<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, 1999
_____ 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 10, 1999, there were outstanding 6,295,810 shares of the
Registrant's Common Stock.
<PAGE>
NEOWARE SYSTEMS, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets:
September 30, 1999 and June 30, 1999 3
Consolidated Statements of Operations:
Three Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows:
Three Months Ended September 30, 1999 and 1998 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 12
Signatures 13
2
<PAGE>
NEOWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1999 1999
------ -------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,278,028 $ 1,470,906
Accounts receivable, net of allowance for
doubtful accounts of $219,014 and $168,710 2,665,151 2,586,693
Inventories 1,163,796 1,324,424
Prepaid expenses and other 303,402 264,322
-------------- ---------------
Total current assets 5,410,377 5,646,345
PROPERTY AND EQUIPMENT, net 387,401 438,367
NOTE RECEIVABLE 700,000 700,000
CAPITALIZED AND PURCHASED SOFTWARE, net 495,005 541,185
-------------- ---------------
$ 6,992,783 $ 7,325,897
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit -- $ 143,000
Accounts payable $ 1,977,871 1,654,926
Accrued expenses 953,213 1,106,388
Deferred revenue 307,890 319,672
--------------- ---------------
Total current liabilities 3,238,974 3,223,986
--------------- ---------------
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,
6,285,782 shares issued and outstanding 6,285 6,285
Additional paid-in capital 10,178,358 10,178,358
Accumulated deficit (6,430,834) (6,082,732)
--------------- ---------------
Total stockholders' equity 3,753,809 4,101,911
-------------- ---------------
$ 6,992,783 $ 7,325,897
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NEOWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
NET REVENUES $ 2,639,515 $ 2,179,293
COST OF REVENUES 2,028,903 1,770,903
--------------- ---------------
Gross profit 610,612 408,390
--------------- ---------------
OPERATING EXPENSES:
Sales and marketing 361,209 535,570
Research and development 182,939 243,429
General and administrative 435,976 588,076
--------------- ---------------
Total operating expenses 980,124 1,367,075
--------------- ---------------
Operating loss (369,512) (958,685)
INTEREST (INCOME) EXPENSE, NET (21,410) 14,690
--------------- ---------------
Loss before income taxes (348,102) (973,375)
INCOME TAX BENEFIT - -
--------------- ---------------
NET LOSS $ (348,102) $ (973,375)
=============== ===============
BASIC AND DILUTED LOSS PER SHARE $ (.06) $ (.16)
=============== ===============
Weighted average number of shares
used in basic and diluted
loss per share computation 6,285,782 6,264,258
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NEOWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (348,102) $ (973,375)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities-
Depreciation and amortization 121,251 163,030
Amortization of deferred compensation -- 13,026
Changes in operating assets and liabilities- (Increase) decrease in:
Accounts receivable (78,458) 2,458,221
Inventories 160,628 278,881
Prepaid expenses and other (39,080) (4,195)
Increase (decrease) in:
Accounts payable 322,945 (964,897)
Accrued expenses (153,175) (128,348)
Deferred revenue (11,782) (8,000)
------------ ------------
Net cash provided by (used in) operating activities (25,773) 834,343
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,970) (936)
Capitalized software (21,135) (60,551)
------------ ------------
Net cash used in investing activities (24,105) (61,487)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (143,000) (1,652,000)
------------ ------------
Net cash used in financing activities (143,000) (1,652,000)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (192,878) (879,144)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,470,906 1,302,984
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,278,028 $ 423,840
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 7,559 $ 27,505
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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, 1999 are not
necessarily indicative of results expected for the full year. These financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission.
2. REVENUE RECOGNITION AND MAJOR CUSTOMERS:
Product revenue is recognized at the time of title transfer, which ordinarily
occurs at the time of shipment. From time to time, customers request delayed
shipment, usually because of customer scheduling for systems integration and
lack of storage space at customers' facility during the implementation. In such
"bill and hold" transactions, the Company recognizes revenues when the following
conditions are met: the equipment is complete, ready for shipment and segregated
from other inventory; the Company has no further significant performance
obligations in connection with the completion of the transaction; the commitment
and delivery schedule is fixed; the customer requested the transaction be
completed on this basis; and the risks of ownership have passed to the customer.
Revenues recognized from "bill and hold" transactions for products which had not
shipped by September 30, 1999 and 1998 were $394,000 and $505,000, respectively.
Accounts receivable relating to "bill and hold" transactions were $96,000 and
$626,000 at September 30, 1999 and 1998, 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 no individual customer exceeded 10% of total net revenues for
the three months ended September 30, 1999. Net revenues from one customer
represented 12% of total net revenues for the three months ended September 30,
1998. At September 30, 1998, the Company had receivables from this customer of
approximately $231,000.
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,
1999 1999
--------------- ---------------
Purchased components and subassemblies $ 605,524 $ 732,026
Work-in-process 108,682 129,972
Finished goods 449,590 462,426
----------- -----------
$ 1,163,796 $ 1,324,424
=========== ===========
6
<PAGE>
4. NOTE RECEIVABLE:
In October 1997, the Company merged ITC, a wholly-owned subsidiary, into
Broadreach in exchange for a 2% stock interest in Broadreach Consulting, Inc.
and the reimbursement of $1,000,000 of expenses incurred by the Company in
connection with its efforts to make certain acquisitions in the information
technology consulting and staffing field. Of the total reimbursement, $300,000
was paid in cash and the remaining $700,000 under a note which is due on the
earlier of three years or upon the completion of the initial public offering of
Broadreach. The note bears interest at 8% per year.
5. LINE OF CREDIT:
The Company has a line of credit agreement with a bank which provides for
borrowings up to $2,000,000 subject to certain limitations, as defined. The line
of credit matures on December 31, 1999. Borrowings under the credit agreement
bear interest at the bank's prime rate plus 2.00%(9.75% at September 30, 1999).
The line of credit is collateralized by substantially all of the assets of the
Company. The line of credit agreement requires the Company to maintain certain
financial ratios and meet other financial conditions, as defined. At September
30, 1999, the Company was not in compliance with certain of its financial
covenants. The bank has subsequently agreed to waive such noncompliance. In
connection with such waiver, the Company has agreed to maintain cash collateral
equal to the amount outstanding under the line from time to time but not less
than $400,000.
6. EARNINGS PER SHARE:
The Company applies 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 statement of operations. 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, 1999 and 1998, there were no dilutive effects
of stock options or warrants as the Company incurred a net loss. Options and
warrants to purchase 7,109,329 shares of Common Stock at prices ranging from
$.84 to $7.13 per share were outstanding at September 30, 1999.
7. PENDING ACQUISITION:
On October 7, 1999, the Company signed a definitive agreement to acquire certain
assets, assume certain liabilities and acquire the business of MTX, Inc. of
Raleigh, North Carolina. In exchange, the Company will issue approximately
25,143,000 shares of its common stock resulting in MTX's shareholder owning 80%
of the combined entity upon consummation of the transaction. Subject to Neoware
shareholder approval and other conditions, the companies expect to complete the
transaction by year-end or shortly thereafter.
7
<PAGE>
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 allow users to access
Windows-based applications from a multi-user Windows NT server, plus connect to
mainframes, minicomputers and the Internet. The Company's NeoStation family of
Windows-based terminals and related software allows users to utilize
substantially all of their existing computer systems and applications running on
Windows platforms, UNIX, mainframes and minicomputers, and access them across a
network.
The Company's current strategy is to become a leader in the Windows-based
terminal and thin client computer market by focusing on expanding its software
products and its thin client computer hardware. The Company plans to continue to
develop strategic partnerships on the basis of technology and/or expanding its
sales and distribution channels. The Company sells its products in North America
directly to end users and through value added resellers, system integrators,
OEMs and the Internet.
Pending Acquisition
On October 7, 1999, the Company signed a definitive agreement to acquire certain
assets, assume certain liabilities and acquire the business of MTX, Inc. of
Raleigh, North Carolina. In exchange, the Company will issue approximately
25,143,000 shares of its common stock resulting in MTX's shareholder owning 80%
of the combined entity upon consummation of the transaction. Subject to Neoware
shareholder approval and other conditions, the companies expect to complete the
transaction by year-end or shortly thereafter.
MTX, Inc., a subsidiary of The MATCO Group, Inc., a privately held company
headquartered in Binghamton, New York, designs, manufactures and sells a broad
array of computer related products, including fixed function displays, printers,
Communications Servers and Windows-based and network computer terminals. These
products offer 3270-mainframe and 5250-midrange compatibility and have been
designed to address the needs of MTX's extensive customer base and their
migration from legacy based native coaxial, twinaxial, and Token Ring
connectivity. MTX product strengths include unique desktop solutions offering
support of technologies in the IBM green screen market, including terminal
emulation software and a patent on the "Coax-to-Ethernet Bridge." MTX sells its
products under the MTX and Memorex-Telex brand names.
8
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain items from
the Company's unaudited consolidated statements of operations as a percentage of
net revenues.
Three Months Ended
September 30,
1999 1998
------ ------
Gross Profit 23.1% 18.7%
Operating expenses
Sales and marketing 13.7 24.5
Research and development 6.9 11.2
General and administrative 16.5 27.0
----- -----
Operating loss (14.0) (44.0)
Interest (income) expense, net .8 (0.7)
----- -----
Loss before taxes (13.2) (44.7)
Income tax benefit -- --
----- -----
Net loss (13.2)% (44.7)%
===== =====
Net revenues for the three months ended September 30, 1999 increased to
$2,639,515 from $2,179,293 for the comparable period in the prior fiscal year.
The increase in net revenues was attributable to a substantial increase in sales
to new customers. 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 increased to 23.1%
for the three months ended September 30, 1999 from 18.7% for the comparable
period of the prior fiscal year. The change in gross profit percentage was a
result of fixed overhead costs representing a lower percentage of revenue and a
more favorable product mix. The Company anticipates that its gross margin
percentage will vary from quarter to quarter depending on the mix of business,
including the mix of hardware and software revenues. The gross profit margin
also varies in response to competitive market conditions as well as periodic
fluctuations in the cost of memory and other significant components. The market
in which the Company competes remains very competitive and although the Company
intends to continue its efforts to reduce the cost of its products, there can be
no certainty that the Company will not be required to reduce prices of its
products without compensating reductions in the cost to produce its products in
order to increase its market share or to meet competitors' price reductions.
Operating expenses for the three months ended September 30, 1999 were $980,124,
a decrease of $386,951 from operating expenses of $1,367,075 in the comparable
period of the prior fiscal year. Sales and marketing expenses decreased by
$174,361 to $361,209 for the three months ended September 30, 1999 as compared
to $535,570 for the prior year. The decrease reflects the impact of the
restructuring of its international and domestic sales force. During the three
months ended September 30, 1998, the Company terminated its relationship with
its U.S. distributor. The Company believes that the elimination of a level of
distribution will allow it to price its products more competitively without a
negative impact on gross profit. The Company is using a low cost telesales
channel to complement its current sales efforts and is selling to value added
resellers. Research and development expenses for the three months ended
September 30, 1999 decreased by $60,490 to $182,939 from $243,429 in the prior
year primarily as a result of staffing changes and a reduction in the use of
outside consultants and services. General and administrative expenses decreased
to $435,976 for the three months ended September 30, 1999 from $588,076 in the
prior year due primarily to the Company's cost reduction efforts.
The Company realized net interest income of $21,410 for the quarter ended
September 30, 1999 as compared to net interest expense of $14,690 for the 1998
9
<PAGE>
quarter. The decline in interest expense was primarily due to decreased
borrowings under the Company's line of credit combined with the collection of
recoverable income taxes of $1,121,554 in fiscal 1999 and the proceeds of
$406,930 from the sale of its equity investment in Broadreach and the investment
of such funds in interest bearing accounts.
No income tax benefit was recognized in the 1999 or 1998 periods as a result of
the net operating losses incurred during the periods as there is no assurance at
this time that the benefit of the net operating loss carryforwards will be
realized.
For the three months ended September 30, 1999, the Company's net loss was
$348,102 as compared to a net loss of $973,375 for the comparable period in the
prior year. The decrease in net loss was attributable to increased revenues and
gross margin combined with a decrease in operating expenses and interest
expense.
Liquidity and Capital Resources
At September 30, 1999, the Company had net working capital of $2,171,403
composed primarily of cash and cash equivalents, accounts receivable and
inventory. The Company's principal sources of liquidity include $1,278,028 of
cash and cash equivalents and a $2,000,000 bank line of credit facility, all of
which was available as of September 30, 1999. The facility is secured by a first
lien security interest on all tangible and intangible personal property of the
Company and separate pledges of investment property owned by Neoware
Investments, Inc. and Neoware Licensing, Inc., each of which is a wholly-owned
subsidiary of the Company. The facility agreement also provides that borrowings
under the line will be based on the amount of eligible accounts receivable, as
defined. Interest on the line of credit facility accrues at the bank's prime
rate plus two percent (2%), with interest payable monthly, and all principal and
interest due and payable on December 31, 1999. At September 30, 1999, the
Company was not in compliance with certain of its financial covenants and the
bank has granted a waiver of such non-compliance. In connection with such
waiver, the Company has agreed to maintain cash collateral equal to the amount
outstanding under the line from time to time but not less than $400,000.
Cash and cash equivalents decreased by $192,878 during the quarter ended
September 30, 1999, primarily as a result of repayments under the line of
credit.
The Company used cash from operations of approximately $26,000 for the three
months ended September 30, 1999 versus generating cash of approximately $834,000
for the three months ended September 30, 1998. Cash flow from operations can
vary significantly from quarter to quarter depending on the timing of payments
from, and shipments to, large customers.
The Company expects to fund current operations and other cash expenditures
through the use of available cash, cash from operations, funds available under
its credit facility and possible new debt sources. However, the Company must
achieve profitable operations in order to provide adequate funding for the long
term.
Year 2000 Compliance
The Company continues to evaluate 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 $25,000 for the software and
training. Conversion to the updated software has been substantially completed.
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 sales contact management and service
10
<PAGE>
data base software application which is Year 2000 compliant. The total cost of
such software 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
Year 2000 compliant.
None of the Company's vendors provides more than 20% of the Company's annual raw
material requirements and alternative sources are generally available. The
Company has substantially completed its evaluation of the Year 2000 readiness of
its sole source vendors. Contingency plans have been developed to ensure
continued supply in the event a vendor expects to incur difficulties achieving
Year 2000 compliance. 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. The Company has
not determined the extent to which its business and customers might be affected
in that event.
The Company estimates that the total cost to complete its Year 2000 evaluation
and remediation, including normal planned system upgrades, of all internal
systems is less than $50,000, of which approximately $40,000 has been incurred
to date. 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 consummation of the MTX transaction, 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, anticipated growth of the thin client computing market,
expansion of software products and thin client computer hardware products,
statements regarding Year 2000 compliance and statements regarding the pending
litigation. 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 Company's ability to lower
its costs, the Company's relationship with SCI, the ability of the Company to
market its products with Motorola to OEM customers, reliance on Microsoft's
actions relating to Windows NT, 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, increased
competition and the ability of the Company, its distributors, vendors, suppliers
and customers to effectively address Year 2000 compliance issues. 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.
11
<PAGE>
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.
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.
During October 1999, an agreement in principle to settle all of the foregoing
litigation was reached. The agreement in principle is subject to approval by the
Court.
On May 5, 1998, a complaint was filed in the Court of Common Pleas of Montgomery
County against the Company by Development Concepts, Inc. ("DCI"). The complaint
asserted 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 sought 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 demanded injunctive and
monetary relief in excess of $180,000. On October 1, 1999, the parties entered
into an agreement settling the litigation without admission of liability by
either party.
Management believes that these settlements will not have a material adverse
effect on the Company's financial position or results of operation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
On October 19, 1999, the Company filed a Form 8-K
reporting the signing of a definitive agreement to
acquire certain assets, assume certain liabilities and acquire the business of
MTX, Inc.
On October 20, 1999, the Company filed two Forms
8-K/A amending its Form 8-K filed on October 19, 1999.
12
<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.
NEOWARE SYSTEMS, INC.
Date: November 15, 1999 By: /S/ EDWARD C. CALLAHAN, JR.
-----------------------------
Edward C. Callahan, Jr.,
President and Chief
Executive Officer
Date: November 15, 1999 By: /S/ VINCENT T. DOLAN
------------------------------
Vincent T. Dolan
Chief Financial Officer
(Principal Accounting Officer
and Principal Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 1,278,028 1,470,906
<SECURITIES> 0 0
<RECEIVABLES> 2,884,165 2,755,403
<ALLOWANCES> 219,014 168,710
<INVENTORY> 1,163,796 1,324,424
<CURRENT-ASSETS> 5,410,377 5,646,345
<PP&E> 1,792,556 1,789,585
<DEPRECIATION> 1,405,155 1,351,218
<TOTAL-ASSETS> 6,992,783 7,325,897
<CURRENT-LIABILITIES> 3,238,974 3,223,986
<BONDS> 0 0
0 0
0 0
<COMMON> 6,285 6,285
<OTHER-SE> 3,747,524 4,095,626
<TOTAL-LIABILITY-AND-EQUITY> 6,992,783 7,325,897
<SALES> 2,639,515 2,179,293
<TOTAL-REVENUES> 2,639,515 2,179,293
<CGS> 2,028,903 1,770,903
<TOTAL-COSTS> 2,028,903 1,770,903
<OTHER-EXPENSES> 980,124 1,367,075
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (21,410) 14,960
<INCOME-PRETAX> (348,102) (973,375)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (348,102) (973,375)
<EPS-BASIC> (.06) (.16)
<EPS-DILUTED> (.06) (.16)
</TABLE>
