administrative 541,494 390,917 829,586 717,751
Research and development 441,177 379,975 874,862 638,112
---------- ---------- ----------- -----------
Total operating expenses 1,908,007 1,764,573 3,539,186 3,138,353
---------- ---------- ----------- -----------
Operating income 84,831 775,359 152,304 754,634
INTEREST INCOME (EXPENSE), NET (58,653) 35,933 (72,734) 75,856
---------- ---------- ----------- -----------
Income before income taxes 26,178 811,292 79,570 830,490
INCOME TAXES 9,210 267,313 28,004 274,224
---------- ---------- ----------- -----------
NET INCOME $ 16,968 $ 543,979 $ 51,566 $ 556,266
========== ========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.00 $ 0.09 $ 0.01 $ 0.10
========== ========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.00 $ 0.07 $ 0.01 $ 0.07
========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING IN 5,760,820 5,727,233 5,760,820 5,727,233
BASIC EARNINGS PER SHARE ========== ========== =========== ===========
COMPUTATION
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING IN 5,760,820 7,572,135 5,760,820 7,651,186
DILUTED EARNINGS PER SHARE ========== ========== =========== ===========
COMPUTATION
The accompanying notes are an integral part of these financial statements.
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited) Six Months Ended
December 31,
----------------------------------
1997 1996
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,566 $ 556,266
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 213,407 112,758
Amortization of deferred compensation 24,630 26,052
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable 1,484,554 (1,691,165)
Inventories (150,879) (678,147)
Prepaid expenses and other 52,538 (447,356)
Increase (decrease) in:
Accounts payable (1,125,371) 2,125,218
Accrued expenses (248,621) 27,709
Deferred revenue (1,785) 35,655
----------- -----------
Net cash provided by
operating activities 300,039 66,990
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (173,237) (45,138)
Capitalized software (203,892) (61,167)
----------- -----------
Net cash used in investing activities (377,129) (106,305)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 143,000 -
Increase in note receivable (700,000) -
Exercise of stock options - 727,674
Principal payments on long-term debt - (7,965)
----------- -----------
Net cash used in financing activities (557,000) 719,709
----------- -----------
INCREASE (DECREASE) IN CASH (634,090) 680,394
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,452,409 2,700,298
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 818,319 $ 3,380,692
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
OPERATING ACTIVITIES:
Cash paid for income taxes $ 50,719 $ 8,184
Cash paid for interest $ 83,274 $ 1,043
The accompanying notes are an integral part of these financial statements.
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 and six month periods ended December 31, 1997 are
not necessarily indicative of the 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. MAJOR CUSTOMERS :
-----------------
Net revenues from two customers represented 22% and 14% of total net revenues
for the three month period ended December 31, 1997 and 16% and 21% of net
revenues for the six month period then ended. Net revenues from three customers
represented 26%, 20% and 13% of total net revenues for the three month period
ended December 31,1996 and 19%, 15% and 10% of net revenues for the six-month
period then ended. At December 31, 1997, the Company had receivables from its
two major customers totaling approximately $5,351,000.
3. INVENTORIES:
------------
Inventories are stated at the lower of cost or market (first-in, first-out
method) and consisted of the following:
December 31, June 30,
1997 1997
---------------- --------------
Purchased components and subassemblies $2,021,027 $1,566,161
Work-in-process 398,150 301,565
Finished goods 1,766,904 2,167,476
---------- ----------
$4,186,081 $4,035,202
========== ==========
4. NOTE RECEIVABLE:
----------------
In October 1997, the Company merged Information Technology Consulting, Inc., a
wholly-owned subsidiary, into The Reohr Group, Inc. ("Reohr") in exchange for a
2% stock interest in Reohr 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 the initial public
offering of Reohr. The note bears interest at 8% per annum. 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 ($1,786,000 available at
December 31, 1997) with a bank which expires on November 30, 1998. 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 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 and six month periods ended December 31, 1996 the
weighted average number of shares outstanding for purposes of calculating
diluted earnings per share included 1,844,902 and 1,923,953 shares,
respectively, attributable to stock options. In accordance with the provisions
of SFAS 128, EPS for prior periods have been restated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
The Company provides thin client computers and related software that are
designed to integrate and deliver information to the desktop cost effectively in
network-centric environments. The Company's @workStation and NeoStation
thin client combine a variety of windowed-display, graphical user interface and
communications industry standards to provide the user seamless and transparent
access to all information, including text, graphics, audio and video data, on
any type of network. The Company has licensed Netscape Navigator(TM), Citrix's
ICA(TM) and Sun Microsystems, Inc.'s Java(TM) technology that it has
incorporated into its products to provide cost-effective access to information
and applications within the corporate enterprise and on the Internet.
The Company's current strategy is to become a leader in the emerging market
for thin client computers by focusing on expanding its software products and its
thin client computer hardware. The Company also plans to continue to seek 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 and through distributors, resellers,
system integrators and OEMs. International sales are generally made through
distributors.
In August 1996, the Company formed a new subsidiary, Information Technology
Consulting, Inc. ("ITC"), for the purpose of acquiring companies in the
computer services field, including information technology staffing companies and
client-server consulting companies. In January 1997 the Company announced that
ITC entered into a definitive agreement to acquire the business of Global
Consulting Group ("Global"), an information technology staffing and consulting
company, subject to the consummation by ITC of a public offering of its stock.
In March 1997 the Company announced that ITC entered into a definitive agreement
to acquire the business of The Reohr Group, Inc. ("Reohr"), an information
technology staffing and consulting company, subject to the consummation by ITC
of a public offering of its stock.
In October 1997, the Company merged ITC with Reohr and Global. Under the
merger, ITC and Global merged into Reohr, and Neoware received stock that
represents a 2% ownership of Reohr. 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 were reimbursed by a $700,000 note from Reohr that is repayable on
the earlier of three years or the consummation of an initial public offering of
Reohr. The note bears interest at 8% per annum.
In February 1997, the Company formed a new subsidiary, Bridging Data
Technology, Inc. ("BDT"). BDT has acquired and further developed a software
product, SmartBridge(TM), which utilizes the "intelligent bridging" approach to
upgrading programs and data for Year 2000 compliance. Neoware holds a majority
ownership stake in BDT, which is based in Atlanta, GA. The SmartBridge product
implements an on-site automated bridge building "factory" that creates
intelligent bridge modules. These modules allow the uncoupling of applications
and data, enabling conversions to take place quickly and with minimal impact to
system performance.
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 Six Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
Gross Profit 28.5% 28.5% 29.2% 31.4%
Operating expenses:
Sales and marketing 13.2 11.1 14.5 14.4
General and administrative 7.8 4.4 6.6 5.8
Research and development 6.3 4.3 6.9 5.1
---- ---- ---- ----
Operating income 1.2 8.7 1.2 6.1
Interest income (expense), net (0.8) 0.4 (0.6) 0.6
---- ---- ----
Income before taxes 0.4 9.1 0.6 6.7
Income taxes 0.1 3.0 0.2 2.2
---- ---- ---- ----
Net Income 0.3% 6.1% 0.4% 4.5%
==== ==== ==== ====
Net revenues for the three months ended December 31, 1997 decreased to
$6,980,500 from $8,924,802 for the comparable period in the prior fiscal year.
For the six months ended December 31, 1997, net revenues increased to
$12,611,492, an increase of 2% from $12,380,422 for the comparable period in the
prior fiscal year. The decrease in net revenues for the three months ended
December 31, 1997 versus the comparable period in the prior year was
attributable to the timing of the receipt of certain large orders during the
second quarter of fiscal 1997. The Company's revenues for the current year
represent shipments of its line of thin client computers. Revenues for the six
months ended December 31, 1996 represent the initial shipments of its thin
client computer line and revenues earned from licensing agreements for its netOS
software for thin client computers. 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 was 28.5% for
the three months ended December 31, 1997 and 1996. The gross profit as a
percentage of net revenues decreased to 29.2% for the six months ended December
31, 1997 from 31.4% for the comparable period in the prior fiscal year. The
change in gross profit percentage for the six months ended December 31, 1997 was
a result of the Company deriving substantially less revenue from software
licensing as well as an increase in the percentage of sales through third party
sales channels. The Company's thin client computer gross profit
margin was substantially unchanged from the prior year. The Company anticipates
that 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.
For the three and six months ended December 31, 1997 net income decreased
to $16,968 and $51,566, respectively, from $543,979 and $556,266 for the
comparable periods in the prior fiscal year. The decrease in net income for the
three months ended December 31, 1997 was attributable to lower net revenues and
increased operating expenses, including approximately $90,000 of net expenses
related to the Company's investment in BDT. The decline in net income for the
six months ended December 31, 1997 versus the comparable period in the prior
fiscal year was attributable to the Company's continued investment in both sales
and marketing and research and development expenses. In addition, the Company
incurred net expenses of approximately $240,000 related to its investment in BDT
which was offset by the reimbursement for net expenses of approximately $292,000
previously incurred in connection with its investment in ITC. The decline in net
income was also impacted by the increase in net interest expense.
Operating expenses for the three and six months ended December 31, 1997
were $1,908,007 and $3,539,186, respectively, versus $1,764,573 and $3,138,353
for the comparable periods in the prior fiscal year. Research and development
expenses for the three and six months ended December 31, 1997 increased to
$441,177 and $874,862, respectively from $379,975 and $638,112 in the comparable
periods in the prior fiscal year as the Company continued to expand its
investment to develop, adapt or acquire technologies that will expand the market
for its current and future products. Sales and marketing expenses decreased to
$925,336 for the three months ended December 31, 1997 as compared to $993,681
for the comparable period in the prior year and increased to $1,834,738 for the
six months ended December 31, 1997 as compared to $1,782,490 for the comparable
period in the prior year. The increase reflects the cost of additions to the
Company's sales and marketing staff partially offset by reduced advertising
during fiscal 1998. General and administrative expenses increased to $441,177
and $874,862 for the three and six months ended December 31, 1997 versus
$379,975 and $638,112 in the comparable periods in the prior year. General and
administrative expenses for the current year include the addition of the
Company's Chief Executive Officer and the expenses related to BDT partially
offset by the reimbursement of expenses related to ITC.
Net interest expense for the three and six months ended December 31, 1997
was $58,653 and $72,734, respectively, versus net interest income of
$35,933 and $75,856 for the comparable periods in the prior year. The
increased interest cost is attributable to increased line of credit borrowings
required to finance higher inventory and accounts receivable balances.
The effective income tax rates were approximately 35.2% and 33.0% during
fiscal 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had net working capital of approximately
$7,659,000 composed primarily of cash and cash equivalents, accounts receivable
and inventory. The Company's principal sources of liquidity included
approximately $818,000 of cash and cash equivalents and a $5,000,000 bank line
of credit facility, $1,786,000 of which was available as of December 31, 1997.
The bank line of credit expired on December 31, 1997; however, the bank has
continued to provide credit under the same terms while a formal extension and
possible expansion of the line is being negotiated.
Cash and cash equivalents decreased by approximately $634,000 during the
six months ended December 31, 1997, primarily as a result of the purchase of
equipment, increased capitalized software costs and a decrease in accounts
payable and accrued expenses, which was offset by a decrease in accounts
receivable.
The Company generated approximately $300,000 in cash from operating
activities in the six months ended December 31, 1997 compared to generating cash
from operations of approximately $67,000 during the comparable period of fiscal
1997.
The Company expects to fund current operations and other cash expenditures,
as well as any acquisitions, through the use of available cash, cash from
operations, funds available under its credit facility, possible new sources of
debt financing, and the sale of its securities.
YEAR 2000 COMPLIANCE
The Company's management information systems primarily use software
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 defaults in the software. All major systems have been reviewed for
Year 2000 issues and, where necessary, upgraded software has been identified and
implementation schedules are in process. There have been no significant
incremental costs identified with updates that specifically address Year 2000
compliance. The Company is also reviewing its products and services for
compliance with Year 2000 requirements. Based on a preliminary review, the
Company's products were determined to be Year 2000 compliant. Notwithstanding
the Year 2000 compliance of the Company's systems and products, 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.
FORWARD-LOOKING STATEMENTS
The foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to certain risks and uncertainties, including, but not
limited to, quarterly fluctuations in operating results, general economic
conditions affecting the demand for computer products, customer acceptance of
the Company's line of thin client computers and related software and the Year
2000 software tools offered by its subsidiary, the timing of significant orders,
increased competition, development, introduction, delivery and customer
acceptance of new products and delays in the receipt of key components. The
Company does not undertake to update any forward-looking statements made herein.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 1997, the Company held its Annual Meeting of Stockholders.
The Stockholders voted to elect six members to the Board of Directors, to amend
the Company's 1995 Stock Option Plan and to ratify the selection of Arthur
Andersen LLP as the Company's independent accountant for the fiscal year ending
June 30, 1998.
Elected to the Board of Directors were Arthur R. Spector (4,506,033 shares
voted for election and 604,364 shares were withheld), Edward C. Callahan
(4,506,333 shares voted for election and 604,064 shares were withheld), Michael
G. Kantrowitz (4,506,333 shares voted for election and 604,064 shares were
withheld), Howard L. Morgan (4,506,333 shares voted for election and 604,064
shares were withheld), John M. Ryan (4,506,333 shares voted for election and
604,064 shares were withheld), and Carl G. Sempier (4,504,833 shares voted for
election and 605,564 shares were withheld).
The selection of Arthur Andersen LLP as the Company's independent
accountant was ratified with 4,542,568 shares voting in favor of ratification,
16,300 shares voting against ratification and 551,529 shares abstaining.
The amendment to the Company's 1995 Stock Option Plan was approved with
1,026,425 shares voting in favor of the proposal, 115,630 shares voting against
the proposal, 576,966 shares abstaining and 3,391,376 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10 1995 Stock Option Plan (as amended on
December 10, 1997)
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
NEOWARE SYSTEMS, INC.
Date: February 17, 1997 By: /s/ EDWARD C. CALLAHAN, JR.
-----------------------------
Edward C. Callahan, Jr., President and
Chief Executive Officer
Date: February 17, 1997 By: /s/ EDWARD T. LACK, JR.
-----------------------
Edward T. Lack, Jr., Vice President of
Finance and Administration (Principal
Financial Officer and Principal
Accounting Officer)