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Rule 424(b)(3)
Prospectus Supplement Registration No. 33-87036
(To Prospectus dated November 7, 1995) Registration No. 333-30560
5,704,842 Shares of Common Stock
NEOWARE SYSTEMS, INC.
This prospectus supplement relates to shares of Neoware Systems, Inc.
common stock issuable upon exercise of Neoware Systems, Inc.'s redeemable common
stock purchase warrants. On February 11, 2000 our board of directors approved
amendments to the two Warrant Agreements under which the warrants were issued.
The amendments reduce the exercise price of the warrants from $5.50 to $3.75 per
share and extend the duration of the warrants from March 25, 2000 to April 14,
2000.
Our common stock and warrants are quoted on the NASDAQ SmallCap Market
under the symbols "NWRE" for the common stock and "NWREW" for the warrants. On
February 11, 2000, the last reported sale price of the common stock was $5.25
and of the warrants was $0.50. The average of the last reported sale prices for
the common stock for the week ended February 11, 2000 was $4.64.
This prospectus supplement amends and supplements the prospectus, dated
November 7, 1995, relating to the shares of our common stock issuable upon
exercise of the warrants. This prospectus supplement is not complete without,
and may not be delivered or utilized except in connection with, the prospectus,
which incorporates the documents that we file with the Securities and Exchange
Commission. The matters addressed in this prospectus supplement supersede any
contrary statement contained in the prospectus.
You may exercise your warrants in any state where the exercise and the
issuance of the shares is permitted. You may contact our warrant agent,
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York,
10004, (212) 509-4000, extension 545, to determine if you may exercise your
warrants.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4.
THE SECURITIES AND EXCHANGE COMMISSION AND ANY STATE SECURITIES
REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SHARES OR DETERMINED IF THE
PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is February 16, 2000.
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TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS...............................................- 3 -
OUR COMPANY..............................................................- 3 -
RISK FACTORS.............................................................- 4 -
AMENDMENT OF WARRANTS...................................................- 12 -
USE OF PROCEEDS.........................................................- 12 -
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FORWARD-LOOKING STATEMENTS
This prospectus supplement contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. They relate
to the development of our products and future operating results that are subject
to risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Forward-looking statements include
the development and marketing of our Linux-based and Windows-based products, the
receipt and use of the proceeds from the exercise of the warrants, anticipated
purchases by customers, future revenues and operating losses, lower cost of
ownership and easier installation of our systems and our competitive position.
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 risks, uncertainties and
assumptions that are difficult to predict. Factors that could affect our actual
results include our ability to develop and market our products, including our
new Linux-based products, our ability to obtain additional financing to enable
us to develop and market our new Linux-based products, customers' acceptance of
our products, pricing pressures, rapid technological changes in the industry,
growth of the Linux market and increased competition. Additional factors which
could affect our 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. We do not undertake to
update any forward-looking statements made herein.
OUR COMPANY
We design, develop and market information appliances based upon
embedded versions of the Linux and Windows operating systems. Our products are
designed to run limited local applications for specific vertical markets, plus
allow access to Linux servers, the Internet and Windows-based applications
running on multi-user Windows NT servers. Our products are designed as an
alternative to general purpose personal computers, offering easier installation,
as well as lower up-front and administrative costs. We also provide integration
services for certain of our customers that allow them to integrate our products
into their environment.
We offer embedded versions of the Windows operating systems and have
developed an embedded version of the open-source Linux operating system by
leveraging our technical expertise and experience in developing embedded UNIX
products. An embedded operating system differs from a desktop operating system
used on a personal computer because it is designed for specific tasks. We
believe that our embedded version of the Linux operating system offers the
following advantages:
1. Ability to run single purpose Linux applications. Our information
appliances are designed to run certain Linux applications locally. Unlike
general-purpose computers, they are not intended to run applications that are
installed by end users. Instead, our products are meant to run specific
applications for particular customer needs. For example, by adding software our
information appliances can be used to connect to the Internet, as point-of-sale
devices by retail stores, to connect to computer servers and as firewalls and
routers, which protect networks and isolate them from the Internet.
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2. Reduced memory use. Our embedded Linux operating system is smaller
than a desktop operating system, which allows it to run on less expensive non-PC
appliances with reduced memory utilization and a smaller amount of local
storage, reducing costs.
3. No hard disk or other moving parts. Our Linux version does not
require a hard disk drive. It can operate with no disk, or with a small amount
of "flash" memory that is solid state, requiring no moving parts. This allows
our software to operate in devices that do not require a fan for cooling, which
offers benefits, including silent operation.
4. Access to server-based applications. We have added software to allow
our products to connect with the Internet, Windows NT servers, UNIX machines,
mainframes and minicomputers. This allows our customers to use their existing
applications with our products, regardless of whether those applications are
written for the Linux operating system or for other operating systems.
5. Less complexity, greater security. We have reduced the complexity of
Linux, shielding the user from UNIX-style commands, making it easier to use.
While developers and administrators can make changes to our products as they see
fit, users cannot easily modify our Linux-based products, increasing security.
Additionally, we have developed technologies that allow Linux to be embedded in
appliances that can be turned off without performing a "shut down" process as is
required with personal computers.
6. Central management and configuration. Our products can be managed
and maintained from a central location, making them less costly to maintain than
certain competitive products. We offer software that performs management tasks,
and we license this software to customers who use our products.
Our business contains all of the problems, expenses, delays, and risks
inherent in establishing a new business enterprise. We have no control over many
of these risks, including uncertain market conditions, product acceptance and
cost and availability of capital. We also expect to encounter intense
competition from other entities having similar products. We may possess less
financial, technical, human and other resources than our potential competitors.
Accordingly, we cannot assure that our business plan will be successful or that
we will be able to achieve or maintain profitable operations.
We are incorporated under the laws of the State of Delaware. Our
principal executive offices are located at 400 Feheley Drive, King of Prussia,
Pennsylvania 19406.
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider the risks described below carefully and all of the information
contained in this prospectus supplement before deciding whether to purchase our
common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations would suffer. In such case, the
trading price of our common stock could decline, and you may lose all or part of
your investment in our common stock.
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Risks Related to Our Financial Results
Our annual revenues have declined over the past three years and our company has
not made a profit since the fiscal year ended June 30, 1997. Our limited
financial resources make it difficult for us to continue to market our line of
thin client terminals in sufficient quantities to make a profit.
We believe that our future success depends upon the sale of a new
embedded version of the Linux operating system designed for fixed function
information appliance products. We have only recently begun to market our new
Linux-based products and it is therefore difficult for you to assess our new
business plan. We cannot be certain that our business strategy will be
successful.
We have a history of losses and may experience losses in the future, which could
result in the market price of our common stock declining.
We have recently incurred significant net losses, including net losses
of $2.8 million in the year ended June 30, 1999 and $1.058 million in the six
months ended December 31, 1999. In addition, we had an accumulated deficit of
$7.1 million as of December 31, 1999. We expect to continue to incur significant
product development, sales and marketing and administrative expenses. As a
result, we will need to generate significant revenues to achieve profitability.
We cannot be certain that we will achieve profitability in the future or, if we
achieve profitability, whether we will be able to sustain it. If we do not
achieve and maintain profitability, the market price for our common stock may
decline, perhaps substantially.
Our company must raise significant additional capital from the exercise
of outstanding warrants and/or the sale of new shares of stock. If we fail to
raise additional capital, we will not be able to implement our new business
plan. Our financial resources, even with the proceeds raised from the exercise
of the warrants, may not be enough for our capital needs, and we may not be able
to obtain additional financing. A failure to derive new revenues from our new
business plan would likely increase our losses and negatively impact the price
of our common stock.
We will have broad discretion to allocate any proceeds we receive from the
exercise of the warrants, and we cannot guarantee that the proceeds will improve
our financial condition.
Any proceeds we may receive from the exercise of the warrants have been
allocated generally to provide working capital for operations, including
primarily the development and marketing of our new Linux-based information
appliance products. We will use funds as they are received for such purposes and
in such amounts as we deem advisable. As a result, our success is substantially
dependent on the discretion and judgment of our management as to the application
of the proceeds. We cannot assure you that the proceeds received will result in
a present or future improvement in our results of operations.
The successful development and marketing of our Linux-based products are
dependent on the proceeds of warrant exercises and our ability to obtain
additional financing.
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We are dependent on and intend to use a significant portion of any
proceeds received upon exercise of the Warrants for working capital, including
primarily the continued development and marketing of our Linux-based products.
Since any proceeds to be received are dependent on the exercise of the warrants,
we cannot predict whether we will raise enough money to benefit us financially.
Therefore, we intend to seek additional financing from other sources. However,
we may not be able to obtain financing or, if we can obtain it, it may not be
available on terms acceptable to us. If we are not able to obtain sufficient
financing, we may not be able to successfully implement our business plan,
including our development and marketing of our new Linux-based products.
Our ability to accurately forecast our quarterly sales is limited, although our
costs are relatively fixed in the short term and we expect our business to be
affected by rapid technological change, which may adversely affect our quarterly
operating results and cause our stock prices to fluctuate.
Because of the new and rapidly evolving market for our embedded Linux
information appliances, our ability to accurately forecast our quarterly sales
is limited, which makes it difficult to predict the quarterly revenues that we
will recognize. In addition, we cannot forecast operating expenses based on
historical results, and most of our costs are for personnel and facilities,
which are relatively fixed in the short term. If we have a shortfall in revenues
in relation to our expenses, we may be unable to reduce our expenses quickly
enough to avoid significantly greater losses. We do not know whether our
business will grow rapidly enough to absorb the costs of these employees and
facilities. As a result, our quarterly operating results could fluctuate, and
such fluctuation could adversely affect the market price of our common stock.
There are factors that may affect the market acceptance of our products, some of
which are beyond our control, including the following:
o the growth and changing requirements of the information appliance
market;
o the quality, price, performance and total cost of ownership of our
products;
o the availability, price, quality and performance of competing products
and technologies; and
o the successful development of our relationships with software
providers, original equipment manufacturer customers and existing and
potential channel partners.
We may not succeed in developing and marketing our new information
appliance products, and our operating results may decline as a result.
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Risks Related to Growth of Our Market And Acceptance of Linux
Our business is dependent on customer adoption of Linux-based information
appliances to perform discrete tasks for corporate and Internet-based computer
networks and a decrease in their rates of adoption could cause the market price
for our common stock to decline as a result of lower revenues or more limited
investor expectations of the size of the market for our products.
Revenues from sales of our existing products have decreased over the
last three years and new revenues need to be derived from our new Linux-based
line of products. As a result, we depend on the growing use of appliances to
perform discrete tasks for corporate and Internet-based networks. If the role of
appliances does not increase as we anticipate, or if it in any way decreases,
our revenues would not materialize. We believe that our expectations for the
growth of the appliance market may not be fulfilled if customers continue to use
general-purpose personal computers. In addition, if corporate information
technology organizations do not accept Linux-based operating systems, or if
there is a wide acceptance of alternative operating systems that provide
enhanced capabilities, the market price of our stock could decline due to our
lower operating results or investors' assessment that the growth potential for
sales of our products is limited.
The appliance market in which we seek to compete is new and
unpredictable, and if this market does not develop and expand as we anticipate,
our revenues may not grow. In addition, consolidation in this market could
result in our clients being absorbed into larger organizations that might not be
as receptive to our products.
Because many of our products use Linux as their operating system, the failure of
Linux developers to enhance and develop the Linux kernel could impair our
ability to release major product upgrades and maintain market share.
We may not be able to release major upgrades of our new products on a
timely basis because our products use Linux as their operating system. The heart
of Linux, the Linux kernel, is maintained by third parties. Linus Torvalds, the
original developer of the Linux kernel, and a small group of independent
engineers are primarily responsible for the development and evolution of the
Linux kernel. If this group of developers fails to further develop the Linux
kernel or if Mr. Torvalds or other prominent Linux developers were to no longer
work on the Linux kernel, we would have to either rely on another party to
further develop the kernel or develop it ourselves. To date, we have optimized
our Linux-based operating system based on a version of Red Hat Linux. If we were
unable to access Red Hat Linux, we would be required to spend additional time to
obtain a tested, recognized version of the Linux kernel from another source or
develop our own operating system internally. We cannot predict whether
enhancements to the kernel would be available from reliable alternative sources.
We could be forced to rely to a greater extent on our own development efforts,
which would increase our development expenses and might delay our product
release and upgrade schedules. In addition, any failure on the part of the
kernel developers to further develop and enhance the kernel could stifle the
development of additional Linux-based applications for use with our products.
We may not succeed if Linux fragments, and application developers do
not develop software for our products.
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Risks Related to Our Product Manufacturing
We may be unable to manufacture the targeted volume of our products, or any
products at all, if our outside manufacturers are unable to meet our
manufacturing needs because we have no internal manufacturing capacity.
We rely on contract manufacturers to produce our products. In the
future, we may need to find a new outside manufacturer that can manufacture our
products in higher volume and at lower costs. We may not find an outside
manufacturer that meets our needs. Additionally, qualifying a new outside
manufacturer and commencing volume production may be time consuming. If we are
required or choose to change outside manufacturers, we may lose sales and our
customer relationships may suffer.
Because we depend on sole source and limited source suppliers for key
components, we are susceptible to supply shortages that could prevent us from
shipping customer orders on time, if at all, and result in lost sales.
We depend upon single source suppliers for our appliance-based products
and for several of the components in them. We also depend on limited sources to
supply several other industry standard components. We have in the past
experienced and may in the future experience shortages of, or difficulties in
acquiring, these components. If we are unable to buy these components, we will
not be able to manufacture our products on a timely basis or deliver our
products to our customers.
Risks Related to Our Marketing And Sales Efforts
Because we rely on channel partners to sell our products and anticipate using
channel partners to sell our new products, our revenues could be negatively
impacted if our existing channel partners do not continue to purchase products
from us.
We cannot be certain that we will be able to attract channel partners
that market our products effectively or provide timely and cost-effective
customer support and service. None of our current channel partners are obligated
to continue selling our products nor to sell our new products. We cannot be
certain that any channel partner will continue to represent our products or that
our channel partners will devote a sufficient amount of effort and resources to
selling our products in their territories. We need to expand our direct and
indirect sales channels, and if we fail to do so, our growth could be limited.
Our failure to expand our sales, customer service and support organizations
could adversely affect our business and results of operations.
We currently have small sales, customer service and support
organizations and will need to increase our staff to support new customers and
the expanding needs of our existing customers. If we are unable to expand our
sales, customer service and support organizations, we may not be able to retain
our existing customers and attract new customers. Hiring sales, customer service
and support personnel is very competitive in our industry due to the limited
number of people available with the necessary technical skills and understanding
of the Linux operating environment.
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We do not have a large consulting staff, and our revenues may suffer if
customers demand extensive consulting or other support services.
Our products are designed to require little or no support from us and
to be deployed quickly and easily by our customers. Many of our competitors
offer extensive consulting services in addition to products. If we introduced a
product that required extensive consulting services for installation and use or
if our customers wanted to purchase from a single vendor a menu of items that
included extensive consulting services, we would be required to change our
business model. We would be required to hire and train consultants, outsource
the consulting services or enter into a joint venture with another company that
could provide those services. If these events were to occur, our future profits
would likely suffer because customers would choose another vendor or we would
incur the added expense of hiring and retaining consulting personnel.
Risks Related to Competition Within Our Industry
We may not be able to effectively compete against other providers as a result of
their greater financial resources and brand awareness.
In the market for information appliances, we face significant
competition from larger companies who have greater financial resources and name
recognition than we do. Increased competition may negatively affect our business
and future operating results by leading to price reductions, higher selling
expenses or a reduction in our market share.
Appliance products are subject to rapid technological change due to changing
operating system software and network hardware and software configurations, and
our products could be rendered obsolete by new technologies.
The appliance market is characterized by rapid technological change,
frequent new product introductions and enhancements, uncertain product life
cycles, changes in customer demands and evolving industry standards. Our
products could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge.
Risks Related to Our Products' Dependence on Intellectual Property
and Our Use of Our Brand
We may not be able to preserve the value of our products' intellectual property
because we do not have any patents and other vendors could challenge our other
intellectual property rights.
Our products will be differentiated from those of our competitors by
our internally developed technology that is incorporated into our products. If
we fail to protect our intellectual property, other vendors could sell products
with features similar to ours, and this could reduce demand for our products.
We may not be able to attract software developers to bundle their products with
our information appliances.
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Our information appliances include our own software, plus software from
other companies for specific vertical markets. If we are unable to attract
software developers, and are unable to include their software in our products,
we may not be able to offer our information appliances for certain important
target markets, and our financial results will suffer.
Certain of our products use embedded versions of the UNIX and Windows operating
systems. If we are unable to continue to develop and offer these products to our
customers, our sales may decline.
Our existing products use embedded versions of the Windows and UNIX
operating systems. Sales to our existing customers will decline if we are unable
to continue to offer and support these products. If we are unable to replace
these sales with sales of our new information appliances, our financial results
will suffer.
Our embedded Linux software is based upon the open-sourced Linux operating
system, and we do not expect to retain ownership of our enhancements to this
operating system.
The Linux operating system is freely available software that is
provided under a software license requiring that modifications be made freely
available to other software developers. As a result, we do not intend to attempt
to protect the intellectual property related to changes that we make to the
Linux operating system. Providing these changes to other software developers may
allow other companies to offer products which are similar to ours, increasing
competition for our products.
Other Risks Related to Our Business
Our decline in revenues has caused us to reduce our personnel expenses,
including software engineers.
In order to develop and market our line of Linux appliances, we must
hire additional software engineers as well as marketing and sales personnel.
Competition for employees with these skills is severe and we may experience
difficulty in attracting suitably qualified people.
Any future growth we experience will place a significant strain on our
management, systems and resources. To manage the anticipated growth of our
operations, we may be required to:
o improve existing and implement new operational, financial and
management information controls, reporting systems and procedures;
o hire, train and manage additional qualified personnel; and
o establish relationships with additional suppliers and partners while
maintaining our existing relationships.
We rely on the services of certain key personnel, and those persons' knowledge
of our business and technical expertise would be difficult to replace.
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Our products and technologies are complex and we are substantially
dependent upon the continued service of our existing personnel, and especially
Michael Kantrowitz, our new President and Chief Executive Officer, and Edward
Parks, our Vice President of Engineering. The loss of any of our key employees
could adversely affect our business and slow our product development processes.
Errors in our products could harm our business and our operating results.
Because our appliance products are complex, they could contain errors
or bugs that can be detected at any point in a product's life cycle. Although
many of these errors may prove to be immaterial, any of these errors could be
significant. Detection of any significant errors may result in:
o the loss of or delay in market acceptance and sales of our products;
o diversion of development resources;
o injury to our reputation; or
o increased maintenance and warranty costs.
These problems could harm our business and future operating results.
Product errors or delays could be material, including any product errors or
delays associated with the introduction of new products or the versions of our
products that support operating systems other than Linux. Occasionally, we have
warranted that our products will operate in accordance with specified customer
requirements. If our products fail to conform to these specifications, customers
could demand a refund for the purchase price or assert claims for damages.
Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive significant liability
claims if our products do not work properly. Our agreements with customers
typically contain provisions intended to limit our exposure to liability claims.
However, these limitations may not preclude all potential claims. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Any such claims, whether or not successful, could
seriously damage our reputation and our business.
Risks Related to Our Stock
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which will be beyond our control, that may
prevent our stockholders from reselling our common stock at a profit.
The securities markets have experienced significant price and volume
fluctuations in the past and the market prices of the securities of technology
companies have been especially volatile. This market volatility, as well as
general economic, market or political conditions, could reduce the market price
of our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of public market analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the price at which they purchase shares in the open market or
at a price in excess of the exercise price of the warrants. In the past,
companies, including ours, that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
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AMENDMENT OF WARRANTS
Our warrants have been amended to reduce the exercise price from $5.50
to $3.75 and to extend the term of the warrants from March 25, 2000 to April 14,
2000. After the expiration of the term of the warrants, the warrants will no
longer be exercisable to acquire shares of our common stock.
The reasons for the reduction in the exercise price and extension of
the terms of the warrants are, first, to attempt to raise additional cash for
working capital and, second, to increase our equity capital. We believe that
modifying the warrants is a substantially less expensive alternative to
additional borrowings or seeking to raise the funds from other sources. We
cannot assure that the reduction in the exercise price and extension of the term
of the warrants will result in material exercises. We intend to seek additional
financing. See "Risk Factors" and "Use of Proceeds."
You may exercise your warrants until April 14, 2000, provided that
there is a current effective registration statement covering the shares of
common stock issuable upon exercise of the warrants. This prospectus supplement
is a part of a current effective registration statement covering the shares of
common stock. However, if we are unable to maintain a current effective
registration statement for the shares, or if the shares of common stock issuable
upon your exercise of the warrants are not registered or qualified for sale, or
exempt from registration or qualification, in the state in which you live, you
will not be permitted to exercise the warrants and you will have no choice but
to attempt to sell the warrants, if a market exists, or allow them to expire
unexercised.
USE OF PROCEEDS
If all of the warrants were exercised, we would receive gross proceeds
of $21,393,157. We will utilize the net proceeds, if any, realized upon the
exercise of the warrants for working capital and for general corporate purposes
including:
o Continued development and marketing of our Linux-based information
appliances;
o Establishing partnerships with Linux-based software developers so that
their products can be added to ours for particular vertical markets;
o Developing sales channels for our information appliances;
o Building brand awareness among software developers, channel partners
and enterprise customers of our products and their capabilities; and
o Establishing strategic partnerships with other companies in our
industry.
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