UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
| (Mark One) | ||
 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Quarter ended March 31, 2004 | ||
 |
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
No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
As of May 10, 2004, there were 15,769,139 outstanding shares of the Registrant’s Common Stock.
NEOWARE SYSTEMS, INC.
INDEX
| Page | |||
| Number | |||
| |
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| PART I. | FINANCIAL INFORMATION | ||
| Item 1. | Consolidated Financial Statements: | ||
| Consolidated Balance Sheets: | |||
| March 31, 2004 and June 30, 2003 | 3 | ||
| Consolidated Statements of Operations: | |||
| Three and Nine Months Ended March 31, 2004 and 2003 | 4 | ||
| Consolidated Statements of Cash Flows: | |||
| Nine Months Ended March 31, 2004 and 2003 | 5 | ||
| Notes to Consolidated Financial Statements | 6 | ||
| Item 2. | Management’s Discussion and Analysis of Financial | ||
| Condition and Results of Operations | 11 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 | |
| Item 4. | Controls and Procedures | 23 | |
| PART II. | OTHER INFORMATION | ||
| Item 6. | Exhibits and Reports on Form 8-K | 24 | |
| Signatures | 25 | ||
2
NEOWARE
SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
(in thousands, except
per share data)
| (Unaudited) | ||||||
| March 31, | June 30, | |||||
| 2004 | 2003 | |||||
ASSETS |
||||||
| CURRENT ASSETS: | ||||||
| Cash and cash equivalents | $ | 20,823 | $ | 26,014 | ||
| Short-term investments | 32,185 | 3,151 | ||||
| Accounts receivable, net | 11,183 | 11,089 | ||||
| Inventories | 748 | 772 | ||||
| Prepaid expenses and other | 1,448 | 798 | ||||
| Deferred income taxes | 946 | 946 | ||||
| Total current assets | 67,333 | 42,770 | ||||
| Property and equipment, net | 493 | 572 | ||||
| Goodwill | 17,554 | 8,943 | ||||
| Intangibles, net | 3,835 | 2,091 | ||||
| $ | 89,215 | $ | 54,376 | |||
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
||||||
| CURRENT LIABILITIES: | ||||||
| Accounts payable | $ | 5,523 | $ | 4,206 | ||
| Accrued expenses | 2,981 | 2,818 | ||||
| Capital lease obligations | 7 | 7 | ||||
| Deferred revenue | 975 | 691 | ||||
| Total current liabilities | 9,486 | 7,722 | ||||
| Capital lease obligations | 5 | 10 | ||||
| Deferred income taxes | 17 | 17 | ||||
| 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, 15,769,139 and 14,054,800 shares issued and | ||||||
| 15,669,139 and 13,954,800 shares outstanding | 16 | 14 | ||||
| Additional paid-in capital | 71,362 | 44,215 | ||||
| Treasury stock, 100,000 shares at cost | (100 | ) | (100 | ) | ||
| Other comprehensive income (loss) | 987 | (27 | ) | |||
| Retained earnings | 7,442 | 2,525 | ||||
| Total stockholders’ equity | 79,707 | 46,627 | ||||
| $ | 89,215 | $ | 54,376 | |||
See accompanying notes to consolidated financial statements.
3
NEOWARE SYSTEMS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Net revenues | $ | 15,750 | $ | 13,468 | $ | 46,086 | $ | 41,699 | ||||
| Cost of revenues | 8,326 | 7,227 | 23,059 | 23,217 | ||||||||
| Gross profit | 7,424 | 6,241 | 23,027 | 18,482 | ||||||||
| Sales and marketing | 3,442 | 2,411 | 9,785 | 6,937 | ||||||||
| Research and development | 712 | 492 | 2,120 | 1,301 | ||||||||
| General and administrative | 1,527 | 1,120 | 4,462 | 3,002 | ||||||||
| Operating expenses | 5,681 | 4,023 | 16,367 | 11,240 | ||||||||
| Operating income | 1,743 | 2,218 | 6,660 | 7,242 | ||||||||
| Loss on investment | — | (300 | ) | — | (300 | ) | ||||||
| Interest income, net | 109 | 83 | 287 | 264 | ||||||||
| Income before income taxes | 1,852 | 2,001 | 6,947 | 7,206 | ||||||||
| Income taxes | 194 | 720 | 2,030 | 2,594 | ||||||||
| Net income | $ | 1,658 | $ | 1,281 | $ | 4,917 | $ | 4,612 | ||||
| Basic earnings per share | $ | 0.11 | $ | 0.09 | $ | .31 | $ | 0.34 | ||||
| Diluted earnings per share | $ | 0.10 | $ | 0.09 | $ | .31 | $ | 0.31 | ||||
| Weighted average number of common shares | ||||||||||||
| outstanding in basic earnings per share computation | 15,769 | 13,725 | 15,652 | 13,485 | ||||||||
| Weighted average number of common shares | ||||||||||||
| outstanding in diluted earnings per share | ||||||||||||
| computation | 16,171 | 14,704 | 15,942 | 14,712 | ||||||||
See accompanying notes to consolidated financial statements.
4
NEOWARE SYSTEMS,
INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
| Nine Months Ended | ||||||
| March 31, | ||||||
| 2004 | 2003 | |||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
| Net income | $ | 4,917 | $ | 4,612 | ||
| Adjustments to reconcile net income to net cash provided by operating activities- | ||||||
| Income tax benefit, primarily from stock option exercises | 1,708 | 2,577 | ||||
| Depreciation | 209 | 175 | ||||
| Amortization of intangibles | 782 | 391 | ||||
| Loss on investment | — | 300 | ||||
| Changes in operating assets and liabilities, net of effect from acquisition- | ||||||
| (Increase) decrease in: | ||||||
| Accounts receivable | (94 | ) | 205 | |||
| Inventories | 24 | (86 | ) | |||
| Prepaid expenses and other | (650 | ) | (416 | ) | ||
| Increase (decrease) in: | ||||||
| Accounts payable | 1,317 | 320 | ||||
| Accrued expenses | 163 | 13 | ||||
| Deferred revenue | 284 | 46 | ||||
| Net cash provided by operating activities | 8,660 | 8,137 | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
| Purchase of the TeemTalk software business | (9,995 | ) | — | |||
| Purchases of short-term investments | (50,187 | ) | — | |||
| Sales of short-term investments | 21,153 | — | ||||
| Purchase of intangible assets | (125 | ) | (47 | ) | ||
| Purchases of property and equipment | (129 | ) | (107 | ) | ||
| Net cash used in investing activities | (39,283 | ) | (154 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
| Repayments of capital leases | (5 | ) | (49 | ) | ||
| Sale of common stock, net of expenses | 24,609 | — | ||||
| Expenses for prior issuance of common stock | (3 | ) | (122 | ) | ||
| Exercise of stock options and warrants | 835 | 1,978 | ||||
| Repayments of officer loans | — | 9 | ||||
| Net cash provided by financing activities | 25,436 | 1,816 | ||||
| EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | (4 | ) | — | |||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (5,191 | ) | 9,799 | |||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 26,014 | 17,031 | ||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 20,823 | $ | 26,830 | ||
| SUPPLEMENTAL DISCLOSURES: | ||||||
| Cash paid for income taxes | $ | 264 | $ | 80 | ||
| Cash paid for interest | 8 | 26 | ||||
See accompanying notes to consolidated financial statements.
5
NEOWARE SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | BASIS OF PRESENTATION |
The accompanying unaudited consolidated financial statements of Neoware Systems, Inc. and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements. These statements, while unaudited, reflect all normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period. Certain information and footnote disclosures included in financial statements have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The consolidated financial statements included in this Form 10-Q 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 for the year ended June 30, 2003, filed with the Securities and Exchange Commission on September 15, 2003.
| 2. | RECENT ACCOUNTING PRONOUNCEMENTS |
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This Issue addresses the appropriate accounting for arrangements that will result in the delivery of multiple products, services and/or rights to assets that may occur over a period of time. The Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have any impact on the Company’s financial statements.
In December 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003) (FIN 46R), “Consolidation of Variable Interest Entities,” which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, which was issued in January 2003. The Company was required to apply FIN 46R as of March 31, 2004. The adoption of this Interpretation is not expected to have any impact on the Company’s financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer of financial statements classifies and measures certain financial instruments that have characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have an impact on the Company’s financial statements.
| 3. | STOCK-BASED COMPENSATION |
The Company applies Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations for stock options and other stock-based awards while disclosing pro forma net income and earnings per share as if the fair value method had been applied in accordance with SFAS No. 123, “Accounting for Stock-based Compensation.”
6
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company has determined that it will not make the voluntary change to the fair value based method of accounting at this time. Had compensation cost been recognized consistent with SFAS No. 123, the Company’s consolidated net income and earnings per share would have been as follows (in thousands, except share and per share data):
| Three Months Ended | Nine Months Ended | |||||||||||
| March 31, | March 31, | |||||||||||
| |
||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Net income | ||||||||||||
| As reported | $ | 1,658 | $ | 1,281 | $ | 4,917 | $ | 4,612 | ||||
| Less: | ||||||||||||
| Total stock-based employee compensation expense determined under the | ||||||||||||
| fair value based method for all awards, net of tax | (871 | ) | (451 | ) | (2,369 | ) | (951 | ) | ||||
| Pro forma | $ | 787 | $ | 830 | $ | 2,548 | $ | 3,661 | ||||
| Basic earnings per share: | ||||||||||||
| As reported | $ | 0.11 | $ | 0.09 | $ | 0.31 | $ | 0.34 | ||||
| Pro forma | $ | 0.05 | $ | 0.06 | $ | 0.16 | $ | 0.27 | ||||
| Diluted earnings per share: | ||||||||||||
| As reported | $ | 0.10 | $ | 0.09 | $ | 0.31 | $ | 0.31 | ||||
| Pro forma | $ | 0.05 | $ | 0.06 | $ | 0.16 | $ | 0.25 | ||||
The fair value of the Company’s stock-based awards to employees was estimated at the date of grant using the Black-Scholes option pricing model, assuming an estimated life of five to ten years, no dividends, volatility of 70% -126%, and risk-free interest rates of 2.1% - 6.8%.
| 4. | ACQUISITION |
On July 1, 2003, the Company acquired the host access software business from Pericom Holdings PLC (referred to as “TeemTalk software
business”), for $9.8 million in cash, excluding transaction costs. The Company acquired all of the assets of the software business, including the
TeemTalk host access software, intellectual property and technology, customer lists, customer contracts and distribution channels and also
entered into a non-competition agreement. The acquisition was accounted for using the purchase method of accounting and the purchase price
has been allocated to the assets acquired, including goodwill and intangible assets. The Company has substantially completed the allocation of
the purchase price for this acquisition and does not expect future adjustments to the purchase price allocation to be material. The results of
operations of the TeemTalk software business have been included in the Company’s statements of operations from the date of the acquisition.
The purchase price was allocated, based on an independent valuation, as follows: $7.8 million to goodwill, $1.6 million to acquired technology, $500,000 to customer relationships and $100,000 to tradenames.
7
The following unaudited pro forma information presents the results of the Company’s operations as though the acquisition had been completed as of July 1, 2002. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition been completed as of July 1, 2002 or the results that may occur in the future (in thousands, except share and per share data):
| Three Months Ended | Nine Months Ended | |||||||||||
| March 31, | March 31, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Total net revenue | $ | 15,750 | $ | 14,238 | $ | 46,086 | $ | 44,010 | ||||
| Net income | 1,658 | 1,460 | 4,917 | 5,189 | ||||||||
| Basic earnings per share | 0.11 | 0.11 | 0.31 | 0.38 | ||||||||
| Diluted earnings per share | 0.10 | 0.10 | 0.31 | 0.35 | ||||||||
| 5. | GOODWILL AND INTANGIBLE ASSETS |
The carrying amount of goodwill was $17.6 million and $8.9 million at March 31, 2004 and June 30, 2003, respectively. The increase in goodwill is due to the acquisition of the TeemTalk software business (See Note 4) ($7.8 million) and the impact of changes in foreign exchange rates.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives. The following table provides a summary of the Company’s intangible assets (in thousands):
| March 31, 2004 | |||||||||||
| Estimated | Gross carrying | Accumulated | |||||||||
| useful life | value | amortization | Net | ||||||||
| Tradenames | Indefinite | $ | 260 | $ | — | $ | 260 | ||||
| Customer relationships | 2 years | 552 | 207 | 345 | |||||||
| Distributor relationships | 5 years | 2,325 | 1,032 | 1,293 | |||||||
| Acquired technology | 5-10 years | 2,270 | 333 | 1,937 | |||||||
| $ | 5,407 | $ | 1,572 | $ | 3,835 | ||||||
| June 30, 2003 | |||||||||||
| Estimated | Gross carrying | Accumulated | |||||||||
| useful life | value | amortization | Net | ||||||||
| Tradenames | Indefinite | $ | 150 | $ | — | $ | 150 | ||||
| Customer relationships | 2 years | — | — | — | |||||||
| Distributor relationships | 5 years | 2,200 | 690 | 1,510 | |||||||
| Acquired technologies | 10 years | 506 | 75 | 431 | |||||||
| $ | 2,856 | $ | 765 | $ | 2,091 | ||||||
In September 2003, the Company acquired certain distribution rights in