<PAGE>
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, 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 November 13, 1997, there were outstanding 5,757,437 shares of the
Registrant's Common Stock.
Page 1 of 13 pages
Exhibit Index is on page 12
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets:
September 30, 1997 and June 30, 1997 3
Consolidated Statements of Operations:
Three Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows:
Three Months Ended September 30, 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 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
ASSETS 1997 1997
------- ------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 717,268 $ 1,452,409
Accounts receivable, net of allowance for doubtful accounts of
$124,086 8,963,623 9,308,731
Inventories 4,659,414 4,035,202
Prepaid expenses and other 281,011 789,179
Deferred income taxes 416,530 416,530
----------- -----------
Total current assets 15,037,846 16,002,051
PROPERTY AND EQUIPMENT, net 731,562 680,859
NOTE RECEIVABLE 700,000 --
CAPITALIZED AND PURCHASED SOFTWARE, net 1,671,898 1,630,339
DEFERRED INCOME TAXES 13,866 13,866
----------- -----------
$18,155,172 $18,327,115
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ 3,492,000 $ 3,071,000
Accounts payable 3,416,130 3,796,549
Accrued expenses 257,786 516,148
Deferred revenue 170,221 172,006
---------- ----------
Total current liabilities 7,336,137 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 1,701,549 1,666,951
Deferred compensation (56,446) (69,471)
----------- -----------
Total stockholders' equity 10,819,035 10,771,412
----------- -----------
$18,155,172 $18,327,115
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
(Unaudited) September 30,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
NET REVENUES $5,630,992 $ 3,455,620
COST OF REVENUES 3,932,340 2,102,565
---------- -----------
Gross profit 1,698,652 1,353,055
---------- -----------
OPERATING EXPENSES:
Sales and marketing 909,402 788,809
General and administrative 288,092 326,834
Research and development 433,685 258,137
---------- -----------
Total operating expenses 1,631,179 1,373,780
---------- -----------
Operating income (loss) 67,473 (20,725)
INTEREST INCOME (EXPENSE), NET (14,081) 39,923
---------- -----------
Income before income taxes 53,392 19,198
INCOME TAXES 18,794 6,911
---------- -----------
NET INCOME $ 34,598 $ 12,287
========== ===========
EARNINGS PER SHARE $ .01 $ .02
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 5,757,437 10,934,314
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEOWARE SYSTEMS, INC.
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
(Unaudited) September 30,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,598 $ 12,287
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 47,379 36,000
Amortization of deferred compensation 13,025 13,000
Changes in operating assets and liabilities-
(Increase) decrease in:
Accounts receivable 345,108 2,260,136
Inventories (624,212) (802,119)
Prepaid expenses and other 508,168 (80,310)
Increase (decrease) in:
Accounts payable (380,419) (601,922)
Accrued expenses (258,362) (111,257)
Deferred revenue (1,785) 27,681
---------- ----------
Net cash provided by
(used in) operating activities (316,500) 753,496
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (98,082) (15,157)
Capitalized software (41,559) (25,000)
---------- ----------
Net cash used in investing activities (139,641) (40,157)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 421,000 --
Increase in note receivable (700,000) --
Principal payments on long-term debt -- (340)
---------- ----------
Net cash used in financing activities (279,000) (340)
---------- ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (735,141) 712,999
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,452,409 2,700,298
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 717,268 $3,413,297
========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH
OPERATING ACTIVITIES:
Cash paid for interest $ 14,081 $ 1,043
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
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, 1997 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. MAJOR CUSTOMERS:
----------------
Net revenues from one customer represented 30% of total net revenues for the
three months ended September 30, 1997 while net revenues from two customers
represented 33% of total net revenues for the three months ended September
30,1996. At September 30, 1997, the Company had receivables from these
customers of approximately $6,398,000.
3. INVENTORIES:
------------
Inventories are stated at the lower of cost or market (first-in, first-out
method) and consisted of the following:
<TABLE>
<CAPTION>
September 30 June 30,
------------ -----------
1997 1997
------------ -----------
<S> <C> <C>
Purchased components and subassemblies $1,722,777 $1,566,161
Work-in-process 346,799 301,565
Finished goods 2,589,838 2,167,476
--------- ---------
$4,659,414 $4,035,202
========== ==========
</TABLE>
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 an initial public
offering of Reohr. 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 ($1,508,000 available at
September 30, 1997)
<PAGE>
with a bank which expires on December 31, 1997, 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. STOCK OPTIONS :
---------------
The Company has a stock option plan (the "Plan") for employees and
directors which provides for the grant of incentive and non-qualified stock
options. The Company is authorized to issue options for the purchase of up to
1,100,000 shares of Common Stock. Under the terms of the Plan, the exercise
price of options granted cannot be less than fair market value on the date of
grant. Employee options generally vest and become exercisable ratably over four
years. Director options vest and become exercisable ratably six months and one
year from the date of grant. All options expire five years from the grant date.
As of June 30, 1997, the Company had options outstanding under the Plan for the
purchase of 697,349 shares of Common Stock at prices ranging from $5.125 to
$7.875 per share. Options to purchase 442,750 shares of Common Stock were
vested at June 30, 1997.
7. EARNINGS PER SHARE
------------------
Earnings per share for the three months ended September 30, 1997 and 1996 are
calculated as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Net income as reported $ 34,598 $ 12,287
Imputed interest income, net of income taxes -- 225,356
---------- -----------
Adjusted net income $ 34,598 $ 237,643
========== ===========
Actual number of shares outstanding 5,760,820 5,619,595
Net additional shares arising from exercise of
warrants and options -- 5,314,719
---------- -----------
Weighted average number of shares outstanding 5,760,820 10,934,314
========== ===========
Earnings per share $.01 $.02
==== ====
</TABLE>
SFAS No. 128, "Earnings per Share", which supersedes APB Opinion No. 15,
"Earnings per Share", was issued in February 1997. 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. SFAS 128 is
required to be adopted for the Company's fiscal year ending June 30, 1998 and,
when adopted, will require restatement of prior periods' EPS.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Introduction
The Company provides network 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 network
computers 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 network computer product line was introduced in June 1996.
Prior to the introduction of the network computer, the Company manufactured and
marketed a family of desktop computing devices, including multimedia-capable X
Window terminals.
The Company's current strategy is to become a leader in the emerging market
for network computers by focusing on expanding its operating system software
products and its network 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 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 network
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 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 in cash. The remainder of the
expenses were reimbursed by a $700,000 note from Reohr that is repayable on the
sooner of three years or the consummation of an initial public offering of
Reohr. The note bears 8% interest.
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1997 1996
------ ------
<S> <C> <C>
Gross Profit 30.2% 39.2%
Operating expenses:
Sales and marketing 16.2 22.8
General and administrative 5.1 9.5
Research and development 7.7 7.5
---- ----
Operating income (loss) 1.2 (0.6)
Interest income (expense), net (0.3) 1.2
---- ----
Income before taxes 0.9 0.6
Income taxes 0.3 0.2
---- ----
Net Income 0.6% 0.4%
==== ====
</TABLE>
For the three months ended September 30, 1997, net revenues increased to
$5,630,992, an increase of 63% from $3,455,620 for the comparable period in the
prior fiscal year. The Company's revenues for the current quarter represent
shipments of its line of network computers. Revenues for the three months ended
September 30, 1996 represent the initial shipments of its network computer line
and revenues earned from licensing agreements for its netOS operating system
software for network computing devices. 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 30.2%
for the three months ended September 30, 1997 from 39.2% for the comparable
three-month period of the prior fiscal year. The change in gross profit
percentage 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 network computer gross profit margin
was unchanged from the prior year quarter. 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,
<PAGE>
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 months ended September 30, 1997, net income was $34,598 as
compared to $12,287 for the comparable period in the prior year. The increase
in net income was due to the reimbursement of net expenses of approximately
$292,000 previously incurred in connection with its investment in ITC. The
Company's net income also reflects net expenses of approximately $150,000
related to the Company's investment in BDT. Net income also reflects significant
increases in the Company's investment in both sales and marketing and research
and development expenses during the period.
Operating expenses for the three months ended September 30, 1997 were
$1,631,179, an increase of $257,399 from operating expenses of $1,373,780 in the
comparable period of the prior year. Research and development expenses for the
three months ended September 30, 1997 increased by $175,548 to $433,685 from
$258,137 in the prior 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 increased by $120,593
to $909,402 for the three months ended September 30, 1997 as compared to
$788,809 for the prior year as a result of significantly increasing the
Company's sales and marketing staff. General and administrative expenses
decreased to $288,092 for the three months ended September 30, 1997 from
$326,834 in the prior year due to the reimbursement of expenses related to ITC.
General and administrative expenses for the current year also include the
addition of the Company's Chief Executive Officer and the expenses related to
BDT.
Operating income (loss) increased to $67,473 for the three-month period ended
September 30, 1997 from an operating loss of ($20,725) for the comparable period
in the previous fiscal year. The increase in operating income is the result of
increased revenues and the reimbursement of expenses related to ITC which were
partially offset by increased investments in the Company's sales and marketing
and research and development expenses as well as the expenses related to BDT.
Net interest income (expense) decreased in the three month period ended
September 30, 1997 due to increased line of credit borrowings, lower interest
rates and lower investment balances caused by financing of higher inventory and
accounts receivable balances.
The effective income tax rates were approximately 35.2% and 36.0% in the three
month periods ended September 30, 1997 and 1996.
<PAGE>
Liquidity and Capital Resources
At September 30, 1997, the Company had net working capital of approximately
$7,702,000 composed primarily of cash and cash equivalents, accounts receivable
and inventory. The Company's principal sources of liquidity included
approximately $717,000 of cash and cash equivalents and a $5,000,000 bank line
of credit facility, $1,508,000 of which was available as of September 30, 1997.
Cash and cash equivalents decreased by approximately $735,000 during the
three-month period ended September 30, 1997, primarily as a result of an
increase in inventory and a decrease in accounts payable and accrued expenses,
which was offset by a decrease in accounts receivable.
The Company used approximately $317,000 in cash from operating activities in
the three months ended September 30, 1997 compared to generating cash from
operations of approximately $753,000 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 its securities.
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 1996. 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 network 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
<PAGE>
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.
HDS NETWORK SYSTEMS, INC.
Date: November 13, 1997 By: /S/ EDWARD C. CALLAHAN, JR.
------------------------------
Edward C. Callahan, Jr., President and
Chief Executive Officer
Date: November 13, 1997 By: /S/ SCOTT HOLLAND
--------------------------------
Scott Holland, Vice President of Finance
and Administration (Principal Financial
Officer and Principal Accounting
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 717,268 1,452,409
<SECURITIES> 0 0
<RECEIVABLES> 9,087,709 9,432,817
<ALLOWANCES> (124,086) (124,086)
<INVENTORY> 4,659,414 4,035,202
<CURRENT-ASSETS> 15,037,846 16,002,051
<PP&E> 731,562 680,859
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 18,155,172 18,327,115
<CURRENT-LIABILITIES> 7,336,137 7,555,703
<BONDS> 0 0
0 0
0 0
<COMMON> 5,761 5,761
<OTHER-SE> 10,813,274 10,765,651
<TOTAL-LIABILITY-AND-EQUITY> 18,155,172 18,327,115
<SALES> 5,630,992 3,455,620
<TOTAL-REVENUES> 5,630,992 3,455,620
<CGS> 3,932,340 2,102,565
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,631,179 1,373,780
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,081 (39,923)
<INCOME-PRETAX> 53,392 19,198
<INCOME-TAX> 18,794 6,911
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 34,598 12,287
<EPS-PRIMARY> 0.01 0.02
<EPS-DILUTED> 0 0
</TABLE>
