-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KEC3jqF+N3MKOqnE4V6KATKPIvE7OQ0nouU2oCq2fBP7QjbiWxMuhTcMLkBy1ewD h2PyPAeWKXZDeP/uSREaAA== 0000950116-98-001935.txt : 19980929 0000950116-98-001935.hdr.sgml : 19980929 ACCESSION NUMBER: 0000950116-98-001935 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOWARE SYSTEMS INC CENTRAL INDEX KEY: 0000894743 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 232705700 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21240 FILM NUMBER: 98716338 BUSINESS ADDRESS: STREET 1: 400 FEHELEY DR CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 BUSINESS PHONE: 6102778300 MAIL ADDRESS: STREET 1: 400 FEHELEY DR CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 FORMER COMPANY: FORMER CONFORMED NAME: HDS NETWORK SYSTEMS INC DATE OF NAME CHANGE: 19950313 FORMER COMPANY: FORMER CONFORMED NAME: INFORMATION SYSTEMS ACQUISITION CORP DATE OF NAME CHANGE: 19930108 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (I.R.S. Employer incorporation or organization) Identification No.) 400 Feheley Drive, King of Prussia, Pennsylvania 19406 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 277-8300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None - ------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share; and Redeemable Common Stock Purchase Warrants each to purchase one share of Common Stock for $5.50 per share - -------------------------------------------------------------------------------- (Title of Class) 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 _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $9,066,276. Such aggregate market value was computed by reference to the last reported sale price of the Common Stock as reported on the NASDAQ National Market on September 21, 1998. In making such calculation, the registrant does not determine whether any director, officer or other holder of Common Stock is an affiliate for any other purpose. The number of shares of the registrant's Common Stock outstanding as of September 21, 1998 was 6,264,158. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on December 10, 1998 are incorporated by reference into Part III. Those portions of the Proxy Statement included in response to Item 402(k) and 402(1) of Regulation S-K are not incorporated by reference into Part III. TABLE OF CONTENTS PAGE ----------------- ---- PART I ..................................................................... 1 ITEM 1. BUSINESS......................................................... 1 ITEM 2. PROPERTIES....................................................... 8 ITEM 3. LEGAL PROCEEDINGS................................................ 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 9 PART II .................................................................... 9 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ............................................. 9 ITEM 6. SELECTED FINANCIAL DATA ......................................... 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................... 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................. 17 PART III ................................................................... 17 PART 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .............. 17 PART 11. EXECUTIVE COMPENSATION .......................................... 18 PART 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...................................................... 18 PART 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 19 PART IV .................................................................... 19 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ..................................................... 19 PART I ITEM 1. BUSINESS. General Neoware Systems, Inc. (the "Company") designs, manufactures and markets a family of Windows-based terminals and thin client computers that are designed to allow users to access Windows-based applications from a multi-user Windows(R) NT server, plus connect to mainframes, minicomputers and the Internet. The Company's NeoStationTM family of Windows-based terminals and related software allows users to utilize all of their existing computer systems and applications running on Windows platforms, UNIX, mainframes and minicomputers, and access them across a network. Unlike Java network computers, an alternative type of thin client, Neoware's products do not require customers to rewrite their applications in the Java language or to use Java emulators to access their existing systems. Unlike personal computers, the Company's products are designed primarily to run applications on a server, not on the desktop. This offers a number of significant advantages compared to an architecture based upon personal computers. Windows-based terminals and thin clients such as the Company's NeoStation line of products are designed to be easier to install, maintain and administer than traditional personal computers. Such lower administration costs are designed to lower the total cost of ownership of systems utilizing the Company's products when compared to personal computers. Prior to focusing on the Windows-based terminal market, the Company produced a line of network computers which offered similar capabilities. The Company's network computer product line was introduced in June 1996. Prior to the introduction of its line of network computers, the Company manufactured and marketed a family of X Window terminals which were targeted primarily at the UNIX market. The X terminal product line was designed around industry standards and allowed users to access multiple forms of information simultaneously, using the industry standard X protocol and industry standard networking interfaces. On March 2, 1995, Human Designed Systems, Inc. ("HDS") was merged into a wholly-owned subsidiary of the Company (the "Merger"). Pursuant to the Merger, all of the outstanding shares of HDS were converted into the right to receive a total of 2,810,000 shares of the Company's Common Stock, 618,200 redeemable common stock purchase warrants and $5,500,000 in cash, in accordance with the exchange ratios set forth in the Merger Agreement. Upon completion of the Merger, the former shareholders of HDS owned approximately 50.1% of the outstanding Common Stock of the Company. At the time of the Merger, the Company changed its name to HDS Network Systems, Inc. In April 1996, HDS was merged into the Company. In September 1996, the Company entered into an agreement with Hitachi Data Systems Corporation whereby the Company, among other things, agreed to sell to Hitachi all of the Company's rights in the mark "HDS" and to cancel certain petitions filed by the Company in the United States Patent and Trademark Office to cancel Hitachi's trademark registrations relating to the mark "HDS." At a Special Meeting of Stockholders held on July 30, 1997, the Company's stockholders approved the Company's name change to Neoware Systems, Inc. 1 In August 1996, the Company formed a new subsidiary, Information Technology Consulting, Inc. ("ITC") for the purpose of acquiring companies in the computer services field, including information technology staffing companies and client-server consulting companies. During fiscal 1997, ITC entered into definitive agreements to acquire Global Consulting Group and The Reohr Group, Inc., subject to consummation by ITC of a public offering of its stock. In October 1997, ITC merged with The Reohr Group, Inc. and Global Consulting Group. The Company, as the sole stockholder of ITC, received stock of the surviving entity representing approximately 2% ownership of the entity after the merger. The Company was also reimbursed for the expenses incurred by the Company and ITC in connection with ITC's efforts to complete these transactions. In February 1997, the Company formed a new subsidiary, Bridging Data Technology, Inc. ("BDT"). BDT acquired and further developed a software product, SmartBridge(TM), which utilizes the "intelligent bridging" approach to upgrading programs and data for Year 2000 compliance. The Company entered into an agreement effective January 1, 1998 which reduced the Company's ownership position in Bridging Data Technology, Inc. and eliminated the Company's requirement to fund future operations. In addition, effective March 31, 1998, the Company wrote off the full amount of its investment in BDT. The write-off reflects the Company's evaluation that recovery, if any, of its investment in BDT will not occur in the near future. Future cash distributions, if any, from BDT will be recorded as income in the period during which the transaction occurs. Expenses related to BDT, including the investment write-off, have been reclassified as expenses of BDT venture in the Consolidated Financial Statements included under Item 8. herein. In June 1998, the Company entered into a joint marketing and development agreement and an equity purchase agreement with Motorola, Inc., under which Motorola purchased approximately 6% of the Company's outstanding Common Stock. Under the joint marketing and development agreement, the two companies agreed to collaborate on technology for the Windows-based terminal market, and to jointly promote this technology to OEM customers. Although the Company believes that its agreements with Motorola allow it to compete more effectively in the market for customers who wish to create Windows-based terminals under their own brand names, there can be no assurance that the Company will generate significant revenue from this agreement. Product Strategy The Company's objective is to establish and maintain a leadership position in the emerging market for Windows-based terminals and thin clients. The Company has invested significant resources in sales and marketing and research and development in the current and prior years to bring its new product families to market. The Company's Windows-based terminal and thin client products incorporate the following elements: o A choice of operating environments. The Company's products are designed to run both its netOS operating environment and Microsoft's Windows(R)CE. The Company has announced its intention to license the Windows CE operating system from Microsoft, although it has not yet finalized an agreement with Microsoft to permit this. Until such a license agreement is signed there can be no assurance that the Company will be successful in entering into an agreement with Microsoft to permit the Company to offer Windows CE 2 with its products. During the current and prior years, the Company developed and enhanced netOS , a set of cross-platform software tools for Windows-based terminals and thin clients based on industry standard protocols and technologies. The Company's netOS allows users to utilize a wide variety of operating systems and access applications and information on multiple platforms, including Windows(R)95, Windows(R)NT, Windows 3.1, UNIX(TM), mainframe and midrange computers, the Internet and Java(TM). The Company intends to offer both environments on its hardware products in order to give its customers a high level of flexibility. o Cost-effective, High-Performance Windows-based terminal and thin client products. The Company's primary products, the NeoStation 200 family, are based upon a highly integrated line of microprocessors from Motorola. The Company believes that this line of microprocessors offers it a very cost effective hardware platform, especially compared to personal computers. The primary microprocessor used in the Company's products, the Motorola MPC 8XX, includes a number of important components built into the processor that required additional components on the Company's older products. This integration reduces the cost of the Company's products and makes them easier to produce. The NeoStation family is offered in a very small enclosure that is approximately the size of a hardcover book. As a result, it takes up significantly less space than a personal computer, although it offers similar capabilities when connected to a server. The Company's products are designed to operate in network environments, and include an Ethernet connection, serial ports, and connections for printers and monitors. The Company also produces older products utilizing microprocessors from other companies. o Focus on central administration and lower total cost of ownership. The Company's products are designed to be centrally administered in order to lower total cost of ownership. Customers who utilize the Company's products typically run applications and store files on a server, not on the desktop as with a personal computer. This makes administration of networks of the Company's products much simpler than administration of personal computer networks, since administration takes place at a small number of servers. Additionally, the Company includes certain software capabilities in its products that make them easier to update and administer centrally. o Diverse Technology Expertise. The Company has significant expertise in a wide range of technical disciplines, including operating systems, windowing and networking software, applications software development, graphics acceleration, multimedia design and compression algorithms. o Low-Cost Design and Manufacturing. The Company plans, implements and manages the manufacturing of its products to take advantage of industry-standard components that are widely available in the personal computer industry. This reduces the Company's risks and costs, and allows the Company more easily to increase production of products quickly to meet customer demand. The Company can add to its manufacturing capabilities by outsourcing some or all of its production to contract manufacturing companies. o Modularity and Use of Standard Peripherals. The Company's line of thin clients and Windows-based terminals are designed to be compatible with a wide range of standard off-the-shelf peripherals, including keyboards and monitors, PC card flash and network cards. 3 Customers The Company's customers span a wide range of industries, including aerospace, automotive, education, financial services, government, healthcare, manufacturing and telecommunications. The Company's products have been adopted by such customers as 1-800-Flowers, IBM, Intel Corporation, Arrow Electronics, and Hollywood Video. Net revenues from International Business Machines Corporation ("IBM") represented 15%, 15% and 27% of total net revenues for fiscal 1998, 1997 and 1996, respectively. Net revenues from Intel Corporation represented 14%, 25% and 16% of total net revenues for fiscal 1998, 1997 and 1996, respectively. Sales to IBM and Intel declined significantly during the last six months of fiscal 1998, as a result of completing delivery of product under existing purchase orders. Revenues to these two customers are expected to remain at this reduced level for the foreseeable future. Product Development The Company believes that its ability to expand the market for its Windows-based terminal products will depend in large part upon its ability to develop enhancements to the Windows CE environment, enhance its netOS software, and continue to develop new products which incorporate the latest improvements in performance, capability and manageability. Accordingly, the Company is committed to investing significant resources in software and hardware development activities. During fiscal 1998, 1997 and 1996 the Company's expenditures for research and development totaled $1,443,720; $1,071,991 and $585,770, respectively. The Company's current research and development programs include: o Development of enhancements to the Windows CE environment that make it more manageable in enterprise environments and allow users to connect to a variety of enterprise systems. o Development of enhanced connectivity to Windows application servers. o Development of lower cost and higher performance versions of its hardware products. There can be no assurance that any of these development efforts will result in the introduction of new products or that any such products will be commercially successful. Marketing and Sales The principal objectives of the Company's marketing strategy are to increase awareness of the benefits of the Company's Windows-based terminal products, maintain the Company's position as a recognized innovator in the Windows-based terminal industry and differentiate the Company's products from other thin clients and personal computers. The Company's marketing activities include participation in trade shows and conferences, advertising and press relations with leading trade publications and the publication of technical articles. 4 The Company's products have won numerous awards in the thin client and Windows-based terminal market, including "Best Windows-based Terminal" from Network Computing, "Editor's Choice" from PC Magazine, "Byte Best" from Byte Magazine, "Editors' Choice" from Network Computing Magazine, "Top of the World" from SCO World, "Crossroads A-List" from Open Systems Advisors, "Best Buy" from PC Dealer, "Gold Award for Excellence" from Computing Magazine, "Five Stars for Features and Overall Performance" from PC Pro, "Best Buy" from PC Week UK, "5-Star PC Digest Recommends" from PC Digest and "Best Buy" from Network Solutions. The Company distributes its products in North America through direct sales to end user customers, through resellers and through systems integration partners. The timing of sales to the Company's customers and the continued evolution of the market for Windows-based terminals will impact the Company's future operating results. The Company utilizes distributors for its products throughout the world, including relationships with distributors in the United Kingdom, France, Scandinavia, Germany, Switzerland, Italy, Spain, Russia, Israel, Australia, and India. Foreign revenues, which accounted for approximately 20%, 22%, and 3% of net revenues, respectively, in fiscal 1998, 1997, and 1996, may be subject to government controls and other risks, including export licenses, federal restrictions on the export of technology, changes in demand resulting from currency exchange fluctuations, political instability, trade restrictions and changes in tariffs. To date, the Company has experienced no material difficulties due to these factors. Service and Support The Company believes that its ability to provide service and support is an important element in the marketing of its products. The Company maintains in-house repair facilities and also provides telephone and electronic mail access to its technical support staff. The Company's technical support specialists not only provide assistance in diagnosing problems but work closely with customers to address system integration issues and to assist in increasing the efficiency and productivity of their systems. The Company provides system level hardware support through its factory-based technical maintenance organization and primarily through contracted field system engineers. The Company typically warrants its products against defects in materials and workmanship for one year after purchase by the end user, and offers an extended warranty of up to an additional two years. To date, the Company has not encountered any material product maintenance problems. Competition The desktop computer market is characterized by rapidly changing technology and evolving industry standards. The Company experiences significant competition from suppliers of workstations and personal computers, as well as providers and prospective providers of Windows-based terminals, thin clients and network computers. Competitive thin client products are offered by a number of established computer manufacturers, including IBM, Sun Microsystems, Inc. ("Sun"), Wyse Technology, Network Computing Devices, and Boundless Technologies. Each of these companies has substantially greater name recognition, engineering, manufacturing and marketing capabilities and greater financial resources than those of the Company. The Company believes that the principal competitive factors among thin client suppliers include breadth of 5 product line, product price/performance, capabilities of the products, software features, network expertise, service and support, and market presence. The Company believes that it competes favorably with respect to all of these factors except market presence. Workstation and personal computer manufacturers who also offer thin client products may have advantages over independent thin client vendors, including the Company, based on their ability to "bundle" their thin clients, workstations and personal computers in certain large system sales. The Company anticipates increased competition from these system suppliers as the thin client market evolves and also expects that other established domestic and foreign computer equipment manufacturers may enter the thin client market. The Company, as well as other manufacturers of thin clients, also faces competition from established computer manufacturers whose personal computer products offer alternatives to thin clients for most applications. Thin clients compete with personal computers offered by such manufacturers as Dell, IBM, Gateway, Compaq and Hewlett Packard. Personal computers can be configured with software, such as an ICA client from Citrix Systems, or an RDP client from Microsoft, that allows them to operate as Windows-based terminals. As the cost of personal computers declines, the difference in cost between thin clients and personal computers may continue to decline. Thin clients compete favorably on a price/performance basis with personal computer networks and offer cost advantages in initial system installation, as well as subsequent system upgrading and administration. However, the significant market presence and reputation of personal computer manufacturers, and customer perceptions regarding their need for desktop application processing capability, constitute obstacles to the penetration of this market segment by thin client manufacturers. Increased competition could result in price reductions, reduced profit margins and loss of market share, which would adversely affect the Company's operating results. There can be no assurance that the Company will be able to continue to compete successfully against current and future competitors as the thin client market evolves and competition increases. At the low end of the commercial segment of the desktop computer market, the Company competes with suppliers of lower cost ASCII and 3270 terminals. These products do not offer the graphics and windowing capabilities offered by the Company's network computers, but are still appealing to certain price sensitive customers. The Company believes that thin clients will become increasingly competitive with ASCII and 3270 terminal systems. Manufacturing and Suppliers The Company's production activities are conducted at its King of Prussia, Pennsylvania facility. These operations consist primarily of final assembly, configuration, testing and quality control of material components, sub-assemblies and systems. The Company utilizes an automated manufacturing control system which integrates purchasing, inventory control and cost accounting. The Company tests each thin client in a network environment prior to shipment. In addition, the Company maintains an approved vendor list and control of engineering changes of parts and components. Incoming material is inspected for conformance with the Company's specifications. The Company conducts regular on-site inspection at its vendors' facilities to maintain quality control. The components and sub-assemblies used in the Company's products are either standard, commercially available components or are manufactured to the Company's specifications by independent suppliers, including foreign suppliers who are subject to risks associated with foreign operations such as the imposition of unfavorable governmental controls or other trade restrictions, changes in tariffs and political instability. 6 Although most of the video monitors used in the Company's products are available from more than one supplier, monitors used in some of its products are currently available from a single source. The Company has, from time to time, experienced delays in the receipt of monitors from certain of these suppliers. In addition, the Company is required to place orders for some monitors several months in advance of its anticipated requirements, and its ability to react to short-term increases or decreases in customer demands of these models is, therefore, limited. A number of other components and parts used in the Company's products, including microprocessors, also are currently available only from single sources. Prolonged or repeated delays in the receipt of these components could have a material adverse effect on the Company's operations. The Company has no long-term purchase agreements or other guaranteed supply arrangements with suppliers of these single or limited source components and purchases such components, as well as its other parts and components, pursuant to its standard form of purchase order. The Company has generally been able to obtain adequate supplies of parts and components in a timely manner from existing sources under purchase orders and endeavors to maintain inventory levels adequate to guard against interruptions in supplies. The Company's inability to develop alternative supply sources in the future, or to obtain sufficient components from existing suppliers as required, could adversely affect the Company's operating results. The Company's products also incorporate memory components, such as DRAMs and VRAMs, that are available from multiple sources but have been subject to substantial fluctuations in availability and price. To date, these fluctuations have not had a material effect on the Company's operating results and the Company has been able to obtain an adequate supply of such components. There can be no assurance, however, that the Company will be able to obtain adequate supplies of these components in the future or that price fluctuations will not adversely affect the Company's operating results. Proprietary Rights and Licenses The Company believes that its success will depend primarily on the innovative skills, technical competence and marketing abilities of its personnel rather than upon the ownership of patents or other intellectual property protection methods. In addition, there can be no assurance that any patents issued to the Company will not be challenged, invalidated or circumvented, or that any rights granted thereunder will provide adequate protection to the Company. Certain technology used in the Company's products is licensed from third parties on a royalty-bearing basis. Generally, such licenses grant to the Company non-exclusive, worldwide rights with respect to the subject technology and terminate upon a material breach by the Company. The Company has licensed technology from Citrix Systems, Inc., Spyglass, Inc. and Network Computer, Inc. (formerly Navio Communications, Inc.). In addition to these licensing agreements, the Company holds a license agreement with the Open Software Foundation (OSF), and various other licenses which it does not consider to be material. Although the Company has not received any claims that its products infringe on the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. 7 Employees As of June 30, 1998, the Company had 71 employees and initiated a workforce reduction. As of August 31, 1998, the Company had 57 full time employees and one part-time employee. ITEM 2. PROPERTIES. The Company's principal administrative, marketing, manufacturing and research and development operations are located in King of Prussia, Pennsylvania. The facility consists of approximately 22,000 square feet under a lease which expires in 2001. The annual gross rent for the facility currently approximates $92,100. The Company believes that its facilities are adequate for its present requirements, and that suitable additional space will be available as needed. ITEM 3. 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. Defendants' time to respond to the FAC has not yet expired nor has lead plaintiff been appointed by the court. 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 and lead co-plaintiffs have been appointed. Defendants' time to respond to the Pennsylvania actions has not yet expired. The Company disputes the validity of these claims and intends to defend the cases vigorously. On May 5, 1998, a complaint was filed in the Court of Common Pleas of Montgomery County against the Company by Development Concepts, Inc. The complaint asserts claims for common law 8 breach of contract, fraud, misrepresentation, breach of warranty and violations of the federal Lanham Act arising primarily from the parties' contractual relationships. The complaint seeks an indeterminate amount of monetary damages in excess of $1,500,000. The Company disputes the validity of these claims and intends to defend the claims vigorously. Management does not anticipate that resolution of the pending litigation, either separately or in the aggregate, will have a material effect on the Company's financial position or results of operations. This is a forward-looking assessment, which may change as the cases develop. While management may reassess this from time to time, it does not undertake to do so on any regular basis. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company during the fourth quarter of fiscal 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Common Stock and the Warrants are traded on the NASDAQ National Market. Prior to August 1, 1997, the Common Stock and the Warrants traded under the symbols HDSX and HDSXW, respectively. On August 1, 1997, the Company's Common Stock and the Warrants began trading under the symbols NWRE and NWREW, respectively. The following table sets forth the high and low closing bid quotations for the periods indicated.
Common Stock Warrants ------------ -------- 1998 High Low High Low - ---- ---- --- ---- --- First Quarter................... 6 13/16 4 1/16 2 5/16 1 9/32 Second Quarter.................. 5 1/16 2 1/8 1 3/4 1/2 Third Quarter................... 3 2 1/4 3/4 5/16 Fourth Quarter.................. 5 1/16 1 3/4 1 3/16 3/8 Common Stock Warrants ------------ -------- 1997 High Low High Low - ---- ---- --- ---- --- First Quarter................... 9 6 3/8 3 5/8 2 1/4 Second Quarter.................. 8 7/8 6 7/8 3 1/2 2 11/32 Third Quarter................... 9 1/2 5 1/2 3 7/8 1 3/4 Fourth Quarter.................. 7 7/8 4 5/16 2 15/16 1 3/8
9 The above quotations represent prices between dealers and do not include retail markups or markdowns or commissions. They may not necessarily represent actual transactions. There were approximately 49 holders of record of Common Stock as of September 18, 1998. The Company has never declared or paid any cash dividends on its capital stock and does not intend to pay any cash dividends in the foreseeable future. On June 30, 1998, the Company sold 396,226 shares of the Company's Common Stock to Motorola for an aggregate purchase price of $1,000,000. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933 (the "Securities Act") under Section 4(2) thereof. The shares were acquired for investment and not with a view to the distribution thereof by an institutional investor which has access to information respecting the Company and its business. During April 1998, the Company issued 100,000 shares of the Company's Common Stock in exchange for Unit Purchase Options to acquire 540,495 Units at an exercise price of $2.44 per Unit, each Unit consisting of one share of the Company's Common Stock and two common stock purchase warrants. The Unit Purchase Options had been issued in connection with the Company's initial public offering in March 1993. The shares were issued in reliance upon the exemption from the registration requirements of the Securities Act under Section 3(a)(9) thereof. In January 1998, in connection with consulting services to be provided to the Company by a financial consultant, the Company granted to the consultant warrants to purchase 300,000 shares of the Company's Common Stock at exercise prices ranging from $3.00 to $7.00 per share until January 2001, subject to certain conditions and to adjustment under certain conditions. The warrants were issued in reliance upon the exception from the registration requirements of the Securities Act under Section 4(2) thereof. The warrants were acquired for investment and not with a view to the distribution thereof by an accredited investor which had access to information respecting the Company and its business. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data with respect to the Company for the periods indicated. The data below has been derived from the Company's consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants. The data set forth below should be read in conjunction with the Consolidated Financial Statements of the Company together with the related notes thereto included elsewhere herein and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Upon the consummation of the Merger, the Company changed its fiscal year for accounting and reporting purposes to June 30. 10
Year Ended June 30, --------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net revenues $ 19,976,423 $ 25,467,487 $ 20,819,444 $ 21,841,229 $ 19,495,642 --------------- --------------- --------------- --------------- --------------- Gross profit 3,637,368 8,393,642 5,115,850 4,990,123 3,596,141 Operating expenses 9,389,393 7,942,846 4,390,344 2,680,209 2,742,126 --------------- --------------- --------------- --------------- --------------- Operating (loss) income (5,752,025) 450,796 725,506 2,309,914 854,015 Interest (expense) income, net (338,354) 69,224 220,277 (23,239) (161,012) ---------------- --------------- --------------- ---------------- ---------------- Income (loss) before income taxes and cumulative effect of change in accounting for income taxes (6,090,379) 520,020 945,783 2,286,675 693,003 Income taxes (1,121,554) 182,791 322,898 843,405 319,561 Cumulative effect of change in accounting for income taxes (1) -- -- -- -- 81,023 --------------- ---------------- -------------------------------- --------------- Net (loss) income $ (4,968,825) $ 337,229 $ 622,885 $ 1,443,270 $ 454,465 =============== ================ =============== =============== =============== Basic earnings per share $ (0.86) $ 0.06 $ 0.11 $ 0.42 $ 0.19 Diluted earnings per share $ (0.86) $ 0.05 $ 0.10 $ 0.39 $ 0.16 Weighted average number of shares used in basic earnings per share computation (2) 5,784,366 5,712,309 5,612,386 3,456,990 2,399,844 Weighted average number of shares used in diluted earnings per share computation (2) 5,784,366 7,132,898 6,069,012 3,747,633 2,809,983 BALANCE SHEET DATA: Current assets $ 10,861,643 $ 16,002,051 $ 11,165,185 $ 12,373,592 $ 6,474,654 Current liabilities 6,180,319 7,555,703 2,449,010 4,554,720 4,971,611 Working capital 4,681,324 8,446,348 8,716,175 7,818,872 1,503,043 Total assets 13,021,393 18,327,115 12,023,903 13,161,155 6,920,222 Long-term debt excluding current portion -- -- 3,733 9,293 388,119 Stockholders' equity 6,841,074 10,771,412 9,481,890 8,494,565 1,503,190
- ------------------ (1) Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and reported the cumulative effect of the change in accounting in fiscal 1994. Prior to fiscal 1994, the Company accounted for income taxes in accordance with Accounting Principles Board Opinion No. 11. (2) Weighted average number of shares in fiscal 1994 reflects the number of equivalent shares of Common Stock received by the shareholders of HDS in connection with the Merger with the Company on March 2, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Introduction The Company designs, manufactures and markets a family of Windows-based terminals and thin client 11 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. Prior to focusing on the Windows-based terminal market, the Company produced a line of network computers which offered similar capabilities but without the same level of focus on Windows-based environments. The Company's network computer product line was introduced in June 1996. Prior to the introduction of its line of network computers, 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 Windows-based terminals and thin clients. 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. 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.
Year Ended June 30, ----------------------------------------------------- 1998 1997 1996 ------- ------- ------- Gross profit 18.2% 33.0% 24.6% Operating expenses: Sales and Marketing 22.4 17.0 11.3 Research and Development 7.2 4.2 2.8 General and administrative 13.3 8.6 7.0 Restructuring charge 1.0 -- -- Bridging Data Technology venture 3.1 1.4 -- ------- ------- ------- Operating (loss) income (28.8) 1.8 3.5 Interest (expense) income (1.7) 0.2 1.0 (Loss) income before taxes (30.5) 2.0 4.5 Income tax (benefit) expense (5.6) 0.7 1.5 ------- ------- ------- Net (loss) income (24.9)% 1.3% 3.0% ======= ======= =======
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997 For the year ended June 30, 1998, net revenues decreased by 21.6% to $19,976,423 from $25,467,487 for the prior fiscal year. The Company's net revenues for the current year primarily represent a transition from its line of network computers and X Window terminals to its new NeoStation family of Windows-based terminals which were introduced in December 1997. Net revenues for the year ended June 30, 1997 represent shipments of the Company's network computer product line and revenues earned from licensing agreements for its netOS system software. The decrease in net revenues was attributable to the aforementioned transition to the NeoStation family of products which have lower selling prices than older 12 products, and the delay in the full scale implementation of thin client computers by corporate customers as they awaited the deployment of Windows Terminal Server from Microsoft. In addition, sales to two of the Company's major customers declined significantly during the last six months of fiscal 1998, as a result of completing delivery of product under existing purchase orders. Revenues to such customers are expected to remain at this reduced level for the foreseeable future. The Company is subject to significant variances in its 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 18.2% for the year ended June 30, 1998 from 33.0% for the prior fiscal year. The decrease was primarily attributable to the write-down of certain software licenses, a charge for a reduction in the carrying value of inventory, higher fixed overhead as a percentage of sales and the impact of reduced selling prices. The reduced gross profit was also attributable to the Company deriving substantially less revenue from software licensing as well as an increase in the percentage of sales through third party sales channels and reduced sales to two of its major customers. The Company anticipates that gross margins will vary from quarter to quarter depending on the source of the Company's business, including the percentage of revenue derived from hardware and software. 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 year ended June 30, 1998 were $9,389,393, an increase from operating expenses of $7,942,846 in the prior fiscal year. Sales and marketing expenses increased by $151,449 to $4,484,289 for the year ended June 30, 1998 as compared to $4,332,840 in fiscal 1997. The increase reflects the cost of additions to the Company's sales and technical staff offset by reduced expenditures for advertising expense. Research and development expenses for the year ended June 30, 1998 increased by 34.7%, or $371,729, to $1,443,720 from $1,071,991 in the prior year which reflects the Company's commitment to developing, adapting or acquiring technologies that will expand the market for its current and future products. The increase in general and administrative expenses to $2,649,800 for the year ended June 30, 1998 from $2,172,886 in the prior year reflects the addition of the Company's Chief Executive Officer and MIS staff and legal costs incurred in connection with the shareholder suit and other litigation. These amounts were partially offset by the reimbursement of expenses related to the Company's former subsidiary, Information Technology Consulting, Inc. The restructuring charge incurred in fiscal 1998 is primarily related to a reduction in the Company's workforce in the United States and the United Kingdom. The Company entered into an agreement effective January 1, 1998 which reduced the Company's ownership position in Bridging Data Technology, Inc. ("BDT") and eliminated the Company's requirement to fund future operations. In addition, effective March 31, 1998, the Company wrote off the full amount of its investment in BDT. The write-off reflects the Company's evaluation that recovery, if any, of its investment in BDT will not occur. Future cash distributions to the Company from BDT, if any, will be recorded as income in the period during which the transaction occurs. Expenses related to BDT including the investment write-off, have been reclassified as expenses of BDT venture in the Company's Consolidated Financial Statements included under Item 8. hereof. The increase in net interest expense to $338,354 for the year ended June 30, 1998 from net interest income of $69,224 for the prior year reflects the increase in average line of credit borrowings during fiscal 1998 needed to finance the losses from operations and higher inventory and accounts receivable balances during much of the year. 13 The effective income tax rates were approximately 18.4% as compared to 35.2% in the prior fiscal year. The reduced rate during the year ended June 30, 1998 reflects the recording of a valuation reserve of $679,749 against deferred tax assets. For the year ended June 30, 1998, the Company incurred a net loss of $4,968,825 as compared to net income of $337,229 for the prior year. The net loss resulted from decreased revenues, increased cost of sales and operating expenses during the period, as well as increased net interest expense, which was partially offset by the reimbursement of expenses related to the Company's former subsidiary, Information Technology Consulting, Inc. Year Ended June 30, 1997 Compared to Year Ended June 30, 1996 For the year ended June 30, 1997, net revenues increased by 22.3% to $25,467,487 from $20,819,444 for the prior fiscal year. The Company's net revenues for the current year primarily represent shipments of its line of network computers, which was introduced at the end of June 1996, and revenues earned from licensing agreements for its netOS software. Net revenues for the year ended June 30, 1996 represent shipments of the Company's X terminal product line, which the Company marketed and manufactured prior to the introduction of its network computers. The Company is subject to significant variances in its 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 33.0% for the year ended June 30, 1997 from 24.6% for the prior fiscal year. The improvement was a result of achieving higher gross margins on the network computer product line, despite comparatively lower selling prices, and from the addition of software licensing revenues. The Company anticipates that gross margins will vary from quarter to quarter depending on the source of the Company's business, including the percentage of revenue derived from hardware and software. 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 year ended June 30, 1997 were $7,942,846, an increase from operating expenses of $4,390,344 in the prior fiscal year. Sales and marketing expenses increased by $1,980,742 to $4,332,840 for the year ended June 30, 1997 as compared to $2,352,098. These increases were the result of significantly increasing the Company's sales and marketing staff, including opening new sales offices in the United States and in Europe, and increased expenditures for advertising and public relations. Research and development expenses for the year ended June 30, 1997 increased by 83%, or $486,221, to $1,071,991 from $585,770 in the prior year as the Company expanded its investment in engineering resources to develop, adapt or acquire technologies complementary to its current business that will expand the market for its current and future products. General and administrative expenses increased to $2,172,886 for the year ended June 30, 1997 from $1,452,476 in the prior year due to an increase in corporate staff relating to the formation of the Company's Information Technology Consulting subsidiary and expenses relating to the recruitment of the Company's new Chief Executive Officer. The increase in operating expenses was also attributable to costs related to BDT. Net interest income decreased in the year ended June 30, 1997 due to 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% as compared to 34.1% in the prior fiscal year. 14 For the year ended June 30, 1997, net income decreased to $337,229 from $622,885 for the prior year. The decrease in net income resulted from increased operating expenses during the period, as well as lower net interest income, which was partially offset by significant increases in revenues and in gross profit percentages. Liquidity and Capital Resources At June 30, 1998, the Company had net working capital of $4,681,324 composed primarily of cash and cash equivalents, accounts receivable and inventory. The Company's principal sources of liquidity included approximately $1,303,000 of cash and cash equivalents and a $5,000,000 bank line of credit facility, of which $1,926,000 was available as of June 30, 1998. The bank line of credit, which is subject to annual renewal, expires on November 30, 1998. Management is currently negotiating an extension of its credit facility; however, there is no assurance that management will be successful in negotiating terms and conditions as favorable as its current line of credit facility. Cash and cash equivalents decreased by $149,425 during the year ended June 30, 1998, primarily as a result of the operating loss, acquisition costs incurred in connection with the formation of the Company's subsidiary, ITC, for which the Company was reimbursed $300,000 in cash and a $700,000 note receivable, purchases of equipment, investment in purchased and capitalized software and a net decrease in accounts payable and accrued expenses which were partially offset by a decrease in accounts receivable and proceeds from the sale of common stock. The Company generated $347,386 in cash from operating activities in fiscal 1998 compared to using cash of approximately $3,397,512 during fiscal 1997. The increase in cash generated from operations during fiscal 1998 is primarily due to significant reductions in accounts receivable and inventories, which were partially offset by the net loss and a net decrease in accounts payable and accrued expenses. Cash flow from operations can vary significantly from quarter to quarter depending on the timing of payments from, and shipments to, large customers. Net cash of $786,195 was used in investing activities in fiscal 1998 primarily due to the capitalization of development costs related to new software products and enhancements to existing software products. Net cash of $1,813,601 was used in investing activities in fiscal 1997 due to the licensing of software from others and prepayment of royalties on such licensed software. 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, possible new debt sources and the sale of its equity securities. In addition, the Company has recorded the benefit for its net operating loss carryback in the 1998 Statement of Operations and expects to recover approximately $1,122,000 of federal income taxes paid in prior years. Management believes that there will be sufficient funds from current cash, operations and available financing to fund operations and cash expenditures through fiscal 1999. However, the Company must achieve profitable operations in order to provide adequate funding for the long term. Inflation The Company believes that inflation has not had a material effect on its sales and net revenues during the past three years. 15 Year 2000 Compliance The Company has made a preliminary evaluation of 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. An upgrade to the current software, which is Year 2000 compliant and will cost approximately $30,000 for the software and training, is scheduled for installation by June 30, 1999. 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 but the Company anticipates replacing the hardware and software as part of its annual management information systems expenditures. The Company is in the process of implementing a contact management and service data base software application which is Year 2000 compliant. Total cost 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 compliant with Year 2000. None of the Company's vendors provide more than 20% of the Company's annual raw material requirements and alternative sources are generally available. The Company will evaluate the Year 2000 readiness of its sole source vendors by June 30, 1999. Contingency plans will be developed to ensure continued supply in the event a vendor expects to incur difficulties achieving Year 2000 compliance. In addition, customers which represent more than 10% of the Company's annual revenues will be surveyed for compliance with Year 2000 by June 30, 1999 in an effort to identify possible interruptions to the Company's revenue streams. 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 estimates the total cost to complete its Year 2000 evaluation and remediation, including normal planned system upgrades, of all internal systems will approximate $100,000. 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" and certain other statements contained in this Form 10-K 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 anticipated purchases by customers, future margins and margin trends, future revenues and operating losses and the Company's 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 16 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 ability of the Company to market its products with Motorola to OEM customers, market acceptance of products utilizing the Windows CE operating system, 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 and increased competition. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements of the Company are filed under this Item 8, beginning on page F-2 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information with respect to directors required by this Item is incorporated by reference to the Section entitled "Election of Directors" in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders. The following individuals are the current executive officers of the Company:
Name Age Position ---- --- -------- Edward C. Callahan, Jr. 52 President and Chief Executive Officer Michael G. Kantrowitz 38 Executive Vice President Steven B. Ahlbom 48 Vice President of Operations Edward M. Parks 46 Vice President of Engineering Edward T. Lack, Jr. 42 Vice President of Finance and Administration
17 Mr. Callahan has been President and Chief Executive Officer and a Director of the Company since June 1997. Prior to joining the Company, Mr. Callahan was President and Chief Operating Officer of Summa Four, Inc. of Manchester, NH, a provider of telecommunications switches, from June 1995 until November 1996. Beginning in 1985, Mr. Callahan also held various executive positions during a ten year tenure at Sun Microsystems Computer Corporation. He was most recently Vice President of Global Telecom and Cable; previously, he was Vice President of Strategic Accounts and Vice President of the Northeast Area. Mr. Kantrowitz has been Executive Vice President and a Director of the Company since March 2, 1995. Prior to that, he was an employee of HDS from 1983, holding the positions of Executive Vice President from 1991 until March 1995 and Vice President of Marketing and Sales from 1987 until 1991. Prior to joining HDS, Mr. Kantrowitz held positions with Raytheon Company and Adage Corporation. Mr. Ahlbom has been Vice President of Operations of the Company since March 2, 1995. Prior to that, he held the positions of Vice President of Operations and Manager of Operations of HDS from 1988. Prior to joining HDS, Mr. Ahlbom was World-Wide Quality Assurance Manager for Commodore International from 1987 until 1988, and served as Quality Assurance Manager of Burroughs Corporation. Mr. Parks has been Vice President of Engineering of the Company since March 2, 1995. Prior to that, he held the position of Vice President of Engineering of HDS from 1987. Prior to joining HDS, Mr. Parks was Corporate Director for Product and Market Development and Director of Engineering for Commodore Business Machines from 1984 until 1987, and was employed by Eastman Kodak in engineering management positions from 1974 to 1984. Mr. Lack has been Vice President of Finance and Administration since February 2, 1998. Prior to joining the Company, he served as Chief Financial Officer for Penn Warehousing and Distribution, Inc. during 1997. From 1994 until 1996, Mr. Lack served as Chief Financial Officer for Pilz America, Inc. From 1993 until 1994, Mr. Lack served as Corporate Controller for Ellis and Everard (U.S. Holdings), Inc. From 1989 until 1993, Mr. Lack held various management positions with Computone Corporation. Prior to that, Mr. Lack was employed by Price Waterhouse from 1978 through 1989 in various positions, with the latest position being Senior Manager, Accounting and Auditing. All officers of the Company are appointed annually by the Company's Board and serve at its discretion. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the section entitled "Executive Compensation" in the Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section entitled 18 "Beneficial Ownership of Common Stock" in the Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the section entitled "Certain Transactions" in the Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. Financial Statements See Index to Financial Statements at page F-1. Financial Statement Schedules All schedules have been omitted because they are not applicable, or not required, or the information is shown in the financial statements or notes thereto. Exhibits The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. Exhibit Numbers Description - ------- ----------- 2.1 Agreement of Merger dated as of December 2, 1994 among the Company, ISAC Acquisition Co. and HDS (Exhibit 2.1)(3) 3.1 Certificate of Incorporation (2 3.1(1) 3.2 Amendment to Certificate of Incorporation (Exhibit 3.2)(2) 3.3 By-laws (Exhibit 3.2)(1) 3.4 Amendment to By-laws, dated July 20, 1995 4.1 Form of Warrant Certificate (Exhibit 4.2)(2) 4.2 Warrant Agreement between Continental Stock Transfer & Trust Company and Registrant (Exhibit 4.4)(3) 19 4.3 Warrant Agreement, dated March 2, 1995, between Continental Stock Transfer & Trust Company and the Registrant (Exhibit 4.5)(2) 4.4* Line of Credit Agreement from First Union National Bank (formerly CoreStates Bank, N.A.) to the Registrant, dated February 17, 1998. 4.5* Common Stock Purchase Warrants held by Kirlin Holding Corp. and two related persons (Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Common Stock Purchase Warrants, which are identical in all material respects except as to the parties thereto and the number of Warrants, held by such related persons are not being filed). 10.1 Letter Agreement between Safeguard Scientifics, Inc. and Registrant (Exhibit 10.5)(3) 10.2 Lease between the Registrant and GBF Partners, as amended (Exhibit 10.9)(4) 10.3+ 1995 Stock Option Plan (Exhibit 10.9)(2) 10.4+ 1995 Stock Option Plan (as amended on November 12, 1996) 10.5+ Employment Agreement, dated March 2, 1995, between the Registrant and Michael G. Kantrowitz (Exhibit 99.2)(5) 10.6+* Letter agreement, dated May 29, 1997, between the Registrant and Edward C. Callahan, Jr. 10.7+* Employment Agreement, dated June 10, 1997, between the Registrant and Edward M. Parks. 21.* Subsidiaries 23.* Consent of Arthur Andersen LLP - ---------- * Filed herewith. + Management contract or arrangement. (1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-56834) filed with the SEC on January 7, 1993. (2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (3) Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (No. 33-56834) filed with the SEC on February 11, 1993. (4) Filed as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 33-87036) filed with the SEC on December 6, 1994. 20 (5) Filed as an Exhibit to Company's Current Report on Form 8-K dated March 2, 1995. Reports on Form 8-K. The following report on Form 8-K was filed during the last quarter of fiscal 1998: Report on Form 8-K dated April 3, 1998. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEOWARE SYSTEMS, INC. Date: September 28, 1998 By: /s/ Edward C. Callahan, Jr. ------------------- ------------------------------------- Edward C. Callahan, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Each person in so signing also makes, constitutes and appoints Edward C. Callahan, President and Chief Executive Officer, Michael G. Kantrowitz, Executive Vice President and Edward T. Lack, Jr., Vice President-Finance and Administration, and each of them severally, his or her true and lawful attorney-in-fact, in his or her name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.
Signature Title Date --------- ----- ---- /s/ Arthur R. Spector Chairman of the Board September 28, 1998 - ----------------------------------------- Arthur R. Spector /s/ Edward C. Callahan, Jr. President, Chief Executive September 28, 1998 - ----------------------------------------- Officer and Director (Principal Edward C. Callahan, Jr. Executive Officer) /s/ Michael G. Kantrowitz Executive Vice President and September 28, 1998 - ----------------------------------------- Director Michael G. Kantrowitz /s/ Edward T. Lack, Jr. Vice President of Finance and September 28, 1998 - ----------------------------------------- Administration (Principal Financial Edward T. Lack, Jr. Officer and Principal Accounting Officer) /s/ Howard L. Morgan Director September 28, 1998 - ----------------------------------------- Howard L. Morgan /s/ John Ryan Director September 28, 1998 - ----------------------------------------- John M. Ryan /s/ Carl G. Sempier Director September 28, 1998 - ----------------------------------------- Carl G. Sempier
22 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Neoware Systems, Inc. and Subsidiaries Report of Independent Public Accountants F-2 Consolidated Financial Statements-- Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Neoware Systems, Inc.: We have audited the accompanying consolidated balance sheets of Neoware Systems, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Neoware Systems, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP Philadelphia, Pa., August 31, 1998 F-2 NEOWARE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
June 30, --------------------------------- ASSETS 1998 1997 ------ ------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 1,302,984 $ 1,452,409 Accounts receivable, net of allowance for doubtful accounts of $168,710 and $124,086 4,777,957 9,308,731 Inventories 3,119,043 4,035,202 Recoverable income taxes 1,121,554 -- Prepaid expenses and other 123,575 789,179 Deferred income taxes 416,530 416,530 ------------ ------------ Total current assets 10,861,643 16,002,051 PROPERTY AND EQUIPMENT, net 636,414 680,859 CAPITALIZED AND PURCHASED SOFTWARE, net 809,470 1,630,339 NOTE RECEIVABLE 700,000 -- DEFERRED INCOME TAXES 13,866 13,866 ------------ ------------ $ 13,021,393 $ 18,327,115 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 3,074,000 $ 3,071,000 Accounts payable 1,834,400 3,796,549 Accrued expenses 1,106,607 516,148 Deferred revenue 165,312 172,006 ------------ ------------ Total current liabilities 6,180,319 7,555,703 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 10) 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, 6,264,158 and 5,760,820 shares issued and outstanding 6,264 5,761 Additional paid-in capital 10,154,052 9,168,171 Retained earnings (deficit) (3,301,874) 1,666,951 Deferred compensation (17,368) (69,471) ------------ ------------ Total stockholders' equity 6,841,074 10,771,412 ------------ ------------ $ 13,021,393 $ 18,327,115 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30, ---------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- NET REVENUES $ 19,976,423 $ 25,467,487 $ 20,819,444 COST OF REVENUES 16,339,055 17,073,845 15,703,594 --------------- --------------- --------------- Gross profit 3,637,368 8,393,642 5,115,850 --------------- --------------- --------------- OPERATING EXPENSES: Sales and marketing 4,484,289 4,332,840 2,352,098 Research and development 1,443,720 1,071,991 585,770 General and administrative 2,649,800 2,172,886 1,452,476 Restructuring charge 198,105 -- -- Bridging Data Technology venture 613,479 365,129 -- --------------- --------------- -------------- Total operating expenses 9,389,393 7,942,846 4,390,344 --------------- --------------- --------------- Operating (loss) income (5,752,025) 450,796 725,506 INTEREST (EXPENSE) INCOME, net (338,354) 69,224 220,277 ---------------- --------------- --------------- (Loss) income before income taxes (6,090,379) 520,020 945,783 INCOME TAX (BENEFIT) EXPENSE (1,121,554) 182,791 322,898 ---------------- --------------- --------------- NET (LOSS) INCOME $ (4,968,825) $ 337,229 $ 622,885 ================ =============== =============== BASIC EARNINGS PER SHARE $ (.86) $ .06 $ .11 ================ =============== =============== DILUTED EARNINGS PER SHARE $ (.86) $ .05 $ .10 ================ =============== =============== Weighted average number of shares used in basic earnings per share computation 5,784,366 5,712,309 5,612,386 =============== =============== =============== Weighted average number of shares used in diluted earnings per share computation 5,784,366 7,132,898 6,069,012 =============== =============== ===============
The accompanying notes are an integral part of these financial statements. F-4 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional ------------------- Paid-in Retained Deferred Shares Amount Capital Earnings Compensation Total --------- ------- ------------ ----------- ---------- ----------- BALANCE AT JUNE 30, 1995 5,609,983 $ 5,610 $ 7,955,796 $ 706,837 $(173,678) $8,494,565 Tax benefit of acquired net operating loss carryforward -- -- 300,000 -- -- 300,000 Exercise of stock options 9,612 10 12,327 -- -- 12,337 Amortization of deferred compensation -- -- -- -- 52,103 52,103 Net income -- -- -- 622,885 -- 622,885 ---------- ------- ------------ ----------- --------- ------------ BALANCE AT JUNE 30, 1996 5,619,595 5,620 8,268,123 1,329,722 (121,575) 9,481,890 Exercise of Common Stock warrants 18,050 18 99,257 -- -- 99,275 Exercise of stock options 123,175 123 733,655 -- -- 733,778 Tax benefit on options exercised -- -- 67,136 -- -- 67,136 Amortization of deferred compensation -- -- -- -- 52,104 52,104 Net income -- -- -- 337,229 -- 337,229 ---------- ------- ------------ ----------- --------- ------------ BALANCE AT JUNE 30, 1997 5,760,820 5,761 9,168,171 1,666,951 (69,471) 10,771,412 Exercise of stock options 7,112 7 (7) -- -- -- Unit Purchase Options exchanged for Common Stock 100,000 100 (100) -- -- -- Sale of Common Stock, net of expenses 396,226 396 985,988 -- -- 986,384 Amortization of deferred compensation -- -- -- -- 52,103 52,103 Net loss -- -- -- (4,968,825) -- (4,968,825) ---------- ------- ------------ ----------- --------- ------------ BALANCE AT JUNE 30, 1998 6,264,158 $ 6,264 $ 10,154,052 $(3,301,874) $ (17,368) $ 6,841,074 ========== ======= ============ =========== ========= ============
The accompanying notes are an integral part of these financial statements. F-5 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30, --------------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(4,968,825) $ 337,229 $ 622,885 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities- Depreciation and amortization 881,295 361,121 357,878 Amortization of deferred compensation 52,103 52,104 52,103 Write-down of purchased software 610,984 -- -- Write-off investment in Bridging Data Technology 159,231 -- -- Deferred income taxes -- (84,196) (66,860) Changes in operating assets and liabilities- (Increase) decrease in: Accounts receivable 4,530,774 (4,394,724) 850,669 Inventories 916,159 (1,680,948) (138,239) Recoverable income taxes (1,121,554) -- -- Prepaid expenses and other 665,603 (28,023) (594,479) Increase (decrease) in: Accounts payable (1,962,149) 1,868,652 (869,755) Accrued expenses 590,459 199,211 (83,637) Deferred revenue (6,694) (27,938) 62,740 Income taxes payable -- -- (626,375) ----------- ----------- ----------- Net cash provided by (used in) operating activities 347,386 (3,397,512) (433,070) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (245,459) (216,661) (291,227) Redemption of short-term investments -- -- 1,959,324 Capitalized and purchased software (540,736) (1,596,940) (137,806) ----------- ----------- ----------- Net cash provided by (used in) investing activities (786,195) (1,813,601) 1,530,291 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayment of) line of credit 3,000 3,071,000 (589,000) Issuance of note receivable (700,000) -- -- Sale of Common Stock 986,384 -- -- Principal payments on long-term debt -- (7,965) (5,243) Exercise of stock options -- 733,778 12,337 Tax benefits on options exercised -- 67,136 -- Exercise of warrants -- 99,275 -- ----------- ----------- ----------- Net cash provided by (used in) financing activities 289,384 3,963,224 (581,906) ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (149,425) (1,247,889) 515,315 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,452,409 2,700,298 2,184,983 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,302,984 $ 1,452,409 $ 2,700,298 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF NONCASH OPERATING ACTIVITIES: Cash paid for income taxes $ 53,032 $ 27,213 $ 1,026,500 Cash paid for interest 313,112 61,560 10,069
The accompanying notes are an integral part of these financial statements. F-6 NEOWARE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. COMPANY BACKGROUND: Neoware Systems, Inc. (the "Company"), formerly HDS Network Systems, Inc., 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(R) NT server, plus connect to mainframes, minicomputers and the Internet. The Company's NeoStation(TM) family of Windows-based terminals and related software allows users to utilize all of their existing computer systems and applications running on Windows platforms, UNIX, mainframes and minicomputers, and access them across a network. In August 1996, the Company formed a new subsidiary, Information Technology Consulting, Inc. ("ITC") for the purpose of acquiring companies in the computer services field, including information technology staffing companies and client-server consulting companies. In October 1997, ITC merged with The Reohr Group, Inc. ("Reohr") and Global Consulting Group. The Company, as the sole stockholder of ITC, received stock of the surviving entity representing approximately 2% ownership of the entity after the merger. The Company was also reimbursed for the expenses incurred by the Company and ITC in connection with ITC's efforts to complete these transactions. (see Note 5.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany profits, accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents for the purpose of determining cash flows. Cash equivalents at June 30, 1998 and 1997 consist of money market funds. F-7 Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Long-Lived Assets The Company follows Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Accordingly, in the event that facts and circumstances indicate that property and equipment, and intangible or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the assets is compared to the assets' carrying amount to determine if a write-down to market value or discounted cash flow value is necessary. Property and Equipment Property and equipment are stated at cost. Additions and improvements that significantly extend the useful life of an asset are capitalized. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation and amortization are provided using the straight-line and accelerated methods over the estimated useful lives of the assets as follows: Computer equipment 3-5 years Office furniture and equipment 5-7 years Leasehold improvements Lease term Other 3-5 years Revenue Recognition 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 fiscal year-end were $814,120, $7,488,222 and $2,023,200 for the years ended June 30, 1998, 1997 and 1996, respectively. Accounts receivable relating to "bill and hold" transactions were $804,234 and $6,240,564 at June 30, 1998 and 1997, 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. F-8 Research and Development Costs incurred in the development of new software products and enhancements to existing software products are charged to expense as incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalized software costs are amortized to cost of revenues over the expected life of the product, not to exceed three years. The Company capitalized $351,136, $285,968,and $137,806 of software development cost and amortized $220,877, $147,977 and $134,795 in fiscal 1998, 1997 and 1996, respectively. Accumulated amortization was $316,352 and $753,280 at June 30, 1998 and 1997, respectively. The Company also enters into various licensing agreements which require up front cash payments and/or royalties based on unit sales. Such amounts are capitalized and amortized over the term of the license agreement or based on the units sold. The Company continually evaluates whether events and circumstances have occurred that indicate that unamortized product development costs may not be recoverable or that the amortization period should be revised. During fiscal 1998, the Company wrote down the carrying value of certain prepaid licenses, as such amounts were not deemed recoverable from future sales. The write-down which totaled $610,984 was charged against cost of revenues in the accompanying consolidated statements of operations. Earnings Per Share Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share," which supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the income statement. Basic EPS is computed by dividing income (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 fiscal 1997 and 1996, the weighted average number of shares outstanding for purposes of calculating diluted earnings per share included 1,420,589 and 456,626 shares, respectively, attributable to stock options and warrants. For the year ended June 30, 1998, there were no dilutive effects of stock options or warrants as the Company incurred a net loss. Options and warrants to purchase 7,265,079 shares of Common Stock at prices ranging from $1.76 to $8.75 per share were outstanding at June 30, 1998. In accordance with the provisions of SFAS 128, EPS for prior periods have been restated. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the asset-and-liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-9 New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS130"). This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management believes that SFAS 130 will not have a material effect on the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management is currently evaluating the need to make additional disclosures under SFAS No. 131. However, this statement will not have any impact on the Company's reported consolidated financial position or results of operations. Reclassifications Certain reclassifications have been made to the 1997 and 1996 consolidated financial statements to conform to the current year presentation. 3. MAJOR CUSTOMERS AND FOREIGN REVENUES: Net revenues from two customers represented 15% and 14% of total net revenues in fiscal 1998, 15% and 25%of total net revenues in fiscal 1997 and 27% and 16% of total net revenues in fiscal 1996. Revenues from one of the significant customers in fiscal 1997 and 1996 were under subcontracts for systems integration contracts for major U.S. government procurements. At June 30, 1998 and 1997, the Company had total receivables from the two major customers of approximately $1,672,000 and $5,937,000, respectively. The Company's products are used in a broad range of industries for a variety of applications. Sales are made to both domestic and international customers. Net foreign revenues in fiscal 1998, 1997 and 1996 were approximately 20%, 22% and 3%, respectively, and were transacted in US dollars. F-10 4. CONSOLIDATED BALANCE SHEET COMPONENTS: Inventories consist of the following:
June 30, --------------------------------- 1998 1997 ------------- ------------- Purchased components and subassemblies $ 1,599,136 $ 1,566,161 Work-in-process 283,587 301,565 Finished goods 1,236,320 2,167,476 ------------- ------------- $ 3,119,043 $ 4,035,202 ============= =============
Property and equipment consist of the following:
June 30, --------------------------------- 1998 1997 ------------- ------------- Computer equipment $ 922,621 $ 749,082 Office furniture and equipment 342,208 318,989 Leasehold improvements 362,518 357,053 Other 121,921 127,712 ------------- ------------- 1,749,268 1,552,836 Less- Accumulated depreciation and amortization (1,112,854) (871,977) -------------- -------------- $ 636,414 $ 680,859 ============= =============
5. NOTE RECEIVABLE: In October 1997, the Company merged ITC, a wholly-owned subsidiary, into Reohr in exchange for a 2% stock interest in Reohr 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 Reohr. The note bears interest at 8% per annum. Of the total reimbursement, $292,000 was offset against general and administrative expenses during fiscal 1998 for costs previously incurred and charged to expense. 6. LINE OF CREDIT: The Company has a $5,000,000 revolving line of credit with a bank which expires on November 30, 1998, subject to annual renewal. Borrowings under the line bear interest at the bank's prime rate (8.5% at June 30, 1998). At June 30, 1998, there was $1,926,000 available for borrowing under the line. Under the line, the Company is required to maintain specified ratios of working capital and debt to net worth, as defined. The maximum amount borrowed under the line of credit was $5,000,000 in fiscal 1998, $3,071,000 in fiscal 1997 and $1,206,000 in fiscal 1996. The average amounts outstanding were $3,434,000, $997,269 and $247,917 in fiscal 1998, 1997 and 1996,respectively, and the weighted average interest rate during such years was 8.5%, 6.2% and 8.69%, respectively. F-11 7. INCOME TAXES: The components of income taxes are as follows:
For the Year Ended June 30, ------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------- Current- Federal $(1,121,554) $ 258,515 $ 377,528 State -- 8,472 12,230 ------------- ------------- ------------- (1,121,554) 266,987 389,758 -------------- ------------- ------------- Deferred- Federal -- (70,725) (57,551) State -- (13,471) (9,309) ------------- -------------- -------------- -- (84,196) (66,860) ------------- -------------- -------------- $ (1,121,554) $ 182,791 $ 322,898 ============== ============= =============
The federal statutory income tax rate is reconciled to the effective tax rate as follows:
For the Year Ended June 30, ------------------------------------------------ 1998 1997 1996 ------------- ------------- ------------- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net -- 0.8 0.8 Expenses not deductible for tax 0.1 0.2 0.4 Valuation allowance (11.2) -- -- Other (4.5) 0.2 (1.1) ------------ ------------ ----------- 18.4% 35.2% 34.1% ------------ ----------- -----------
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred taxes are comprised of the following: June 30, ---------------------- 1998 1997 ---------- --------- Gross current deferred income tax asset $1,016,787 $ 543,852 Gross current deferred income tax liability (106,133) (127,322) ----------- ---------- Total current deferred tax asset 910,654 416,530 ---------- --------- Gross non-current deferred income tax asset 386,657 144,226 Gross non-current deferred income tax liability (187,166) (130,360) ---------- --------- Total non-current deferred tax asset 199,491 13,866 ---------- --------- Valuation allowance (679,749) -- ---------- --------- Net deferred tax asset $ 430,396 $ 430,396 ========== ========= F-12 The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: June 30, --------------------- 1998 1997 --------- --------- Net operating loss carryforwards $ 865,533 $ 444,426 Expenses not currently deductible for tax purposes 472,613 175,710 Deferred revenue 65,298 67,942 Basis difference in property and equipment and capitalized software (187,166) (130,360) Capitalized inventory costs (106,133) (127,322) Valuation allowance (679,749) -- --------- --------- Net deferred tax asset $ 430,396 $ 430,396 ========= ========= In fiscal 1996, the Company recognized a $300,000 income tax benefit from a net operating loss carryforward of Information Systems Acquisition Corp. ("ISAC"), an entity with which the Company merged in March 1995. The income tax benefit was recorded as a deferred tax asset and an increase in additional paid-in capital. 8. STOCK OPTIONS AND WARRANTS: The Company has a stock option plan (the "Plan") for employees and directors. The Company is authorized to issue options for the purchase of up to 1,500,000 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, 1998, the Company had options outstanding under the Plan for the purchase of 1,253,125 shares of Common Stock at prices ranging from $2.44 to $8.75 per share. Options to purchase 219,625 shares of Common Stock were vested at June 30, 1998. In November 1994, a stock option to purchase 20,000 shares of Common stock of HDS at $2.50 per share was granted, which has been exchanged in connection with the merger with ISAC (see Note 7) into an option to purchase 28,448 shares of Common Stock of the Company at $1.76 per share. Deferred compensation of $191,046 was recorded for the difference between the exercise price and merger consideration, and is being amortized over the option vesting period. As of June 30, 1998, the options outstanding under this grant were for 7,112 shares, none of which were vested. After giving effect to the merger with ISAC discussed in Note 7, there are 5,704,842 warrants outstanding to purchase Common Stock at $5.50 per share. The warrants are exercisable over seven years and expire in March 2000 through March 2002. The warrants will be redeemable at a price of $.01 per warrant upon 30 days notice at any time, only in the event that the last price of the Common Stock is at least $10 per share for 20 consecutive trading days ending on the third day prior to the one on which notice of redemption is given. F-13 During fiscal 1998, the Company issued 300,000 warrants to purchase Common Stock at prices ranging from $3.00 to $7.00 in connection with entering into a financial advisory and investment banking agreement. Warrants for 100,000 shares are exercisable immediately and 200,000 shares upon meeting certain provisions, as defined. The warrants expire in January 2001. During fiscal 1998, the Company issued 100,000 shares of Common Stock in exchange for the termination of 540,495 Unit Purchase Options with an exercise price of $2.44. The Unit Purchase Options had been issued in connection with the initial public offering of ISAC in March 1993 and provided the holder with the option to acquire Units consisting of one share of Common Stock and two Common Stock purchase warrants. 9. ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards Board adopted SFAS No. 123, "Accounting for Stock-Based Compensation. The Company adopted this standard during the year ended June 30, 1997. The Company has elected to adopt the disclosure requirement of this pronouncement only. The adoption of this pronouncement, therefore, had no impact on the Company's financial position or results of operations. Had compensation cost been calculated based on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent with the provisions of SFAS 123, the Company's net income (loss) and net income (loss) per share would have been changed to the following pro forma amounts: 1998 1997 1996 ----------- -------- -------- Net income (loss) As reported $(4,968,825) $337,229 $622,885 Pro forma $(6,069,420) $ 69,953 $557,673 Basic EPS As reported $ (.86) $ .06 $ .11 Pro forma $ (1.05) $ .01 $ .10 Diluted EPS As reported $ (.86) $ .05 $ .10 Pro forma $ (1.05) $ .01 $ .09 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996; no dividend yield; expected volatility of 70.0%; risk-free interest rates of approximately 5.44% - 6.94%; and an expected life of 5 years. The pro forma effect on net income (loss) for 1998, 1997 and 1996 is not representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal 1996. 10. COMMITMENTS AND CONTINGENCIES: The Company leases its principal facility and an automobile under noncancelable operating leases. The facility lease expires in 2001 and the auto lease expires in fiscal 2000. Rent expense under these leases was $108,486, $73,168 and $72,929 in fiscal 1998, 1997 and 1996, F-14 respectively. Minimum required lease payments are $112,332 in 1999, $98,651 in 2000 and $23,025 in 2001. The Company sponsors a profit sharing/401(k) plan (the "Plan") for all of its employees who meet certain age and years of employment requirements. Participants may make voluntary contributions to the Plan and the Company makes a matching contribution of 50% of the first 4% of such contributions. Effective January 1, 1998, the Company's matching contribution is limited to $500 per participant per year. The Company's contributions were $46,501, $47,600 and $20,139 in fiscal 1998, 1997 and 1996, respectively. 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. Defendants' time to respond to the FAC has not yet expired nor has lead plaintiff been appointed by the court. 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 and lead co-plaintiffs have been appointed. Defendants' time to respond to the Pennsylvania actions has not yet expired. On May 5, 1998, a complaint was filed in the Court of Common Pleas of Montgomery County against the Company by Development Concepts, Inc. The complaint asserts 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 seeks an indeterminate amount of monetary damages in excess of $1,500,000. The Company disputes the validity of these cases and intends to defend the claims vigorously. Management does not anticipate that resolution of the pending litigation, either separately or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. F-15 EX-4.4 2 EXHIBIT 4.4 EXHIBIT 4.4 February 17, 1998 Neoware Systems, Inc. 400 Feheley Drive King of Prussia, PA 19406 Attention: Mr. Edward T. Lack, Chief Financial Officer Gentlemen: We are pleased to inform you that CoreStates Bank, N.A. (hereinafter referred to as "Bank") has reaffirmed and approved the following credit availability to Neoware Systems, Inc. and Subsidiaries (hereinafter referred to as "Borrower") under the terms and subject to the conditions set forth below: I. Line of Credit 1. AMOUNT: $5,000,000.00. 2. CO-BORROWERS: Neoware Systems, Inc., HDS Network Systems Investment, Inc., and Human Designed Systems Licensing, Inc.(hereinafter referred to as "Borrower"). 3. USE OF PROCEEDS: The advances under the line of credit shall be used primarily for working capital purposes and short-term borrowings. 4. TERM: The line of credit will be available until November 30, 1998 at which time continuation of the line will be considered by the Bank on the basis of the Borrower's financial statements for the year ended June 30, 1998 and other information available to Bank, or which Bank may reasonably request. 5. INTEREST RATE: The Borrower shall have the choice of one of the following rate options; this choice is to be made known to the Bank at the time an advance is made on this commitment: OPTION A: Prime Rate, floating. Prime Rate is a reference rate which floats and is stated from time to time by the Bank for the guidance of its officers. The determination and statement of the Prime Rate shall not in any way preclude CoreStates Bank, N.A. from making loans to other borrowers at differing rates. OPTION B: Bank's adjusted London Interbank Offered Rate ("LIBOR") rate plus 175 basis points for 30, 60 or 90 days. A minimum draw in the amount of $100,000 is required for each advance 1 under this rate option. "LIBOR rate" for any applicable interest paid hereunder shall mean, for the purposes of this note, the rate per annum at which deposits in dollars are offered to CoreStates Bank, N.A. in the London Interbank market. "Adjusted LIBOR rate" for any applicable interest period hereunder shall mean, for the purposes of this note, a rate per annum equal to the quotient obtained by dividing the LIBOR rate by 1.00 minus the reserve requirement (currently 0%). There is no prepayment of principal permitted under this option. OPTION C: Overnight Base Rate (OBR) plus 200 basis points. OBR is a rate stated by CoreStates Bank for overnight borrowings and may be changed from time to time. 6. UNUSED PORTION FEE: A fee will be due and payable quarterly, based upon the following schedule, determined on the borrower's daily unused line of credit commitment: Minimum Quarter Average Annualized Fee Deposits held @ Corestates 0% $2,000,000 1/16% $1,000,000 < $2,000,000 1/8% 0 < $1,000,000 7. COLLATERAL: The Bank will require a Negative Pledge on all of the Borrower's corporate assets including tangible and intangible assets and noncompete agreement. Borrower will not give a negative pledge to any other person or entity 8. FINANCIAL COVENANTS: The Borrower shall maintain the following financial covenants on a consolidated basis throughout the term of the commitment: a) Total Liabilities to Tangible Net Worth shall not exceed l.0:1.0 b) Current Ratio shall not be less than 1.75:1.0 c) Minimum Quick Ratio of 1.25:1.00 Defined as (Cash + Accounts Receivable divided by Line of Credit Outstanding) 9. CROSS-DEFAULTED: This commitment will be cross-defaulted with all other loans to the Borrower from the Bank. If at any time there is a default under this loan, all loans will be considered in default and all outstandings under the commitments will be immediately due and payable in full. 2 10. INSURANCE: The Borrower will provide fire and extended coverage insurance on all insurable assets during the term of the loan satisfactory to the Bank as to form and insurer and containing the standard mortgagee and/or loss payee clauses in favor of the Bank. The insurance will be in effect evidenced by a certificate of insurance submitted to the Bank prior to or at settlement. The policy shall require a thirty-day notice of cancellation to the Bank. 11. EXPENSES: The Borrower shall pay all out-of-pocket costs and expenses incurred by the Bank in connection with the proposed loan and financing arrangement promptly upon Bank's submission of a statement to the Borrower. This will include, but not be limited to, attorney's fees and costs, lien search fees and filing fees. These fees will be paid by Borrower as a condition to closing and whether or not the transaction contemplated herein is closed. 12. DOCUMENTATION: Borrower shall duly execute and deliver such instruments, documents, certificates, opinions, assurances, and do such other acts and things as the Bank may reasonably request, to effect the purpose of the transaction described in this commitment letter. All proceedings, agreements, instruments, documents, and other matters relating to the making of the loan, and all of the transactions herein contemplated, shall be satisfactory in form and substance to the Bank and its counsel. Our counsel must be satisfied with respect to the legality, validity, binding effect, and enforceability of all instruments, agreements, and documents used to effect and consummate the loans and transactions herein contemplated. 13. DUE AUTHORIZATION: The Borrower will obtain all necessary authorization of their respective board of directors and shareholders to enter into the agreement evidenced by this letter and will obtain, prior to the making of the loan, such further authorization of their respective board of directors and shareholders as may be necessary or appropriate to the financing arrangements set forth herein. 14. FINANCIAL STATEMENTS: The Borrower shall deliver its annual financial statements and 10-K to the Bank within ninety (90) days after the close of each fiscal year during the term of this commitment. The financial statements will be audited by an independent accountant satisfactory to the Bank. The statements will be prepared in accordance with generally accepted accounting principles (GAAP). In addition, the Borrower will submit on a quarterly basis, a Balance Sheet and Profit and Loss Statement and 10-Q which may be internally prepared in accordance with GAAP and signed by the chief financial officer. Submission of the quarterly statements will be within sixty (60) days after the end of each period. 15. DEPOSIT RELATIONSHIP: The Borrower will maintain CoreStates Bank, N.A. as its primary bank of account for the term of the above loan. 3 16. SATISFACTORY FINANCIAL CONDITION: The Borrower shall maintain, in the Bank's reasonable judgment, a satisfactory financial condition and shall notify the Bank promptly in writing of any material adverse changes in its financial condition since the date of its financial statements dated September 30, 1997. 17. COMMITMENT EXPIRATION: The Bank's commitment as outlined herein will expire 30 days from the date of this letter unless accepted in its entirety in writing as evidenced by executing the acknowledgment below. The availability of the within credit facilities is contingent upon the Borrower and the Bank entering into mutually acceptable loan documentation setting forth the terms and conditions stated herein and such other terms and conditions, covenants, warrants, and representations as may be required by the Bank. This commitment shall terminate if there occurs a material adverse change in the financial condition, results of operations, assets, business, prospects or management of the Borrower or if there occur any facts, events, or changes that could adversely affect the ability to proceed to closing or perform after closing. We appreciate the opportunity of making this credit accommodation available to you. If the terms and conditions outlined herein are acceptable to you, please execute the acknowledgment on the original of this letter, returning it to the undersigned in the envelope provided. A copy is enclosed for your records. Should you have any questions regarding this letter or if the Bank can be of further service, please feel free to contact the undersigned at (610) 918-8110. Sincerely, CORESTATES BANK, N.A. /S/ Thomas J. Curtis Thomas J. Curtis Vice President Suburban Middle Market 4 ACKNOWLEDGMENT: We hereby accept the terms and conditions outlined herein this 17th day of February, l998. BORROWER: Neoware Systems, Inc. By: /S/Michael Kantrowitz --------------------- Attest: _______________________________ HDS Network Systems Investments, Inc. By: /S/Edward T. Lack, Jr. ---------------------- Attest: _______________________________ Human Designed Systems Licensing, Inc. By: /S/Edward T. Lack, Jr. ---------------------- Attest: _______________________________ 5 EX-4.5 3 EXHIBIT 4.5 EXHIBIT 4.5 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. KS-1A 60,000 Shares NEOWARE SYSTEMS, INC. --------------------- Date of Issuance: January 31, 1998 Expiration Date: January 31, 2001 Warrant for the Purchase of Common Stock ---------------------------------------- FOR VALUE RECEIVED, Neoware Systems, Inc., a Delaware corporation (the Company"), hereby certifies that Kirlin Holding Corp. or assigns (the "Holder"), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time before 5:00 p.m. (Eastern Standard Time) on January 31, 2001 (the "Expiration Date"), up to Sixty Thousand (60,000) shares of common stock, $.001 par value per share ("Common Stock"), of the Company. The Company in its sole discretion may extend the duration of the Warrant by delaying the Expiration Date. The Common Stock purchasable upon exercise of this Warrant may be purchased at an exercise price, subject to adjustment pursuant to Section 2 below, of $3.00 per share (as adjusted pursuant to Section 2 hereof, the "Warrant Price"). The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as the "Warrant Shares." 1. Exercise of Warrant. 1.1 Payment. This Warrant may be exercised by the registered holder thereof by surrendering it to the Company at its principal office in King of Prussia, Pennsylvania (or at such other address as the Company may hereafter notify the Holder in writing), with the subscription form, as annexed hereto, duly executed, and by paying in full, either (i) in lawful money of the United States, in cash, good certified check or good bank draft payable to the order of the Company or (ii) by net issuance (as provided below), the Warrant Price for each full share of Common Stock as to which this Warrant is exercised and any and all applicable taxes due in connection with the exercise of this Warrant, the exchange of this Warrant for the Common Stock, and the issuance of the Common Stock. In lieu of the payment of the Warrant Price in the manner provided by this Section 1.1, the registered holder shall have the right (but not the obligation) to convert this Warrant, in whole or in part, into Common Stock ("Conversion Right"), as follows: upon exercise of the Conversion Right, the Company shall deliver to the registered Holder (without payment of any of the Warrant Price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the "Value" (as defined below) of the portion of the Warrant being converted at the time the Conversion Right is exercised by (y) the "Current Value" (as defined in Section 2.5). The "Value" of the portion of the Warrant being converted shall equal the remainder derived from subtracting (a) the Warrant Price multiplied by the number of shares of Common Stock underlying the portion of the Warrant being converted from (b) the Current Value of the Common Stock multiplied by the number of shares of Common Stock underlying the portion of the Warrant being converted. 1.2 Issuance of Certificates. As soon as practicable after the exercise of this Warrant, the Company shall cause to be issued to the registered Holder of this Warrant a certificate or certificates for the number of full shares of Common Stock to which he is entitled, registered in such name or names as may be directed by him, and if the Warrant shall not have been exercised in full, a new Warrant for the number of shares as to which this Warrant shall not have been exercised, reduced by the number of shares of Common Stock deemed to have been surrendered in connection with a net issuance. Notwithstanding the foregoing, the Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities is available. This Warrant may not be exercised by, or securities issued to, the registered Holder in any state in which such exercise would be unlawful. The Company agrees to take all reasonable action necessary to permit the exercise of this Warrant by the Registered Holder in compliance with the Securities Act and applicable state securities laws. 1.3 Valid Issuance. All shares of Common Stock issued upon the proper exercise of this Warrant in conformity with the terms contained herein shall be validly issued. 1.4 Date of Issuance. Each person in whose name any such certificate for shares of Common Stock is issued shall for all purposes be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Warrant Price was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2. Adjustments. 2.1 Stock Dividends - Split-Ups. If after the date hereof, and subject to the provisions of Section 2.5 below, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up of shares of Common Stock or other similar event, then, on the day following the date fixed for the determination of holders of Common Stock entitled to receive such stock dividend or split-up, the number of shares issuable on exercise of this Warrant shall be increased in proportion to such increase in outstanding shares and the then applicable Warrant Price shall be correspondingly decreased. 2.2 Aggregation of Shares. If after the date hereof, and subject to the provisions of Section 2.5, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, after the effective date of such consolidation, combination or reclassification, the number of shares issuable on exercise of this Warrant shall be decreased in proportion to such decrease in outstanding shares and the then applicable Warrant Price shall be correspondingly increased. 2.3 Reorganization. etc. If after the date hereof any capital reorganization or reclassification of the Common Stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation or other similar event shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, lawful and fair provision shall be made whereby the Warrant Holder shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant, had such reorganization, reclassification, consolidation, merger, or sale not taken place and in such event appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Warrant Price and of the number of shares purchasable upon the exercise of the Warrant) shall thereafter be applicable, as nearly as may be in relation to any share of stock, securities, or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger, or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and delivered to the Company the obligation to deliver to the Holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions the Holder may be entitled to purchase. 2.4 Notices of Changes in Warrant. Upon every adjustment of the Warrant Price or the number of shares issuable on exercise of this Warrant, the Company shall give written notice thereof to the registered Holder, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Sections 2.1, 2.2, or 2.3, then, in any such event, the Company shall give written notice in the manner set forth above of the record date for such dividend, distribution, or subscription rights, or the effective date of such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up or issuance. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution, or subscription rights, or shall be entitled to exchange their Common Stock for stock, securities, or other assets deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up of issuance. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. 2.5 No Fractional Shares. Notwithstanding any provision contained in this Warrant to the contrary, the Company shall not issue fractional shares upon exercise of this Warrant. If, by reason of any adjustment made pursuant to this Section 2, the Holder would be entitled, upon the exercise of this Warrant, to receive a fractional interest in a share, the Company shall, upon such exercise, purchase such fractional interest, determined as follows: (i) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market or the NASD OTC Bulletin Board, the current value ("Current Value") shall be the last reported sale price of the Common Stock on the principal trading market for the Common Stock on the last business day prior to the date of exercise or conversion of the Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the Current Value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise or conversion of the Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Current Value shall be an amount determined in good faith and in such reasonable manner as may be prescribed by resolution of the Board of Directors of the Company. 3. Transfer and Exchange of Warrant. 3.1 Procedure for Surrender of Warrant. This Warrant may be surrendered to the Company, together with a written request for exchange, and thereupon the Company shall cause to be issued in exchange therefor one or more new Warrants as requested by the registered Holder of this Warrant so surrendered, representing an equal aggregate number of Warrants; provided, however, that in the event that this Warrant bears a restrictive legend, the Company shall not cancel this Warrant and issue new Warrants in exchange therefor until the Company has received an opinion of counsel stating that such transfer may be made and indicating whether the new Warrants must also bear a restrictive legend. 3.2 Fractional Warrants. The Company shall not be required to effect any registration of transfer or exchange which will result in the issuance of a fraction of a Warrant. 3.3 Service Charges. No service charge shall be made for any exchange or registration of transfer of this Warrant. 4. Other Provisions Relating to Rights of the Holder of this Warrant. 4.1 No Rights as Stockholder. This Warrant does not entitle the Holder thereof to any of the rights of a stockholder of the Company, including, without limitation, the right to receive dividends, or other distributions, exercise any preemptive rights to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of directors of the Company or any other matter. 4.2 Lost. Stolen. Mutilated. or Destroyed Warrant. If this Warrant is lost, stolen, mutilated, or destroyed, the Company may on such terms as to indemnify or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination, tenor, and date as this Warrant so lost, stolen, mutilated, or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated, or destroyed Warrant shall be at any time enforceable by anyone. 4.3 Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of this Warrant. 5. Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery of shares of Common Stock upon the exercise of this Warrant, but the Company shall not be obligated to pay any transfer taxes in respect of the Warrant or such shares. 6. Restrictions on Transferability of Warrant and Shares; Registration Rights. 6.1 In General. This Warrant and the Common Stock issued upon the exercise hereof shall not be transferable except upon the conditions hereinafter specified, which conditions are intended to insure compliance with the provisions of the Securities Act and any applicable state securities laws in respect of the transfer of this Warrant or any such Common Stock. 6.2 Restrictive Legends. This Warrant (including each Warrant issued upon the transfer of any Warrant) shall bear on the face thereof a legend substantially in the form of the notice endorsed on the first page of this Warrant. Each certificate for shares of Common Stock initially issued upon the exercise of this Warrant and each certificate for shares of Common Stock issued to a subsequent transferee of such certificate shall, unless otherwise permitted by the provisions of this Section 6.2, bear on the face thereof a legend reading substantially as follows: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. In the event that a registration statement covering the shares of Common Stock issued upon exercise of this Warrant shall become effective under the Securities Act or in the event that the Company shall receive an opinion of its counsel that, in the opinion of such counsel, such legend is not, or is no longer, necessary or required (including, without limitation, because of the availability of the exemption afforded by Rule 144 of the Regulations of the Securities and Exchange Commission), the Company shall, or shall instruct its transfer agents and registrars to, remove such legend from the certificates evidencing such shares of Common Stock or issue new certificates without such legend in lieu thereof. 6.3 Notice of Proposed Transfer. Prior to any proposed transfer of this Warrant or the shares of Common Stock issued upon exercise of this Warrant, the Holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company to the effect that the proposed transfer may be effected without registration under the Securities Act, whereupon the holder of such securities shall be entitled to transfer such stock in accordance with the terms of this notice. Each certificate for Warrants or Common stock transferred as above provided shall bear the legend set forth in Section 6.2, except that such certificate shall not bear such legend if the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 8.2 shall not apply to securities which are not required to bear the legend prescribed by Section 6.2 in accordance with the provisions of that Section. 6.4 Required Registration and Notice. Subject to the conditions set forth in Section 6.4 hereof, upon the written request of the Holder of this Warrant or shares of Common Stock issued or issuable upon the exercise of the Warrant and evidenced by a certificate required to bear the legend specified in Section 6.2 (the "Restricted Shares") setting forth the Holder's demand that the Company effect the registration pursuant to a registration statement permitted under the Securities Act of such Restricted Shares, the Company shall promptly give written notice to all holders of Warrants and Restricted Shares of a proposed registration, and shall, subject to the conditions of Section 6.4, use its best efforts to effect promptly any such registration pursuant to a registration statement under the Securities Act of (a) such Restricted Shares, and (b) all Restricted Shares of the Holder of this Warrant or Restricted Shares which shall have advised the Company in writing within 30 days after the giving of such written notice by the Company of their desire to have their Restricted Shares registered under the Securities Act, for public sale in accordance with the method of disposition described by the holders, and the Company will keep effective such registration and a prospectus related thereto current until the earlier of such time that the Restricted Shares (i) have been sold or (ii) are eligible for sale without restriction pursuant to Rule 144(k) of the Regulations of the Securities and Exchange Commission. 6.5 Conditions to Required Registration. (a) The Company shall not be required to register or to use its best efforts to effect any registration of the Restricted Shares under the Securities Act: (i) more than one time in the aggregate for all holders thereof; or (ii) more than two years after the date on which the last remaining rights under this Warrant are exercised; or (iii) unless a demand therefor is made to the Company by the holders of at least 50% of the aggregate number of the Restricted Shares issued or issuable under this Warrant; or (iv) if any holder which has advised the Company in writing of its desire to have its Restricted Shares (or portion thereof) registered is, in the opinion of counsel for such holder, legally permitted to sell all such shares pursuant to any exemption from the registration requirements of the Securities Act; or (v) any securities other than Restricted Shares. (b) The Company may delay any registration of Restricted Shares required pursuant to Section 6.3 for a period not exceeding 60 days provided the Company shall in good faith determine, as evidenced by resolution of its Board of Directors, that any such registration would adversely affect active negotiations or planning for a proposed or pending merger, stock or asset acquisition or sale of all or substantially all of the Company's assets. (c) The Company may include in the registration statement pursuant to which the Restricted Shares are registered additional securities of the Company to be sold for the account of the Company or other security holders, as long as such inclusion does not adversely affect the registration of the Restricted Shares. 7. Miscellaneous Provisions. 7.1 Successors. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns. 7.2 Notices. Any notice, statement or demand authorized by this Warrant to be given or made by the Holder of this Warrant to or on the Company shall be sufficiently given or made if sent by certified mail, or private courier service, postage prepaid, addressed (until another address is provides in writing by the Company to the Holder), as follows: Neoware Systems, Inc. 400 Feheley Drive King of Prussia, Pennsylvania 19406 Attn: Edward C. Callahan, President and Chief Executive Officer With a copy to: McCausland, Keen & Buckman Radnor Court 259 Radnor-Chester Road, Suite 160 Radnor, Pennsylvania 19087-5240 Attn: Nancy D. Weisberg, Esquire Any notice, statement or demand authorized by this Warrant to be given or made by the Holder of this Warrant to the Company shall be sufficiently given or made if sent by certified mail or private courier service, postage prepaid, addressed (until another address is provided in writing by the Holder to the Company), as follows: Kirlin Holding Corp. 6901 Jericho Turnpike Syosset, New York 11791 7.3 Applicable Law. The validity, interpretation, and performance of this Warrant shall be governed in all respects by the laws of the State of New York, without giving effect to conflict of laws. 7.4 Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, this Warrant has been duly executed by the Company as of the day and year first above written. Attest: NEOWARE SYSTEMS, INC. /s/ Margaret M. Huebsch By: /s/Edward C. Callahan, Jr. - ----------------------- -------------------------- Edward C. Callahan, Jr., President and Chief Executive Officer SUBSCRIPTION FORM ----------------- Dated __________________, 19___ The undersigned hereby irrevocably elects to exercise the within Warrant dated as of ________________ to purchase _________shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation, and hereby makes payment pursuant to Section 1.1 of the Warrant of $ in payment of the Warrant Price thereof. or -- The undersigned hereby irrevocably elects to convert its right to purchase __________ shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation, purchasable under the within Warrant dated as of _______________, into __________ shares of Common Stock (based on a "Current Value" of $__________). Holder: ______________________________ By:___________________________ Print Name:___________________ Title:________________________ Date:_________________________ ASSIGNMENT FORM Date __________________, 19__ FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and transfers unto___________________________________________________________________________ (please type or print in block letters) _______________________________________________________________________________ (insert address) its right to purchase ____________shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation (the "Company"), represented by this Warrant and does hereby irrevocably constitute and appoint , Attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. ______________________________ By:___________________________ Print Name:___________________ Title:________________________ Date:_________________________ THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. KS-2A 60,000 Shares NEOWARE SYSTEMS, INC. -------------------- Date of Issuance: January 31, 1998 Expiration Date: January 31, 2001 Warrant for the Purchase of Common Stock ---------------------------------------- FOR VALUE RECEIVED, Neoware Systems, Inc., a Delaware corporation (the Company"), hereby certifies that Kirlin Holding Corp. or assigns (the "Holder"), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time during the Exercise Period (as defined below), up to Sixty Thousand (60,000) shares of Common Stock of the Company. The term "Exercise Period" shall mean the period commencing on the third business day after the ten (10) consecutive trading day period during which the last sale price of the Common Stock has been at least $7.00 on each day in such period, which period must be completed prior to July 31, 1999, and terminating prior to 5:00 p.m. (Eastern Standard Time) on January 31, 2001 (the "Expiration Date"). The Company in its sole discretion may extend the duration of the Warrant by delaying the Expiration Date. The Common Stock purchasable upon exercise of this Warrant may be purchased at an exercise price, subject to adjustment pursuant to Section 2 below, of $5.00 per share (as adjusted pursuant to Section 2 hereof, the "Warrant Price"). The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as the "Warrant Shares." 1. Exercise of Warrant. 1.1 Payment. This Warrant may be exercised by the registered holder thereof by surrendering it to the Company at its principal office in King of Prussia, Pennsylvania (or at such other address as the Company may hereafter notify the Holder in writing), with the subscription form, as annexed hereto, duly executed, and by paying in full, either (i) in lawful money of the United States, in cash, good certified check or good bank draft payable to the order of the Company or (ii) by net issuance (as provided below), the Warrant Price for each full share of Common Stock as to which this Warrant is exercised and any and all applicable taxes due in connection with the exercise of this Warrant, the exchange of this Warrant for the Common Stock, and the issuance of the Common Stock. In lieu of the payment of the Warrant Price in the manner provided by this Section 1.1, the registered holder shall have the right (but not the obligation) to convert this Warrant, in whole or in part, into Common Stock ("Conversion Right"), as follows: upon exercise of the Conversion Right, the Company shall deliver to the registered Holder (without payment of any of the Warrant Price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the "Value" (as defined below) of the portion of the Warrant being converted at the time the Conversion Right is exercised by (y) the "Current Value" (as defined in Section 2.5). The "Value" of the portion of the Warrant being converted shall equal the remainder derived from subtracting (a) the Warrant Price multiplied by the number of shares of Common Stock underlying the portion of the Warrant being converted from (b) the Current Value of the Common Stock multiplied by the number of shares of Common Stock underlying the portion of the Warrant being converted. 1.2 Issuance of Certificates. As soon as practicable after the exercise of this Warrant, the Company shall cause to be issued to the registered Holder of this Warrant a certificate or certificates for the number of full shares of Common Stock to which he is entitled, registered in such name or names as may be directed by him, and if the Warrant shall not have been exercised in full, a new Warrant for the number of shares as to which this Warrant shall not have been exercised, reduced by the number of shares of Common Stock deemed to have been surrendered in connection with a net issuance. Notwithstanding the foregoing, the Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities is available. This Warrant may not be exercised by, or securities issued to, the registered Holder in any state in which such exercise would be unlawful. The Company agrees to take all reasonable action necessary to permit the exercise of this Warrant by the Registered Holder in compliance with the Securities Act and applicable state securities laws. 1.3 Valid Issuance. All shares of Common Stock issued upon the proper exercise of this Warrant in conformity with the terms contained herein shall be validly issued. 1.4 Date of Issuance. Each person in whose name any such certificate for shares of Common Stock is issued shall for all purposes be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Warrant Price was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2. Adjustments. 2.1 Stock Dividends - Split-Ups. If after the date hereof, and subject to the provisions of Section 2.5 below, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up of shares of Common Stock or other similar event, then, on the day following the date fixed for the determination of holders of Common Stock entitled to receive such stock dividend or split-up, the number of shares issuable on exercise of this Warrant shall be increased in proportion to such increase in outstanding shares and the then applicable Warrant Price shall be correspondingly decreased. 2.2 Aggregation of Shares. If after the date hereof, and subject to the provisions of Section 2.5, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, after the effective date of such consolidation, combination or reclassification, the number of shares issuable on exercise of this Warrant shall be decreased in proportion to such decrease in outstanding shares and the then applicable Warrant Price shall be correspondingly increased. 2.3 Reorganization. etc. If after the date hereof any capital reorganization or reclassification of the Common Stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation or other similar event shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, lawful and fair provision shall be made whereby the Warrant Holder shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant, had such reorganization, reclassification, consolidation, merger, or sale not taken place and in such event appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Warrant Price and of the number of shares purchasable upon the exercise of the Warrant) shall thereafter be applicable, as nearly as may be in relation to any share of stock, securities, or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger, or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and delivered to the Company the obligation to deliver to the Holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions the Holder may be entitled to purchase. 2.4 Notices of Changes in Warrant. Upon every adjustment of the Warrant Price or the number of shares issuable on exercise of this Warrant, the Company shall give written notice thereof to the registered Holder, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Sections 2.1, 2.2, or 2.3, then, in any such event, the Company shall give written notice in the manner set forth above of the record date for such dividend, distribution, or subscription rights, or the effective date of such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up or issuance. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution, or subscription rights, or shall be entitled to exchange their Common Stock for stock, securities, or other assets deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up of issuance. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. 2.5 No Fractional Shares. Notwithstanding any provision contained in this Warrant to the contrary, the Company shall not issue fractional shares upon exercise of this Warrant. If, by reason of any adjustment made pursuant to this Section 2, the Holder would be entitled, upon the exercise of this Warrant, to receive a fractional interest in a share, the Company shall, upon such exercise, purchase such fractional interest, determined as follows: (i) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market or the NASD OTC Bulletin Board, the current value ("Current Value") shall be the last reported sale price of the Common Stock on the principal trading market for the Common Stock on the last business day prior to the date of exercise or conversion of the Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the Current Value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise or conversion of the Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Current Value shall be an amount determined in good faith and in such reasonable manner as may be prescribed by resolution of the Board of Directors of the Company. 3. Transfer and Exchange of Warrant. 3.1 Procedure for Surrender of Warrant. This Warrant may be surrendered to the Company, together with a written request for exchange, and thereupon the Company shall cause to be issued in exchange therefor one or more new Warrants as requested by the registered Holder of this Warrant so surrendered, representing an equal aggregate number of Warrants; provided, however, that in the event that this Warrant bears a restrictive legend, the Company shall not cancel this Warrant and issue new Warrants in exchange therefor until the Company has received an opinion of counsel stating that such transfer may be made and indicating whether the new Warrants must also bear a restrictive legend. 3.2 Fractional Warrants. The Company shall not be required to effect any registration of transfer or exchange which will result in the issuance of a fraction of a Warrant. 3.3 Service Charges. No service charge shall be made for any exchange or registration of transfer of this Warrant. 4. Other Provisions Relating to Rights of the Holder of this Warrant. 4.1 No Rights as Stockholder. This Warrant does not entitle the Holder thereof to any of the rights of a stockholder of the Company, including, without limitation, the right to receive dividends, or other distributions, exercise any preemptive rights to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of directors of the Company or any other matter. 4.2 Lost. Stolen. Mutilated. or Destroyed Warrant. If this Warrant is lost, stolen, mutilated, or destroyed, the Company may on such terms as to indemnify or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination, tenor, and date as this Warrant so lost, stolen, mutilated, or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated, or destroyed Warrant shall be at any time enforceable by anyone. 4.3 Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of this Warrant. 5. Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery of shares of Common Stock upon the exercise of this Warrant, but the Company shall not be obligated to pay any transfer taxes in respect of the Warrant or such shares. 6. Restrictions on Transferability of Warrant and Shares; Registration Rights. 6.1 In General. This Warrant and the Common Stock issued upon the exercise hereof shall not be transferable except upon the conditions hereinafter specified, which conditions are intended to insure compliance with the provisions of the Securities Act and any applicable state securities laws in respect of the transfer of this Warrant or any such Common Stock. 6.2 Restrictive Legends. This Warrant (including each Warrant issued upon the transfer of any Warrant) shall bear on the face thereof a legend substantially in the form of the notice endorsed on the first page of this Warrant. Each certificate for shares of Common Stock initially issued upon the exercise of this Warrant and each certificate for shares of Common Stock issued to a subsequent transferee of such certificate shall, unless otherwise permitted by the provisions of this Section 6.2, bear on the face thereof a legend reading substantially as follows: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. In the event that a registration statement covering the shares of Common Stock issued upon exercise of this Warrant shall become effective under the Securities Act or in the event that the Company shall receive an opinion of its counsel that, in the opinion of such counsel, such legend is not, or is no longer, necessary or required (including, without limitation, because of the availability of the exemption afforded by Rule 144 of the Regulations of the Securities and Exchange Commission), the Company shall, or shall instruct its transfer agents and registrars to, remove such legend from the certificates evidencing such shares of Common Stock or issue new certificates without such legend in lieu thereof. 6.3 Notice of Proposed Transfer. Prior to any proposed transfer of this Warrant or the shares of Common Stock issued upon exercise of this Warrant, the Holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company to the effect that the proposed transfer may be effected without registration under the Securities Act, whereupon the holder of such securities shall be entitled to transfer such stock in accordance with the terms of this notice. Each certificate for Warrants or Common stock transferred as above provided shall bear the legend set forth in Section 6.2, except that such certificate shall not bear such legend if the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 8.2 shall not apply to securities which are not required to bear the legend prescribed by Section 6.2 in accordance with the provisions of that Section. 6.4 Required Registration and Notice. Subject to the conditions set forth in Section 6.4 hereof, upon the written request of the Holder of this Warrant or shares of Common Stock issued or issuable upon the exercise of the Warrant and evidenced by a certificate required to bear the legend specified in Section 6.2 (the "Restricted Shares") setting forth the Holder's demand that the Company effect the registration pursuant to a registration statement permitted under the Securities Act of such Restricted Shares, the Company shall promptly give written notice to all holders of Warrants and Restricted Shares of a proposed registration, and shall, subject to the conditions of Section 6.4, use its best efforts to effect promptly any such registration pursuant to a registration statement under the Securities Act of (a) such Restricted Shares, and (b) all Restricted Shares of the Holder of this Warrant or Restricted Shares which shall have advised the Company in writing within 30 days after the giving of such written notice by the Company of their desire to have their Restricted Shares registered under the Securities Act, for public sale in accordance with the method of disposition described by the holders, and the Company will keep effective such registration and a prospectus related thereto current until the earlier of such time that the Restricted Shares (i) have been sold or (ii) are eligible for sale without restriction pursuant to Rule 144(k) of the Regulations of the Securities and Exchange Commission. 6.5 Conditions to Required Registration. (a) The Company shall not be required to register or to use its best efforts to effect any registration of the Restricted Shares under the Securities Act: (i) more than one time in the aggregate for all holders thereof; or (ii) more than two years after the date on which the last remaining rights under this Warrant are exercised; or (iii) unless a demand therefor is made to the Company by the holders of at least 50% of the aggregate number of the Restricted Shares issued or issuable under this Warrant; or (iv) if any holder which has advised the Company in writing of its desire to have its Restricted Shares (or portion thereof) registered is, in the opinion of counsel for such holder, legally permitted to sell all such shares pursuant to any exemption from the registration requirements of the Securities Act; or (v) any securities other than Restricted Shares. (b) The Company may delay any registration of Restricted Shares required pursuant to Section 6.3 for a period not exceeding 60 days provided the Company shall in good faith determine, as evidenced by resolution of its Board of Directors, that any such registration would adversely affect active negotiations or planning for a proposed or pending merger, stock or asset acquisition or sale of all or substantially all of the Company's assets. (c) The Company may include in the registration statement pursuant to which the Restricted Shares are registered additional securities of the Company to be sold for the account of the Company or other security holders, as long as such inclusion does not adversely affect the registration of the Restricted Shares. 7. Miscellaneous Provisions. 7.1 Successors. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns. 7.2 Notices. Any notice, statement or demand authorized by this Warrant to be given or made by the Holder of this Warrant to or on the Company shall be sufficiently given or made if sent by certified mail, or private courier service, postage prepaid, addressed (until another address is provides in writing by the Company to the Holder), as follows: Neoware Systems, Inc. 400 Feheley Drive King of Prussia, Pennsylvania 19406 Attn: Edward C. Callahan, President and Chief Executive Officer With a copy to: McCausland, Keen & Buckman Radnor Court 259 Radnor-Chester Road, Suite 160 Radnor, Pennsylvania 19087-5240 Attn: Nancy D. Weisberg, Esquire Any notice, statement or demand authorized by this Warrant to be given or made by the Holder of this Warrant to the Company shall be sufficiently given or made if sent by certified mail or private courier service, postage prepaid, addressed (until another address is provided in writing by the Holder to the Company), as follows: Kirlin Holding Corp. 6901 Jericho Turnpike Syosset, New York 11791 7.3 Applicable Law. The validity, interpretation, and performance of this Warrant shall be governed in all respects by the laws of the State of New York, without giving effect to conflict of laws. 7.4 Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, this Warrant has been duly executed by the Company as of the day and year first above written. Attest: NEOWARE SYSTEMS, INC. /s/ Margaret M. Huebsch By:/s/Edward C. Callahan, Jr. - ----------------------- -------------------------- Edward C. Callahan, President and Chief Executive Officer SUBSCRIPTION FORM ----------------- Dated __________________, 19__ The undersigned hereby irrevocably elects to exercise the within Warrant dated as of ________________ to purchase ___________ shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation, and hereby makes payment pursuant to Section 1.1 of the Warrant of $________ in payment of the Warrant Price thereof. or -- The undersigned hereby irrevocably elects to convert its right to purchase __________ shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation, purchasable under the within Warrant dated as of _______________, into __________ shares of Common Stock (based on a "Current Value" of $__________). Holder: ______________________________ By:___________________________ Print Name:___________________ Title:________________________ Date:_________________________ ASSIGNMENT FORM Date __________________, 19__ FOR VALUE RECEIVED,____________________________ hereby sells, assigns and transfers unto____________________________________________________________________________ (please type or print in block letters) _______________________________________________________________________________ (insert address) its right to purchase ___________ shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation (the "Company"), represented by this Warrant and does hereby irrevocably constitute and appoint _________________, Attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. _____________________________ By:__________________________ Print Name:__________________ Title:_______________________ Date:________________________ THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. KS-3A 60,000 Shares NEOWARE SYSTEMS, INC. --------------------- Date of Issuance: January 31, 1998 Expiration Date: January 31, 2001 Warrant for the Purchase of Common Stock ---------------------------------------- FOR VALUE RECEIVED, Neoware Systems, Inc., a Delaware corporation (the Company"), hereby certifies that Kirlin Holding Corp. or assigns (the "Holder"), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at any time during the Exercise Period (as defined below), up to Sixty Thousand (60,000) shares of Common Stock of the Company. The term "Exercise Period" shall mean the period commencing on the third business day after the ten (10) consecutive trading day period during which the last sale price of the Common Stock has been at least $7.00 on each day in such period, which period must be completed prior to July 31, 1999, and terminating prior to 5:00 p.m. (Eastern Standard Time) on January 31, 2001 (the "Expiration Date"). The Company in its sole discretion may extend the duration of the Warrant by delaying the Expiration Date. The Common Stock purchasable upon exercise of this Warrant may be purchased at an exercise price, subject to adjustment pursuant to Section 2 below, of $7.00 per share (as adjusted pursuant to Section 2 hereof, the "Warrant Price"). The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as the "Warrant Shares." 1. Exercise of Warrant. 1.1 Payment. This Warrant may be exercised by the registered holder thereof by surrendering it to the Company at its principal office in King of Prussia, Pennsylvania (or at such other address as the Company may hereafter notify the Holder in writing), with the subscription form, as annexed hereto, duly executed, and by paying in full, either (i) in lawful money of the United States, in cash, good certified check or good bank draft payable to the order of the Company or (ii) by net issuance (as provided below), the Warrant Price for each full share of Common Stock as to which this Warrant is exercised and any and all applicable taxes due in connection with the exercise of this Warrant, the exchange of this Warrant for the Common Stock, and the issuance of the Common Stock. In lieu of the payment of the Warrant Price in the manner provided by this Section 1.1, the registered holder shall have the right (but not the obligation) to convert this Warrant, in whole or in part, into Common Stock ("Conversion Right"), as follows: upon exercise of the Conversion Right, the Company shall deliver to the registered Holder (without payment of any of the Warrant Price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the "Value" (as defined below) of the portion of the Warrant being converted at the time the Conversion Right is exercised by (y) the "Current Value" (as defined in Section 2.5). The "Value" of the portion of the Warrant being converted shall equal the remainder derived from subtracting (a) the Warrant Price multiplied by the number of shares of Common Stock underlying the portion of the Warrant being converted from (b) the Current Value of the Common Stock multiplied by the number of shares of Common Stock underlying the portion of the Warrant being converted. 1.2 Issuance of Certificates. As soon as practicable after the exercise of this Warrant, the Company shall cause to be issued to the registered Holder of this Warrant a certificate or certificates for the number of full shares of Common Stock to which he is entitled, registered in such name or names as may be directed by him, and if the Warrant shall not have been exercised in full, a new Warrant for the number of shares as to which this Warrant shall not have been exercised, reduced by the number of shares of Common Stock deemed to have been surrendered in connection with a net issuance. Notwithstanding the foregoing, the Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities is available. This Warrant may not be exercised by, or securities issued to, the registered Holder in any state in which such exercise would be unlawful. The Company agrees to take all reasonable action necessary to permit the exercise of this Warrant by the Registered Holder in compliance with the Securities Act and applicable state securities laws. 1.3 Valid Issuance. All shares of Common Stock issued upon the proper exercise of this Warrant in conformity with the terms contained herein shall be validly issued. 1.4 Date of Issuance. Each person in whose name any such certificate for shares of Common Stock is issued shall for all purposes be deemed to have become the holder of record of such shares on the date on which this Warrant was surrendered and payment of the Warrant Price was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. 2. Adjustments. 2.1 Stock Dividends - Split-Ups. If after the date hereof, and subject to the provisions of Section 2.5 below, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up of shares of Common Stock or other similar event, then, on the day following the date fixed for the determination of holders of Common Stock entitled to receive such stock dividend or split-up, the number of shares issuable on exercise of this Warrant shall be increased in proportion to such increase in outstanding shares and the then applicable Warrant Price shall be correspondingly decreased. 2.2 Aggregation of Shares. If after the date hereof, and subject to the provisions of Section 2.5, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, after the effective date of such consolidation, combination or reclassification, the number of shares issuable on exercise of this Warrant shall be decreased in proportion to such decrease in outstanding shares and the then applicable Warrant Price shall be correspondingly increased. 2.3 Reorganization. etc. If after the date hereof any capital reorganization or reclassification of the Common Stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation or other similar event shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, lawful and fair provision shall be made whereby the Warrant Holder shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by this Warrant, had such reorganization, reclassification, consolidation, merger, or sale not taken place and in such event appropriate provision shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Warrant Price and of the number of shares purchasable upon the exercise of the Warrant) shall thereafter be applicable, as nearly as may be in relation to any share of stock, securities, or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger, or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and delivered to the Company the obligation to deliver to the Holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions the Holder may be entitled to purchase. 2.4 Notices of Changes in Warrant. Upon every adjustment of the Warrant Price or the number of shares issuable on exercise of this Warrant, the Company shall give written notice thereof to the registered Holder, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Sections 2.1, 2.2, or 2.3, then, in any such event, the Company shall give written notice in the manner set forth above of the record date for such dividend, distribution, or subscription rights, or the effective date of such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up or issuance. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution, or subscription rights, or shall be entitled to exchange their Common Stock for stock, securities, or other assets deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up of issuance. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event. 2.5 No Fractional Shares. Notwithstanding any provision contained in this Warrant to the contrary, the Company shall not issue fractional shares upon exercise of this Warrant. If, by reason of any adjustment made pursuant to this Section 2, the Holder would be entitled, upon the exercise of this Warrant, to receive a fractional interest in a share, the Company shall, upon such exercise, purchase such fractional interest, determined as follows: (i) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market or the NASD OTC Bulletin Board, the current value ("Current Value") shall be the last reported sale price of the Common Stock on the principal trading market for the Common Stock on the last business day prior to the date of exercise or conversion of the Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the Current Value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise or conversion of the Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the Current Value shall be an amount determined in good faith and in such reasonable manner as may be prescribed by resolution of the Board of Directors of the Company. 3. Transfer and Exchange of Warrant. 3.1 Procedure for Surrender of Warrant. This Warrant may be surrendered to the Company, together with a written request for exchange, and thereupon the Company shall cause to be issued in exchange therefor one or more new Warrants as requested by the registered Holder of this Warrant so surrendered, representing an equal aggregate number of Warrants; provided, however, that in the event that this Warrant bears a restrictive legend, the Company shall not cancel this Warrant and issue new Warrants in exchange therefor until the Company has received an opinion of counsel stating that such transfer may be made and indicating whether the new Warrants must also bear a restrictive legend. 3.2 Fractional Warrants. The Company shall not be required to effect any registration of transfer or exchange which will result in the issuance of a fraction of a Warrant. 3.3 Service Charges. No service charge shall be made for any exchange or registration of transfer of this Warrant. 4. Other Provisions Relating to Rights of the Holder of this Warrant. 4.1 No Rights as Stockholder. This Warrant does not entitle the Holder thereof to any of the rights of a stockholder of the Company, including, without limitation, the right to receive dividends, or other distributions, exercise any preemptive rights to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of directors of the Company or any other matter. 4.2 Lost. Stolen. Mutilated. or Destroyed Warrant. If this Warrant is lost, stolen, mutilated, or destroyed, the Company may on such terms as to indemnify or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination, tenor, and date as this Warrant so lost, stolen, mutilated, or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated, or destroyed Warrant shall be at any time enforceable by anyone. 4.3 Reservation of Common Stock. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of this Warrant. 5. Payment of Taxes. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery of shares of Common Stock upon the exercise of this Warrant, but the Company shall not be obligated to pay any transfer taxes in respect of the Warrant or such shares. 6. Restrictions on Transferability of Warrant and Shares; Registration Rights. 6.1 In General. This Warrant and the Common Stock issued upon the exercise hereof shall not be transferable except upon the conditions hereinafter specified, which conditions are intended to insure compliance with the provisions of the Securities Act and any applicable state securities laws in respect of the transfer of this Warrant or any such Common Stock. 6.2 Restrictive Legends. This Warrant (including each Warrant issued upon the transfer of any Warrant) shall bear on the face thereof a legend substantially in the form of the notice endorsed on the first page of this Warrant. Each certificate for shares of Common Stock initially issued upon the exercise of this Warrant and each certificate for shares of Common Stock issued to a subsequent transferee of such certificate shall, unless otherwise permitted by the provisions of this Section 6.2, bear on the face thereof a legend reading substantially as follows: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. In the event that a registration statement covering the shares of Common Stock issued upon exercise of this Warrant shall become effective under the Securities Act or in the event that the Company shall receive an opinion of its counsel that, in the opinion of such counsel, such legend is not, or is no longer, necessary or required (including, without limitation, because of the availability of the exemption afforded by Rule 144 of the Regulations of the Securities and Exchange Commission), the Company shall, or shall instruct its transfer agents and registrars to, remove such legend from the certificates evidencing such shares of Common Stock or issue new certificates without such legend in lieu thereof. 6.3 Notice of Proposed Transfer. Prior to any proposed transfer of this Warrant or the shares of Common Stock issued upon exercise of this Warrant, the Holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company to the effect that the proposed transfer may be effected without registration under the Securities Act, whereupon the holder of such securities shall be entitled to transfer such stock in accordance with the terms of this notice. Each certificate for Warrants or Common stock transferred as above provided shall bear the legend set forth in Section 6.2, except that such certificate shall not bear such legend if the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 8.2 shall not apply to securities which are not required to bear the legend prescribed by Section 6.2 in accordance with the provisions of that Section. 6.4 Required Registration and Notice. Subject to the conditions set forth in Section 6.4 hereof, upon the written request of the Holder of this Warrant or shares of Common Stock issued or issuable upon the exercise of the Warrant and evidenced by a certificate required to bear the legend specified in Section 6.2 (the "Restricted Shares") setting forth the Holder's demand that the Company effect the registration pursuant to a registration statement permitted under the Securities Act of such Restricted Shares, the Company shall promptly give written notice to all holders of Warrants and Restricted Shares of a proposed registration, and shall, subject to the conditions of Section 6.4, use its best efforts to effect promptly any such registration pursuant to a registration statement under the Securities Act of (a) such Restricted Shares, and (b) all Restricted Shares of the Holder of this Warrant or Restricted Shares which shall have advised the Company in writing within 30 days after the giving of such written notice by the Company of their desire to have their Restricted Shares registered under the Securities Act, for public sale in accordance with the method of disposition described by the holders, and the Company will keep effective such registration and a prospectus related thereto current until the earlier of such time that the Restricted Shares (i) have been sold or (ii) are eligible for sale without restriction pursuant to Rule 144(k) of the Regulations of the Securities and Exchange Commission. 6.5 Conditions to Required Registration. (a) The Company shall not be required to register or to use its best efforts to effect any registration of the Restricted Shares under the Securities Act: (i) more than one time in the aggregate for all holders thereof; or (ii) more than two years after the date on which the last remaining rights under this Warrant are exercised; or (iii) unless a demand therefor is made to the Company by the holders of at least 50% of the aggregate number of the Restricted Shares issued or issuable under this Warrant; or (iv) if any holder which has advised the Company in writing of its desire to have its Restricted Shares (or portion thereof) registered is, in the opinion of counsel for such holder, legally permitted to sell all such shares pursuant to any exemption from the registration requirements of the Securities Act; or (v) any securities other than Restricted Shares. (b) The Company may delay any registration of Restricted Shares required pursuant to Section 6.3 for a period not exceeding 60 days provided the Company shall in good faith determine, as evidenced by resolution of its Board of Directors, that any such registration would adversely affect active negotiations or planning for a proposed or pending merger, stock or asset acquisition or sale of all or substantially all of the Company's assets. (c) The Company may include in the registration statement pursuant to which the Restricted Shares are registered additional securities of the Company to be sold for the account of the Company or other security holders, as long as such inclusion does not adversely affect the registration of the Restricted Shares. 7. Miscellaneous Provisions. 7.1 Successors. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns. 7.2 Notices. Any notice, statement or demand authorized by this Warrant to be given or made by the Holder of this Warrant to or on the Company shall be sufficiently given or made if sent by certified mail, or private courier service, postage prepaid, addressed (until another address is provides in writing by the Company to the Holder), as follows: Neoware Systems, Inc. 400 Feheley Drive King of Prussia, Pennsylvania 19406 Attn: Edward C. Callahan, President and Chief Executive Officer With a copy to: McCausland, Keen & Buckman Radnor Court 259 Radnor-Chester Road, Suite 160 Radnor, Pennsylvania 19087-5240 Attn: Nancy D. Weisberg, Esquire Any notice, statement or demand authorized by this Warrant to be given or made by the Holder of this Warrant to the Company shall be sufficiently given or made if sent by certified mail or private courier service, postage prepaid, addressed (until another address is provided in writing by the Holder to the Company), as follows: Kirlin Holding Corp. 6901 Jericho Turnpike Syosset, New York 11791 7.3 Applicable Law. The validity, interpretation, and performance of this Warrant shall be governed in all respects by the laws of the State of New York, without giving effect to conflict of laws. 7.4 Effect of Headings. The Section headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. IN WITNESS WHEREOF, this Warrant has been duly executed by the Company as of the day and year first above written. Attest: NEOWARE SYSTEMS, INC. /s/ Margaret M. Huebsch By: /s/ Edward C. Callahan, Jr. --------------------------------- Edward C. Callahan, President and Chief Executive Officer SUBSCRIPTION FORM ----------------- Dated __________________, 19__ The undersigned hereby irrevocably elects to exercise the within Warrant dated as of ________________ to purchase _________________shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation, and hereby makes payment pursuant to Section 1.1 of the Warrant of $_____________ in payment of the Warrant Price thereof. or -- The undersigned hereby irrevocably elects to convert its right to purchase __________ shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation, purchasable under the within Warrant dated as of _______________, into __________ shares of Common Stock (based on a "Current Value" of $__________). Holder: ________________________________ By:_____________________________ Print Name:_____________________ Title:__________________________ Date:___________________________ ASSIGNMENT FORM Date __________________, 19__ FOR VALUE RECEIVED, ______________________________ hereby sells, assigns and transfers unto____________________________________________________________________________ (please type or print in block letters) _______________________________________________________________________________ (insert address) its right to purchase ________________shares of Common Stock, $.001 par value per share, of Neoware Systems, Inc., a Delaware corporation (the "Company"), represented by this Warrant and does hereby irrevocably constitute and appoint _________________, Attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. ______________________________ By:___________________________ Print Name:___________________ Title:________________________ Date:_________________________ EX-10.6 4 EXHIBIT 10.6 EXHIBIT 10.6 May 29, 1997 Mr. Edward C. Callahan, Jr. 5 Roswell Road Bedford, NH 03110 Dear Ed: Everyone at HDS is extremely excited about the opportunity to work with you. This is going: to be a wonderful partnership full of opportunity and excitement and we can't wait to get started. Your personality, style and business experience are a perfect match for HDS and I personally look forward to working with you. So, I'd like to take this opportunity formally to offer you the position of President and Chief Executive Officer as well as a seat on the Board of Directors of HDS Network Systems, Inc., with a starting date of June 16th, 1997. We have structured a compensation package that consists of several components: salary, bonus, executive equity plan, severance, relocation and benefits. 1. You shall serve at the pleasure of the Board of Directors. Your starting salary shall be at a rate of $210,000 per year, paid according to standard company payroll policy. 2. Your annual bonus will be 40 % of your base salary, based upon meeting certain MBO's. In your first year of employment, 5% of the bonus will be guaranteed and 50% of the bonus will be based upon objectives that you and the Board will agree to once you have started work with the company. 3. The company has established an executive equity plan which will enable you to acquire and retain a significant equity stake in the company. Pursuant to the company's existing plan, you will be given non-qualified options to purchase 385,000 shares of HDS stock priced at fair market value on the day of the formal option grant but no lower than $5.50 per share. The options will vest at a rate 25% per year on each of your first four anniversary dates. 4. We hope that the employment relationship will be mutually satisfactory; however, in the event of a substantial dimunition in the nature or status of your responsibilities or you are involuntarily terminated for reasons other than cause, you will continue to receive your base salary and standard company benefits for a period of twelve months. Your annual bonus will be paid only if part of the guaranteed portion as mentioned above or if MBO's have been met by the time of termination. The annual bonus and the MBO's will be adjusted pro rata for the period of the year prior to the end of employment. 5. In the event that there is a sale of the company or substantially all of its assets within your first twelve months of employment and you are not employed by the new owners immediately following such transaction, you will continue to receive your base salary and standard company benefits (or cash in lieu thereof) for a period of twelve months and you will vest 50% of your stock options. In the event that such sale takes place after your first twelve months of employment and you are not employed by the new owners immediately following the transaction you will continue to receive your base salary and standard company benefits (or cash in lien thereof) for a period of twelve months and will vest 100 % of your stock options. In either of these cases, your annual bonus will be paid only if part of the guaranteed portion as mentioned above or if MBO's have been met by time of material change of ownership. The annual bonus and the MBO's will he adjusted pro rata for the period of the year prior to the end of employment. 6. The company will assist in your relocation to the Philadelphia area by offering you a sign-on bonus of $60,000.00. 7. You will execute all standard company non-disclosure and non-solicitation agreements. You will agree not to compete with the Company while any payments are made pursuant to Paragraph 4. Competition shall include employment or consultation on behalf of any company whose primary business is the development of network computers or on behalf of a subsidiary or division of any company if the primary business of such subsidiary or division is the development of network computers. In addition to the above, you will be entitled to all benefits afforded to all HDS employees. If the terms of this offer are acceptable, and I hope that they are, please sign this letter in the space indicated and return it to me. Your signature will acknowledge that you have read and understood and agreed to the terms and conditions of this offer. Ed, the Board and I are excited about our future together. Should you have anything else that you wish to discuss, please do not hesitate to call me. Best regards, /S/ ARTHUR SPECTOR Arthur Spector Chairman of the Board HDS Network Systems, Inc. Accepted and Agreed: /S/ EDWARD C. CALLAHAN, JR 5/30/97 __________________________ Date:__________________ Edward C. Callahan, Jr. EX-10.7 5 EXHIBIT 10.7 EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made the 10th day of June, 1997 by and between HDS NETWORK SYSTEMS, INC., a Pennsylvania corporation ("Employer"), and EDWARD M. PARKS ("Employee"). WITNESSETH: WHEREAS, Employer desires to continue to employ Employee and Employee is willing to continue such employment, all upon and subject to the terms and conditions contained in this Agreement; NOW, THEREFORE, the parties to this Agreement, for good and valuable consideration and intending to be legally bound, hereby agree as follows: SECTION 1. EMPLOYMENT. (a) Duties. Employer agrees to continue the employment of Employee as the Vice President of Engineering of Employer. Employee agrees to perform such duties and services consistent with Employee's position and to perform such other duties and to serve in such capacities at such location as may be determined and assigned to him from time to time by the Chief Executive Officer, President or Board of Directors of Employer, it being expressly provided that the duties of Employee may be enlarged or diminished, as the Chief Executive Officer, the President or the Board of Directors determines. Employee will use his best efforts to perform his duties and discharge his responsibilities pursuant to this Agreement competently, carefully and faithfully. (b) Devotion of Time. Employee will devote his entire time, attention and energies to the affairs of Employer. Employee will not enter the employ of or serve as a consultant to, or in any way perform any services with or without compensation to, any other person, business or organization without the prior written consent of the Board of Directors of Employer, provided that Employee shall be permitted to devote a limited amount of time, without compensation, to charitable or similar activities. SECTION 2. DURATION AND TERMINATION OF EMPLOYMENT. (a) The term (the "Term") of this Agreement shall begin as of the date hereof and shall continue thereafter unless terminated by either party pursuant to this Section 2 hereof, with or without cause. (b) Employee's employment pursuant to this Agreement may be terminated by Employer as follows: (i) If Employee shall die during the Term, Employee's employment shall terminate, except that Employee's legal representatives shall be entitled to receive the base salary provided for under Section 3 hereof prorated to the last day of the month in which Employee's death occurs. (ii) If during the Term, Employee shall become physically or mentally disabled whether totally or partially, so that Employee is unable substantially to perform Employee's services hereunder for a period of six (6) consecutive months, Employer may, by written notice to Employee, terminate Employee's employment hereunder. (iii) Employer may, by written notice to Employee, terminate Employee's employment hereunder for "cause." For the purposes of this Agreement, "cause" shall mean Employee's termination only upon: (A) Employee's continued failure to perform such assigned duties and responsibilities as shall be consistent with the terms of this Agreement after receipt of a written warning of specific deficiencies and Employee's failure to cure said deficiencies within thirty (30) days; or (B) Employee's engaging in willful misconduct which is demonstrably injurious to Employer; or (C) Employee's committing a felony or an act of fraud against or the misappropriation of property belonging to Employer, or (D) Employee's breaching in any material respect the terms of this Agreement and Employee's failure to cure the breach within thirty (30) days after written notice of the breach from Employer. (iv) Employer may terminate Employee's employment hereunder "without cause" upon thirty (30) days prior written notice. A termination "without cause" shall mean the termination of Employee's employment by Employer under this Agreement other than pursuant to Sections 2(b)(i), (ii) or (iii) above. (c) If Employer terminates this Agreement during the first twenty-four (24) months of the Term "without cause," Employer shall pay to Employee the amount of Employee's then current annual base salary for a period of one (1) year. In the event that Employee violates any of the provisions of Sections 4 or 6 hereunder, Employer's obligation to make payments under this Section 2(c) shall terminate immediately. (d) Employee may terminate his employment hereunder upon thirty (30) days prior written notice to Employer. (e) Notwithstanding any termination of Employee's employment as provided in this Section 2 or otherwise, the provisions of Sections 4, 5 and 6 shall remain in full force and effect. SECTION 3. COMPENSATION. (a) Employee's base salary shall be $130,000 per annum, payable in equal, bi-weekly installments, subject to annual review. (b) Employee shall be entitled to participate in any employee bonus pool and stock option plans at the discretion of the Compensation and Stock Option Committee or Board of Directors, as applicable. (c) Employee shall participate in Employer's standard employee benefit plans (for example, life insurance, disability insurance, health and dental insurance) available to similarly situated employees. SECTION 4. COVENANT NOT TO COMPETE OR SOLICIT. (a) Non-Competition. Employee agrees that he will not directly or indirectly engage in (whether as an employee, consultant, proprietor, partner, director or otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that engages in or (to Employee's knowledge) intends to engage in a "Restricted Business" (as defined below), during the term of his employment by Employer and for a period of six (6) months following the termination of this Agreement other than pursuant to Section 2(b)(iv). Ownership of (i) no more than five percent (5%) of the outstanding voting stock of a publicly traded corporation, or (ii) any stock presently owned by Employee, shall not constitute a violation of this provision. In addition, this provision shall not apply to Employee's employment by a company if: (i) less than ten percent (10%) of the company's revenues during the prior twelve (12) months were generated by the Restricted Business and (ii) Employee is not employed by the division or subsidiary engaged in the Restricted Business. "Restricted Business" shall mean any business that is engaged in or, to Employee's knowledge after due inquiry, is preparing to engage in the design, manufacture, marketing, sale or distribution of network computers and related operating software for Network Computers. (b) Non-Solicitation. For a period of one (1) year following the termination of this Agreement, Employee shall not: (i) solicit or initiate any other action which is intended to induce any other employee of Employer to terminate his employment with Employer, or (ii) interfere in any manner with the contractual or employment relationship between Employer and any such employee. (c) Worldwide. The parties acknowledge that the market for products of the type sold by Employer is worldwide, and that, in this market, products from any nation compete with products from all other nations. Accordingly, in order to secure to Employer the benefits of the Merger, the parties agree that the provisions of this Section 4 shall apply to each of the states and counties of the United States and to each nation worldwide. (d) Severability. The parties intend that the covenants contained in the preceding paragraphs shall be construed as a series of separate convenants, one for each state of the United States, and each nation. If, in any judicial proceeding, a court shall refuse to enforce any of the separate convenants (or any part thereof) deemed included in said paragraphs, then such unenforceable covenant (or such part) shall be deemed eliminated from this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions of this Section 4 should ever be deemed to exceed the time or geographic limitations, permitted by applicable law, then such provisions shall be reformed to be maximum time or geographic limitations, as the case may be, permitted by applicable law. SECTION 5. EMPLOYEE's REPRESENTATIONS. Employee represents and warrants to Employer that Employee is familiar with and approves the covenants not to compete and not to solicit set forth in Section 4, including, without limitation, the reasonableness of the length of time, scope and geographic coverage of those covenants. SECTION 6. PROTECTION OF CONFIDENTIAL INFORMATION. In view of the fact that the Employee's work for Employer will bring him into close contact with many confidential affairs of Employer not readily available to the public, Employee agrees: (a) To keep secret and retain in the strictest confidence all confidential matters of Employer, including, without limitation, secrets, know-how, customer lists, pricing policies, operational methods, technical data and processes, inventions, research projects, marketing and sales data, customer lists and other business affairs of Employer, learned by him about Employer heretofore or hereafter, and not to disclose them to anyone outside of Employer either during or after his employment with Employer, except in the course of performing his duties hereunder or with Employer's express written consent; and (b) To deliver promptly to Employer on termination of his employment, or at any time Employer may so request, all memoranda, notes, records, reports, manuals, drawings and other documents (and all copies thereof) relating to Employer's business and all property associated therewith, which he may then possess or have under his control. (c) Confidential information of Employer shall not include information which is in the possession of Employee at the time Employee commenced employment with Employer or a predecessor or Employer or in the public domain other than as a result of any breach of this Agreement or any confidentiality agreement between Employer and Employee. SECTION 7. REMEDIES (a) If Employee violates any of the provisions of Sections 4 or 6 hereof, Employer shall have the following rights and remedies: (i) In the event of a breach, or a threatened breach, the right and remedy to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to Employer and that money damages will not provide an adequate remedy to Employer; (ii) In the event of an actual breach, the right to recover damages for all losses, actual and contingent, and the right to require the Employee to account for and pay over to Employer all profits or other benefits (collectively "Benefits") derived or received by the Employee as a result of any transactions constituting such a breach, and the Employee hereby agrees to account for and pay over such Benefits to Employer; and (iii) The immediate termination of Employer's obligation to make payments pursuant to Section 2(c). (b) Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies avaiable to Employer at law or in equity. SECTION 8. INTELLECTUAL PROPERTY. (a) Employer shall be the sole owner of all the products and proceeds of the Employee's services to Employer, including, but not limited to, all materials, ideas, concepts, formats, designs, suggestions, developments, arrangements, packages, computer programs, inventions, patent applications, patents, copyrights, trademarks and other intellectual properties (collectively, "Intellectual Property") that Employee may acquire, obtain, develop or create in connection with the Employee's employment hereunder, free and clear of any claims by Employee (or anyone claiming under Employee) of any kind or character whatsover (other than Employee's right to receive payments hereunder). (b) Employee shall, at the request of Employer, execute such assignments, certificates or other instruments as Employer may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its rights, title and interest in or to any such Intellectual Property. SECTION 9. MISCELLANEOUS (a) Notices. All notices, reports or other communications required or permitted to be given hereunder shall be in writing to both parties and shall be deemed given on the date of delivery, if delivered, or three days after mailing, if mailed first-class mail, postage prepaid, to the following addresses: (i) If to Employee Edward M. Parks (ii) If to Employer: HDS NETWORK SYSTEMS, INC. 400 Feheley Drive King of Prussia, PA 19406 Attention: President or to such other address as any party hereto may designate by notice given as herein provided. (b) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania, without regard to its rule or principles relating to conflicts of laws. (c) Amendments. This Agreement shall be be changed or modified in whole or in part except by an instrument in writing signed by each party. (d) Attorneys' Fees. In the event of any legal action or proceeding to enforce or interpret the provisions hereof, the prevailing party shall be entitled to reasonable attorneys' fees, whether or not the proceeding results in a final judgment. (e) Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. (f) Effect of Headings. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. HDS NETWORK SYSTEMS, INC. By: /S/ ARTHUR SPECTOR Print Name: Arthur Spector Title: Chairman EMPLOYEE /S/ EDWARD M. PARKS Print Name: Edward M. Parks EX-21 6 EXHIBIT 21 EXHIBIT 21 Subsidiaries ------------ Name State of Incorporation - --------------------------- ---------------------- Neoware Licensing, Inc. Delaware Neoware Investments, Inc. Delaware EX-23 7 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-93942, No. 33-87036 and No. 333-20185. /s/ Arthur Andersen LLP Philadelphia, Pa., September 25, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 1,302,984 0 4,946,667 168,710 3,119,043 10,861,643 1,749,268 1,112,854 13,021,393 6,180,319 0 0 0 6,264 6,834,810 13,021,393 19,976,423 19,976,423 16,339,055 16,339,055 0 49,745 338,354 (6,090,379) (1,121,554) 0 0 0 0 (4,968,825) (.86) (.86)
EX-27.2 9 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 1,452,409 0 9,432,817 124,086 4,035,202 16,002,051 1,552,836 871,977 18,327,115 7,555,703 0 0 0 5,761 10,765,651 18,327,115 25,467,487 25,467,487 17,073,845 17,073,845 0 0 0 520,020 182,791 0 0 0 0 337,229 .06 .05
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