-----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, HOQpV0hs9mz9dKRQAn2zw6L8kRvN6uz8tEIs+q+0VFC9cKYD0MIvhitEgiKriumz vbE1cXYeoMcVNYzlyGPaVg== 0000950116-00-001222.txt : 20000516 0000950116-00-001222.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950116-00-001222 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 000-21240 FILM NUMBER: 633321 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q -------------------- (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF - --------- THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended March 31, 2000 _________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________. Commission File Number: 000-21240 ------------------------------- NEOWARE SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 23-2705700 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 400 Feheley Drive King of Prussia, Pennsylvania 19406 (Address of principal executive offices) (610) 277-8300 (Registrant's telephone number including area code) ------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 1, 2000, there were outstanding 10,275,163 shares of the Registrant's Common Stock. NEOWARE SYSTEMS, INC. INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Unaudited Consolidated Financial Statements: Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999 3 Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities and Use of Proceeds 11 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 2 NEOWARE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS March 31, 2000 June 30, 1999 -------------- ------------- CURRENT ASSETS: Cash and cash equivalents $ 9,092,028 $ 1,470,906 Accounts receivable, net 1,770,594 2,586,693 Inventories 981,206 1,324,424 Prepaid expenses and other 49,435 264,322 Note receivable 700,000 - ------------ ----------- Total current assets 12,593,263 5,646,345 ------------ ----------- Property and equipment, net 283,898 438,367 Note receivable - 700,000 Capitalized and purchased software, net 393,283 541,185 ------------ ----------- $ 13,270,444 $ 7,325,897 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit - $ 143,000 Accounts payable $ 1,049,136 1,654,926 Accrued expenses 823,056 1,106,388 Deferred revenue 286,198 319,672 ------------ ----------- Total current liabilities 2,158,390 3,223,986 ------------ ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - - Common stock 8,781 6,285 Additional paid-in capital 18,807,385 10,178,358 Retained earnings (7,704,112) (6,082,732) ------------ ----------- Total stockholders' equity 11,112,054 4,101,911 ------------ ----------- $ 13,270,444 $ 7,325,897 ============ =========== The accompanying notes are an integral part of these financial statements. 3 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, March 31, March 31, 2000 1999 2000 1999 ----------- ---------- ----------- ----------- Net Revenues $2,520,727 $2,437,877 $ 7,840,093 $ 7,844,285 Cost of revenues 2,131,923 1,888,222 6,312,377 6,955,669 ---------- ---------- ----------- ----------- Gross profit 388,804 549,655 1,527,716 888,616 ---------- ---------- ----------- ----------- OPERATING EXPENSES: Sales and Marketing 359,448 313,819 980,069 1,244,345 Research and development 138,860 161,001 480,065 571,301 General and administrative 454,232 458,028 1,329,921 1,551,519 Acquisition costs 39,942 - 445,987 - ---------- ---------- ----------- ----------- Operating expenses 992,482 932,848 3,236,042 3,367,165 ---------- ---------- ----------- ----------- Operating (loss) income (603,678) (383,193) (1,708,326) (2,478,549) Gain on sale of equity investment - - - 406,930 Interest income (expense), net 40,183 18,507 86,946 13,610 ---------- ---------- ----------- ----------- Net (loss) income $ (563,495) $ (364,686) $(1,621,380) $(2,058,009) ========== ========== =========== =========== Basic and diluted loss per share $ (0.08) $ (0.06) $ (0.25) $ (0.33) ========== ========== =========== =========== Weighted average number of Shares used in basic and diluted Earnings per share computation 6,872,634 6,285,772 6,493,581 6,281,543 ========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. 4 NEOWARE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended March 31, March 31, 2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (1,621,380) $ (2,058,009) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 434,340 561,744 Amortization of deferred compensation - 17,368 Gain on sale of equity investment - (406,930) Provision for inventory obsolescence 130,000 800,000 Changes in operating assets and liabilities- (Increase) decrease in: Accounts receivable 816,099 3,580,837 Inventories 213,218 795,095 Recoverable income taxes - 1,121,554 Prepaid expenses and other 214,887 (127,617) Increase (decrease) in: Accounts payable (605,790) (1,047,276) Accrued expenses (283,332) (5,249) Deferred revenue (33,474) 82,143 ------------- ------------- Net cash (used in) provided by operating activities (735,432) 3,313,660 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equity investment - 406,930 Purchases of property and equipment (7,339) (21,500) Capitalized software (124,630) (162,909) ------------- ------------- Net cash (used in) provided by investing activities (131,969) 222,521 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit (143,000) (2,901,000) Sale of common stock - 24,327 Exercise of stock options 264,757 - Exercise of warrants 8,366,766 - ------------- ------------- Net cash (used in) provided by financing activities 8,488,523 (2,876,673) ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,621,122 659,508 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,470,906 1,302,984 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,092,028 $ 1,962,492 ============= ============= SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 14,372 $ 59,028
The accompanying notes are an integral part of these financial statements. 5 NEOWARE SYSTEMS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Neoware Systems, Inc. and Subsidiaries (the "Company") have been prepared in conformity with generally accepted accounting principles. The interim financial information, while unaudited, reflects all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of financial position and operating results for the interim periods presented. The results of operations for the nine month period ended March 31, 2000 are not necessarily indicative of results expected for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. REVENUE RECOGNITION AND MAJOR CUSTOMERS Product revenue is recognized at the time of title transfer, which ordinarily occurs at the time of shipment. From time to time, customers request delayed shipment, usually because of customer scheduling for systems integration and/or 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 March 31, 2000 and 1999 were approximately $164,000 and $403,000, respectively. There were no accounts receivable relating to "bill and hold" transactions at both March 31, 2000 and 1999. Service contract revenue is recognized ratably over the contract period. Product warranty costs and an allowance for sales returns are accrued at the time revenues are recognized. Net revenues from one customer amounted to 11.3% of total net revenues for the three months ended March 31, 2000 and, as of March 31, 2000, the Company had receivables from this customer of approximately $204,000. No customer accounted for 10% or more of total net revenues for the nine months ended March 31, 2000 and 1999. Net revenues from one customer amounted to 12% of total revenues for the three months ended March 31, 1999. 3. INVENTORIES Inventories are stated at the lower of cost or market (first-in, first-out method) and consisted of the following: March 31, June 30, 2000 1999 ------------ ----------- Purchased components and subassemblies $ 487,952 $ 732,026 Work-in-process 91,721 129,972 Finished goods 401,533 462,426 ------------ ----------- $ 981,205 $ 1,324,424 ============ =========== During the three months ended March 31, 2000, the Company made a decision to terminate the engineering and manufacturing of its proprietary hardware and has transitioned to become a software and services company with system sales based upon installing its software products onto standard platforms. In connection with this transition, the Company recorded a charge of $165,000 for the reduction in carrying value of certain inventory to the lower of cost or market value and for the acceleration of depreciation of customized test equipment no longer required for manufacturing of custom hardware platforms. The charge is recorded as a component of cost of sales in the accompanying consolidated statements of operations for the three and nine month periods ended March 31, 2000. 6 During the nine months ended March 31, 1999, the Company entered into an agreement to outsource a significant portion of its custom manufacturing and fulfillment services. In December 1998, the Company recorded a charge of $800,000 to reduce the carrying value of certain inventory to the lower of cost or market value. The charge is recorded as a component of cost of revenues in the accompanying consolidated statement of operations for the nine months ended March 31, 1999. 4. NOTE RECEIVABLE In October 1997, the Company merged Information Technology Consulting, Inc., a wholly-owned subsidiary, into Broadreach Consulting, Inc. in exchange for a 2% stock interest in Broadreach and the reimbursement of $1,000,000 of expenses incurred by the Company in connection with its efforts to make certain acquisitions in the information technology consulting and staffing field. Of the total reimbursement, $300,000 was paid in cash and the remaining $700,000 under a note which is due on the earlier of three years or upon the completion of the initial public offering of Broadreach. The note bears interest at 8% per year. In December 1998, the Company sold its 2% interest in Broadreach for $406,930, which is included as a gain on sale of equity investment in the accompanying consolidated statement of operations for the nine months ended March 31, 1999. 5. LINE OF CREDIT The Company has a line of credit agreement with a bank that provides for borrowings up to $2,000,000 subject to certain limitations, as defined. The line of credit matures on June 30, 2000. Borrowings under the credit agreement bear interest at the bank's prime rate plus 2.00% (11% at March 31, 2000). The line of credit is collateralized by substantially all of the assets of the Company and requires the Company to maintain certain financial ratios and meet other financial conditions, as defined. The Company has agreed to maintain cash collateral equal to the amount outstanding under the line from time to time. 6. EARNINGS PER SHARE The Company applies SFAS No. 128, "Earnings per Share", which requires dual presentation of basic and diluted earnings per share (EPS) for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. For the three and nine month periods ended March 31, 2000 and 1999, there were no dilutive effects of stock options or warrants as the Company incurred net losses. Options and warrants to purchase 4,424,888 shares of Common Stock at prices ranging from $.84 to $7.13 per share were outstanding at March 31, 2000. 7. ACQUISITION COSTS During the three and nine month periods ended March 31, 2000, the Company incurred costs of $39,942 and $445,987, respectively, relating to a definitive agreement dated October 7, 1999 to acquire certain assets, assume certain liabilities and acquire the business of MTX, Inc. of Raleigh, North Carolina. On January 31, 2000, the Company exercised its right to terminate the agreement. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Introduction The Company provides the software and infrastructure to allow the wide-scale deployment of information appliances in business environments. Neoware's software and management tools are designed to power a new generation of smart devices that bring the benefits of open, industry-standard technologies to a wide variety of proprietary business devices. Neoware's products are designed to run local applications for specific vertical markets, plus allow access to Linux servers, the Internet and Windows-based applications running on multi-user Windows servers. Neoware's infrastructure software powers and manages information appliances, which are designed as alternatives to proprietary devices and general-purpose personal computers, offering the cost benefits of industry-standard hardware and software, easier installation, as well as lower up-front and administrative costs. During the quarter ended March 31, 2000, the Company announced the reduction in the exercise price of its outstanding warrants and extended the expiration date of the warrants to April 14, 2000. A total of approximately $14 million was raised as a result of the exercise of these warrants (of which approximately $8.4 million was received as of March 31, 2000) and the Company intends to utilize this capital to begin to aggressively pursue a growth strategy in the information appliance marketplace. The Company intends to seek additional financing, if necessary, and strategic partnerships in order to capitalize upon these new product opportunities. Results of Operations The following table sets forth, for the periods indicated, certain items from the Company's unaudited consolidated statements of operations as a percentage of net revenues.
Three Months Ended Nine Months Ended March 31, March 31, 2000 1999 2000 1999 ---- ---- ---- ---- Gross Profit 15.4% 22.6% 19.5% 11.3% Operating expenses: Sales and marketing 14.2 12.9 12.5 15.9 Research and development 5.5 6.6 6.1 7.3 General and administrative 18.0 18.8 17.0 19.7 Acquisition costs 1.6 - 5.7 - ----- ----- ----- ----- Operating loss (23.9) (15.7) (21.8) (31.6) Gain on sale of equity investment - - - 5.2 Interest income (expense), net 1.5 0.7 1.1 0.2 ----- ----- ----- ----- Loss before taxes (22.4) (15.0) (20.7) (26.2) Income taxes - - - - ----- ----- ----- ----- Net loss (22.4)% (15.0)% (20.7)% (26.2)% ===== ===== ===== =====
Net revenues for the three and nine months ended March 31, 2000 amounted to $2,520,727 and $7,840,093, respectively, compared to $2,437,877 and $7,844,285 for the comparable periods in the prior fiscal year. Although not a factor for the periods reported, the Company's revenues can be subject to significant variances because of fluctuations in the timing of receipt of large orders. 8 The Company's gross profit as a percentage of net revenues for the three and nine month periods ended March 31, 2000, before the provision of $165,000 for the write-down of certain inventory and fixed assets associated with its transition from a proprietary hardware manufacturer, was 21.9% and 22.6%, respectively. For the nine months ended March 31, 1999, the Company's gross profit, before the provision of $800,000 for inventory obsolescence recorded in December 1998, was 21.5% compared to 19.5% for the current year. The variations in gross profit percentages, after the adjustments described above, are attributable to product mix. The Company anticipates that its gross margin percentage may vary from quarter to quarter depending on the relationship of fixed overhead to total revenue and the mix of business, including the mix of hardware and software revenues. The gross profit percentage may also vary 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. Sales and marketing expenses amounted to $359,448 and $980,069 for the three and nine month periods ended March 31, 2000 as compared to $313,819 and $1,244,345, respectively, for the prior year. The increase for the three months ended March 31, 2000 over the prior year is attributable to the addition of personnel and the increase in professional costs associated with the beginning of the Company's implementation of its growth strategy. The decrease for the nine months ended March 31, 2000 in relation to the prior year is a result of the impact of the reduction in personnel which was implemented during the nine months ended March 31, 1999 due to the slower than anticipated expansion of the thin client computer market at that time. In order to successfully increase its revenues, the Company must hire additional marketing and sales personnel which may be difficult due to competition for employees with such skills. Research and development expenses for the three and nine month periods ended March 31, 2000 decreased to $138,860 and $480,065, respectively, as compared to $161,001 and $571,301, respectively, in the prior year primarily as a result of reductions in staffing (including the elimination of all hardware engineering staff during the three months ended March 31, 2000) and in the use of outside consultants and services. In conjunction with the implementation of its growth strategy, it is anticipated that research and development costs will increase significantly in future quarters primarily as a result of hiring additional software engineers. Competition for employees with thes skills is severe and the Company may have difficulty attracting suitably qualified personnel. General and administrative expenses decreased to $454,232 and $1,329,921 for the three and nine month periods ended March 31, 2000, respectively, as compared to $458,028 and $1,551,519 in the prior year. The decrease for the current nine months compared to the prior year is due primarily to a reduction in professional fees and personnel costs. During the three and nine month periods ended March 31, 2000, the Company incurred costs of $39,942 and $445,987, relating to a definitive agreement dated October 7, 1999 to acquire certain assets, assume certain liabilities and acquire the business of MTX, Inc. of Raleigh, North Carolina. On January 31, 2000, in connection with announcing its new Linux-based product strategy, the Company exercised its right to terminate the agreement. The Company expects that general and administrative expenses will increase in the future as a result of the need to add personnel to support the Company's growth strategy. The Company realized net interest income of $40,183 and $86,946 for the three and nine month periods ended March 31, 2000, respectively, as compared to net interest income of $18,507 and $13,610 in the prior year. The increase in interest income was primarily due to cash received from the exercise of the Company's warrants and the investment of such funds in interest bearing accounts combined with decreased borrowings under the Company's line of credit. No income tax benefit was recognized in the 2000 or 1999 periods as a result of the net operating losses incurred during the periods as there is no assurance at this time that the benefit of the net operating loss carryforwards will be realized. 9 The increase in the Company's net loss for the three months ended March 31, 2000 compared to the prior year is primarily attributable to the charge of $165,000 described above. The net loss for the nine months ended March 31, 2000 includes the MTX acquisition costs of $445,987 and the charge of $165,000. The net loss for nine months ended March 31, 1999 includes the inventory writedown of $800,000 offset by a gain on sale of equity investment of $406,930. The decrease in net loss for the nine months ended March 31, 2000 compared to the prior year, after taking these items into account, is primarily attributable to the reduction in operating expenses described above. The Company expects to incur increased sales and marketing, research and development, and general and administrative expenses relating to its growth strategy. As a result, the Company will need to generate significant increases in revenues to achieve profitability. There are no assurances that the Company will achieve profitability in the future or, if it does, whether it will be able to sustain it. Liquidity and Capital Resources At March 31, 2000, the Company had net working capital of $10,434,873 composed primarily of cash and cash equivalents, accounts receivable, inventory and a note receivable. The Company's principal sources of liquidity include $9,092,028 of cash and cash equivalents. The Company also has a line of credit facility of $2,000,000 which is secured by a first lien security interest on all tangible and intangible personal property of the Company and separate pledges of investment property owned by Neoware Investments, Inc. and Neoware Licensing, Inc., each of which is a wholly-owned subsidiary of the Company. The facility agreement also provides that borrowings under the line will be based on the amount of eligible accounts receivable, as defined. Interest on the line of credit facility accrues at the bank's prime rate plus two percent (2%), with interest payable monthly, and all principal and interest due and payable on June 30, 2000. The Company has agreed to maintain cash collateral equal to the amount outstanding under the line from time to time. Cash and cash equivalents increased by $7,621,122 during the nine months ended March 31, 2000, primarily as a result of exercises of the Company's warrants. The Company used cash from operations of $735,432 for the nine months ended March 31, 2000 primarily as a result of the net loss for the period. The Company generated cash from operations of $3,313,660 for the nine months ended March 31, 1999, which included a reduction in accounts receivable of $3,580,837, recoverable income taxes of $1,121,554 and a gain of $406,930 on the sale of the equity investment in Broadreach offset by the net loss for the period and a reduction in accounts payable of $1,047,276. Cash flow from operations can vary significantly from quarter to quarter depending on the timing of payments from, and shipments to, large customers. The Company expects to fund current operations and other cash expenditures through the use of available cash, cash from operations, funds available under the credit facility and possible new debt and equity sources. The Company intends to seek additional financing, if necessary, and strategic partnerships in order to capitalize upon new product opportunities relating to information appliance devices. The Company may not be able to obtain financing or it may not be available on terms acceptable to the Company. If the Company is not able to obtain sufficient financing, it may not be able to successfully implement its growth strategy. However, the Company must achieve profitable operations in order to provide adequate funding for the long term. Year 2000 Matter The Year 2000 matter related to whether computer hardware and software would properly recognize date sensitive information referring to the Year 2000. During calendar year 2000, the Company has not experienced any significant Year 2000 problems with its information systems hardware, application software, equipment or operating systems. The Company also has not experienced any significant Year 2000 complications regarding any of its suppliers, customers or other business partners. Since latent Year 2000 related problems may arise in the future, the Company will continue to monitor the Year 2000 compliance of its operating systems and equipment. 10 Forward-Looking Statements Certain statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and relate to the development of the Company's products and future operating results that are subject to certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Forward-looking statements include statements regarding the Company's new product and market strategy, the development of the Company's new Windows-based and Linux-based products, anticipated purchases by customers, future margins and margin trends, future revenues and operating losses, the Company's competitive position, lower cost of ownership and easier installation of the Company's systems, anticipated growth of the information appliance markets, any potential problems relating to Year 2000 matters and the Company's plan to seek financing and strategic partnerships. The words "believe," "expect," intend," "anticipate," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Factors that could affect the Company's actual results include the Company's ability to obtain financing and strategic partnerships, to add qualified personnel, to successfully develop and market its products, including its new Windows-based and Linux-based products, to lower its costs, to market its products to OEM customers, the Company's reliance on Microsoft's actions relating to Windows CE, Windows NT and Windows 2000, customers' acceptance of Neoware's products, pricing pressures, rapid technological changes in the industry, growth of the information appliance and thin client computer markets 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. The Company does not undertake to update any forward-looking statements made herein. PART II. OTHER INFORMATION Item 1. Legal Proceedings On March 11, 1998, a complaint, naming as defendants the Company, its Chairman, and its former CFO, 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. The complaint alleged, 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. An amended complaint was subsequently filed which added claims on behalf of a second purported class - -- purchasers of the Company's stock from November 13, 1997 through May 1, 1998 - -- related to the Company's announcement, on April 30, 1998, that it would be restating certain financial results previously reported for the first two quarters of fiscal year 1998. Thereafter, four separate purported securities class actions were filed. During October 1999, an agreement in principle to settle all of the foregoing litigation was reached and the parties subsequently have executed and filed with the Court a definitive settlement agreement. The settlement agreement is subject to approval by the Court and a hearing in that regard is scheduled for July 14, 2000. Management believes that this settlement will not have a material adverse effect on the Company's financial position or results of operation. Item 2. Changes in Securities and Use of Proceeds Effective February 14, 2000, the Company amended the terms of its publicly traded Common Stock Purchase Warrants to reduce the exercise price to $3.75 and to extend the expiration date from March 25, 2000 to April 14, 2000. Upon the termination of the exercise period, 3,725,853 warrants had been exercised subsequent to the reduction of the exercise price, from which the Company derived gross proceeds of approximately $14 million, with the balance of approximately 2 million warrants expiring unexercised. 11 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Employment Agreement, dated February 14, 2000, between the Company and Michael G. Kantrowitz 10.2 1995 Stock Option Plan (as amended through February 28, 2000) 10.3 Separation Agreement, dated February 14, 2000, between the Company and Edward C. Callahan, Jr. (b) Report on Form 8-K: On February 25, 2000, the Company filed a Form 8-K reporting the appointment of Michael G. Kantrowitz as President and CEO of the Company replacing Edward C. Callahan, Jr. The Company also announced that it reduced the exercise price of its warrants from $5.50 to $3.75 and extended the expiration date of the warrants from March 25, 2000 to April 14, 2000. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. NEOWARE SYSTEMS, INC. Date: May 15, 2000 By: /s/ MICHAEL G. KANTROWITZ ----------------------------- Michael G. Kantrowitz, President and Chief Executive Officer Date: May 15, 2000 By: /s/ VINCENT T. DOLAN ------------------------------- Vincent T. Dolan Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) 13 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 February 14, 2000 Mr. Michael Kantrowitz 620 Christian Street Philadelphia, PA 19947 Dear Mike: 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 Neoware Systems, Inc., with a starting date of February 14, 2000. We have structured a compensation package that consists of several components: salary, bonus, executive equity plan, severance, and benefits. 1. You shall serve at the pleasure of the Board of Directors. Your starting base salary shall be at a rate of $210,000 per year, paid according to standard company payroll policy. You will be provided with the use of a company automobile similar to your current automobile. 2. Your annual bonus opportunity will be up to 50 % of your base salary or greater as determined solely by the Board of Directors. The annual bonus shall be reasonably determined by the Board of Directors, based upon meeting certain performance goals to be agreed on each year with the Board of Directors. 3. The company has established an executive equity plan that will enable you to acquire and retain a significant equity stake in the company. You will be granted an additional 130,000 options (bringing your total to 400,000 options) at fair market value on the date of grant. The options will have a term of five years and will vest at a rate of 25% per year on each of your first four anniversaries of the date of this agreement. 4. We hope that the employment relationship will be mutually satisfactory; however, in the event of any change in your position as President and CEO reporting solely to the Board of Directors, or your involuntary termination for reasons other than Cause, you will continue to receive your base salary, use of your company-provided automobile and health benefits for a period of twelve months from the date of your termination. For the purpose of this Agreement, "Cause" shall mean your termination only upon: (a) your 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 with specific deficiencies and your failure to cure such deficiencies within thirty (30) days; or (b) your engaging in willful misconduct which is demonstrably injurious to the Company; or (c) your committing a felony or act of fraud against or misappropriation of property belonging to the Company. Your annual bonus for the year of termination will be paid only if agreed goals have been met by the time of termination. The annual bonus and the agreed goals 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 or merger of the company or substantially all of its assets within your first twelve months of employment as CEO and you are not employed by the new owners in a similar capacity (head of a business unit reporting to the CEO or Board of Directors but not necessarily CEO of the resulting company), or you do not accept, in your sole discretion, employment in any other capacity offered by the new owners, immediately following such transaction, you will continue to receive your base salary, use of your company-provided automobile, and health benefits (or cash in lieu thereof) for a period of twelve months and you will vest 50% of your then unvested stock options. In the event that such transaction takes place after your first twelve months of employment and you are not employed by the new owners in a similar capacity (head of a business unit reporting to the CEO or Board of Directors but not necessarily CEO of the resulting company), or you do not accept, in your sole discretion, employment in any other capacity offered by the new owners, immediately following the transaction, you will continue to receive your base salary, use of your company-provided automobile and health benefits (or cash in lieu 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 agreed goals have been met by the time of consummation of the transaction. The annual bonus and the agreed goals will he adjusted pro rata for the period of the year prior to the end of employment. 6. You will execute an appropriate non-disclosure agreement similar to one you previously signed. You will agree not to compete with the Company while any payments are made pursuant to Paragraph 4and for a period of six (6) months thereafter. Competition shall include solicitation to hire any Neoware employees, or employment by or consultation on behalf of any company whose primary business is the development of thin client information appliances or whatever other business the company is pursuing at the time of your separation; or on behalf of a subsidiary or division of any company if the primary business of such subsidiary or division is the development of thin client information appliances or whatever other business the company is pursuing at the time of your separation. In addition to the above, during your employment, you will be entitled to all benefits afforded to all Neoware employees. Except as set forth herein, this Agreement sets forth our complete understanding and agreement and supersedes all previous employment agreements or terms between you and Neoware and terminates any rights under those agreements. 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. Mike, 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. Very truly yours, NEOWARE SYSTEMS, INC. Arthur R. Spector Chairman Accepted and agreed to: - ----------------------- Michael Kantrowitz EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 1995 STOCK OPTION PLAN [Adopted by the Board of Directors on November 29, 1994, as amended through February 28, 2000 (Subject to stockholder approval of the amendment to increase the shares reserved for issuance to 2,500,000)] PART I DEFINITIONS AND ADMINISTRATIVE MATTERS SECTION 1. Purpose; Definitions. The purpose of the Neoware Systems, Inc.1995 Stock Option Plan (the "Plan") is to enable employees, officers, directors and independent contractors of Information Systems Acquisition Corporation ("the Company") to (i) own shares of stock in the Company, (ii) participate in the stockholder value which has been created, (iii) have a mutuality of interest with other stockholders and (iv) enable the Company to attract, retain and motivate employees, officers, directors and independent contractors of particular merit. For the purposes of the Plan, the following terms shall be defined as set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (c) "Committee" means the Committee designated by the Board to administer the Plan. (d) "Company" means Neoware Systems , Inc., its Subsidiaries or any successor organization. (e) "Disability" means permanent and total disability within the meaning of Section 22(e)(3) of the Code. (f) "Disinterested Person" shall have the meaning set forth in the Rules. (g) "Eligible Independent Contractor" means an independent contractor hired by the Company who is neither an Employee of the Company nor a Non-Employee Director. (h) "Employee" means any person, including a director, who is employed by the Company and is compensated for such employment by a regular salary. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" means the per share value of the Stock as of any given date, as determined by reference to the price of the last traded share of Stock on the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System for such date or the next preceding date that Stock was traded on such market, or, in the event the Stock is listed on a stock exchange, the closing price per share of Stock as reported on such exchange for such date. (k) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (l) "Insider" means a Participant who is subject to Section 16 of the Exchange Act. (m) "Non-Employee Director" means any member of the Board who is not an Employee of the Company and is not compensated for employment by a regular salary. (n) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (o) "Participant" means an Employee, officer, Non-Employee Director or Eligible Independent Contractor to whom an award is granted pursuant to the Plan. (p) "Plan" means the Information Systems Acquisition Corporation 1995 Stock Option Plan, as hereinafter amended from time to time. (q) "Rules" means Rule 16(b)(3) and any successor provisions promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (r) "Securities Act" shall mean the Securities Act of 1933, as amended. (s) "Securities Broker" means the registered securities broker acceptable to the Company who agrees to effect the cashless exercise of an Option pursuant to Section 5(d) hereof. (t) "Stock" means the Common Stock of the Company, par value $.01 per share. (u) "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below. (v) "Subsidiary" means any corporation owned, in whole or in part, by the Company. SECTION 2. Administration. 2.1 Except as provided in Section 2.2, the portion of the Plan with respect to the grant of Options pursuant to Part II shall be administered by a Committee of not less than three Directors who shall be Disinterested Persons appointed by the Board and who shall serve at the pleasure of the Board; provided further, however, that, notwithstanding the foregoing, Part II of the Plan shall be administered by such number of Disinterested Persons as and to the extent required by the Rules. 2 The Committee shall have the authority to grant pursuant to the terms of the Plan: Stock Options to Employees (including directors who are Employees) and officers of the Company, and Eligible Independent Contractors. In particular, the Committee shall, subject to the limitations and terms of the Plan, have the authority: (i) to select the officers, directors (who are Employees) and other Employees of the Company, and the Eligible Independent Contractors to whom Stock Options may from time to time be granted hereunder; (ii) to determine whether and to what extent incentive Stock Options are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder, including the option or exercise price and any restrictions or limitations, based upon such factors as the Committee shall determine, in its sole discretion; (v) to determine whether and under what circumstances a Stock Option may be exercised and settled in cash or Stock or without a payment of cash; (vi) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the Participant; and (vii) to amend the terms of any outstanding award (with the consent of the Participant) to reflect terms not otherwise inconsistent with the Plan, including amendments concerning exercise price changes, vesting acceleration or forfeiture waiver regarding any award or the extension of a Participant's right with respect to awards granted under the Plan, as a result of termination of employment or service or otherwise, based on such factors as the Committee shall determine, in its sole discretion. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan, provided that the Committee may delegate to the Chief Executive Officer of the Company, or such other officer as may be designated by the Committee, the authority, subject to guidelines prescribed by the Committee, to grant Options to Employees and Eligible Independent Contractors who are not then subject to the provisions of Section 16 of the Exchange Act, and to determine the number of shares to be covered by any such Option, and the Committee may authorize any one or more of such persons to execute and deliver documents on behalf of the Committee, provided that no such delegation may be made that would cause grants of Options to persons subject to Section 16 of the Exchange Act to fail to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. Determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final and binding and conclusive for all purposes and upon all persons. 3 No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Option granted under it. Nothing herein shall be deemed to expand the personal liability of a member of the Board or Committee beyond that which may arise under any applicable standards set forth in the Company's by-laws and Delaware law, nor shall anything herein limit any rights to indemnification or advancement of expenses to which any member of the Board or the Committee may be entitled under any by-law, agreement, vote of the stockholders or directors, or otherwise. 2.2 The portion of the Plan with respect to the grant of Options to Non-Employee Directors pursuant to Part II shall be administered by the Board. The Board shall have the same authority with respect to the grant of Options to Non-Employee Directors under Part II to as is provided to the Committee pursuant to Section 2.1. 2.3 The portion of the Plan with respect to the grant of Options pursuant to Part III shall be administered by the Board. Grants of Stock Options under Part III of the Plan and the amount, price and timing of the awards to be granted will be automatic, as described in Part III hereof. All questions of interpretation of the Plan with respect to the grant of Options pursuant to Part III will be determined by the Board, and such determination shall, unless otherwise determined by the Board, be final and conclusive on all persons having any interest hereunder. SECTION 3. Stock Subject to the Plan. 3.1 The aggregate number of shares of Stock that may be issued or transferred under the Plan is 2,500,000, subject to adjustment pursuant to Section 3.2 below. Such shares may be authorized but unissued shares or reacquired shares. If the number of shares of Stock issued under the Plan and the number of shares of Stock subject to outstanding awards (taking into account the share counting requirements established under the Rules) equals the maximum number of shares of Stock authorized under the Plan, no further awards shall be made unless the Plan is amended in accordance with the Rules or additional shares of Stock become available for further awards under the Plan. If and to the extent that Options granted under the Plan terminate, expire or are canceled without having been exercised, such shares shall again be available for subsequent awards under the Plan. 3.2 If any change is made to the Stock (whether by reason of merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares, or exchange of shares or any other change in capital structure made without receipt of consideration), then unless such event or change results in the termination of all outstanding awards under the Plan, the Board or the Committee shall preserve the value of the outstanding awards by adjusting the maximum number and class of shares issuable under the Plan to reflect the effect of such event or change in the Company's capital structure, and by making appropriate adjustments to the number and class of shares subject to an outstanding award and/or the option price of each outstanding Option, except that any fractional shares resulting from such adjustments shall be eliminated by rounding any portion of a share equal to .500 or greater up, and any portion of a share equal to less than .500 down, in each case to the nearest whole number. 4 3.3 In any fiscal year of the Company, the maximum number of shares of Common Stock with respect to which Options may be granted to any Optionee shall not exceed 5% of the Common Stock outstanding, as adjusted for stock splits, stock dividends or other similar changes affecting the Common Stock. SECTION 4. Designation of Optionees. 4.1 Except as provided below, Optionees under Part II of the Plan shall be selected, from time to time, by the Committee from among those Employees and Eligible Independent Contractors who, in the opinion of the Committee, occupy responsible positions and who have the capacity to contribute materially to the continued growth, development and long-term success of the Company and its Subsidiaries. Optionees under Part II may also be selected from among those Non-Employee Directors who, in the opinion of the Board, have the capacity to devote themselves to the Company's success. 4.2 All Non-Employee Directors on the date of grant shall be eligible to receive Options under Part III of the Plan. PART II GRANTS TO EMPLOYEES AND ELIGIBLE INDEPENDENT CONTRACTORS SECTION 5. Stock Options. Any Stock Option granted under Part II of the Plan shall be in such form as the Committee or the Board may from time to time approve. Stock Options granted under Part II of the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. The Board shall have the authority to grant Non-Qualified Stock Options to Non-Employee Directors under Part II. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under Section 422. Options granted hereunder shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee or the Board shall deem appropriate: 5 5.1 Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee or the Board at the time of grant; provided, however, that the option price per share for any Stock Option shall be not less than 100% of the Fair Market Value of the Stock on the date of grant. Any Incentive Stock Option granted to any optionee who, at the time the Option is granted, owns more than 10% of the voting power of all classes of stock of the Company or of a Parent or Subsidiary corporation (within the meaning of Section 424 of the Code), shall have an exercise price no less than 110% of Fair Market Value per share on the date of the grant. 5.2 Option Term. The term of each Stock Option shall be fixed by the Committee or the Board, but no Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. However, any Incentive Stock Option granted to any optionee who, at the time the Option is granted, owns more than 10% of the voting power of all classes of stock of the Company or of a Parent or Subsidiary corporation may not have a term of more than five years. No Option may be exercised by any person after expiration of the term of the Option. 5.3 Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee or the Board at or after grant. If the Committee or the Board provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee or the Board may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee or the Board shall determine, in its sole discretion. 5.4 Method of Exercise. Subject to whatever installment exercise provisions apply under Section 5.3, Stock Options may be exercised in whole or in part at any time and from time to time during the Option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by cash, check, or such other instrument as the Committee or the Board may accept. As determined by the Committee or the Board, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (based upon the Fair Market Value of a share of Stock on the business date preceding tender if received prior to the close of the stock market and at the Fair Market Value on the date of tender if received after the stock market closes); provided, however, that, (i) in the case of an Incentive Stock Option, the right to make a payment in the form of unrestricted Stock already owned by the optionee may be authorized only at the time the Option is granted and (ii) the Company may require that the Stock has been owned by the Participant for a minimum period of time specified by the Committee or the Board. In addition, if such unrestricted Stock was acquired through exercise of an Incentive Stock Option, such Stock shall have been held by the optionee for a period of not less than the holding period described in Section 422(a)(1) of the Code on the date of exercise, or if such Stock was acquired through exercise of a Non-Qualified Stock Option or of an option under a similar plan of the Company, such Stock shall have been held by the optionee for a period of more than one year on the date of exercise, and further provided that the optionee shall not have tendered Stock in payment of the exercise price of any other Option under the Plan or any other stock option plan of the Company within six calendar months of the date of exercise. 6 To the extent permitted under the applicable laws and regulations, at the request of the Participant, and with the consent of the Committee or the Board, the Company shall permit payment to be made by means of a "cashless exercise" of an Option. Payment by means of a cashless exercise shall be effected by the Participant delivering to the Securities Broker irrevocable instructions to sell a sufficient number of shares of Stock to cover the cost and expenses associated therewith and to deliver such amount to the Company. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall not have any right to dividends or other rights of a stockholder with respect to shares subject to the Option until such time as Stock is issued in the name of the optionee following exercise of the Option in accordance with the Plan. 5.5 Stock Option Agreement. Each Option granted under this Plan shall be evidenced by an appropriate Stock Option agreement, which agreement shall expressly specify whether such Option is an Incentive Stock Option or a Non-Qualified Stock Option and shall be executed by the Company and the optionee. The agreement shall contain such terms and provisions, not inconsistent with the Plan, as shall be determined by the Committee or the Board. Such terms and provisions may vary between optionees or as to the same optionee to whom more than one Option may be granted. 5.6 Replacement Options. If an Option granted pursuant to the Plan may be exercised by an optionee by means of a stock-for-stock swap method of exercise as provided in 5.4 above, then the Committee or the Board may, in its sole discretion and at the time of the original Option grant, authorize the Participant to automatically receive a replacement Option pursuant to this part of the Plan. This replacement Option shall cover a number of shares determined by the Committee or the Board, but in no event more than the number of shares equal to the difference between the number of shares of the original Option exercised and the net shares received by the Participant from such exercise. The per share exercise price of the replacement Option shall equal the then current Fair Market Value of a share of Stock, and shall have a term extending to the expiration date of the original Option. The Committee or the Board shall have the right, in its sole discretion and at any time, to discontinue the automatic grant of replacement Options if it determines the continuance of such grants to no longer be in the best interest of the Company. 5.7 Non-transferability of Options. No Stock Option shall be transferable by the optionee other than by will, by the laws of descent and distribution, pursuant to a qualified domestic relations order, or as permitted under the Rules, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the Committee or the Board may grant non-qualified Options that are transferable, without payment of consideration, to immediate family members (i.e., spouses, children and grandchildren) of the Optionee or to trusts for, or partnerships whose only partners are, such family members. The Committee or the Board may also amend outstanding non-qualified Options to provide for such transferability. 5.8 Termination of Employment by Reason of Death. Unless otherwise determined by the Committee at or after grant, if any optionee dies during the optionee's period of employment by the Company, or during the periods referred to in Sections 5.9, 5.10 or 5.11, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Committee may determine at or after grant, by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such shorter period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. 7 5.9 Termination of Employment by Reason of Disability. Unless otherwise determined by the Committee at or after grant, if an optionee's employment by the Company terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Committee may determine at or after grant, for a period of one year (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. 5.10 Termination of Employment Upon Retirement. Unless otherwise determined by the Committee at or after grant, if an optionee's employment terminates due to retirement (as hereinafter defined), any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the date of retirement, or on such accelerated basis as the Committee may specify at grant, for a period of one-year (or such shorter period as the Committee may specify at grant) from the date of such retirement or until the expiration of the stated term of such Stock Option, whichever period is shorter. For purposes of this Section 5.10, "Retirement" shall mean any Employee retirement under the Company's retirement policy. 5.11 Other Termination of Employment. Unless otherwise determined by the Committee at or after grant, in the event of termination of employment (voluntary or involuntary) for any reason other than death, Disability or retirement, or if an Employee is terminated for cause, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such termination or on such accelerated basis as the Committee may determine at or after grant, for a period of three months (or such shorter period as the Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is shorter. If an Employee is terminated for cause, any Stock Option held by such Optionee shall terminate immediately. 5.12 Incentive Stock Option Limitation. The aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by the optionee during any calendar year under the Plan and/or any other stock option plan of the Company shall not exceed $100,000. 5.13 Termination of Eligible Independent Contractors Options. The termination provisions of Options granted to Eligible Independent Contractors shall be determined by the Committee in its sole discretion. 8 5.14 Withholding and Use of Shares to Satisfy Tax Obligations. The obligation of the Company to deliver Stock upon the exercise of any Option shall be subject to applicable federal, state and local tax withholding requirements. If the exercise of any Option is subject to the withholding requirements of applicable federal tax laws, the Committee, in its discretion (and subject to such withholding rules ("Withholding Rules") as shall be adopted by the Committee), may permit the optionee to satisfy the federal withholding tax, in whole or in part, by electing to have the Company withhold (or by delivering to the Company) shares of Stock, which Stock shall be valued, for this purpose, at their Fair Market Value on the date the amount of tax required to be withheld is determined (the "Determination Date"). Such election must be made in compliance with and subject to the Withholding Rules, and the Committee may not withhold shares of Stock in excess of the number necessary to satisfy the minimum federal income tax withholding requirements. If Stock acquired under the exercise of an Incentive Stock Option is used to satisfy such withholding requirement, such Stock must have been held by the optionee for a period of not less than the holding period described in Section 422(a)(1) of the Code on the Determination Date. If Stock acquired through the exercise of a Non-Qualified Stock Option or of an option under a similar plan is delivered by the optionee to the Company to satisfy such withholding requirement, such Stock must have been held by the optionee for a period of more than one year on the Determination Date. For Optionees subject to Section 16 of the Exchange Act, to the extent required by Section 16, the election to have Stock withheld by the Corporation hereunder must be either (a) an irrevocable election made six months before the Determination Date; or (b) an irrevocable election where both the election and the Determination Date occur during one of the ten-day periods beginning on the third business day following the date of release of the Company's quarterly or annual summary financial data and ending on the twelfth business day following such release. 5.15 Issuance of Shares and Compliance with Securities Acts. Within a reasonable time after exercise of an Option, the Company shall cause to be delivered to the optionee a certificate for the Stock purchased pursuant to the exercise of the Option. At the time of any exercise of any Option, the Company may, if it shall deem it necessary and desirable for any reason connected with any law or regulation of any governmental authority relative to the regulation of securities, require the optionee to represent in writing to the Company that it is his or her then intention to acquire the Stock for investment and not with a view to distribution thereof and that such optionee will not dispose of such Stock in any manner that would involve a violation of applicable securities laws. In such event, no Stock shall be issued to such holder unless and until the Company is satisfied with such representation. Certificates for shares of Stock issued pursuant to the exercise may bear an appropriate securities law legend. 5.16 Termination of Non-Employee Directors Options. Section 11 of the Plan shall apply to the termination of Options granted to Non-Employee Directors under Part II. 9 PART III GRANTS TO NON-EMPLOYEE DIRECTORS SECTION 6. Grant of Options. Options to purchase 10,000 shares of Common Stock, subject to adjustment as provided in Section 3.2 (the "Initial Options") and options to purchase 5,000 shares, subject to adjustments as provided in Section 3.2, (the "Annual Options"), shall be granted to Non-Employee Directors as follows: (a) Each Non-Employee Director on the 30th day after the stockholders of the Company have approved the Plan shall be granted an Initial Option. (b) Each Non-Employee Director who is not granted an Initial Option pursuant to Section 6(a), shall be granted an Initial Option on the first business day immediately following the date that such person is first elected or appointed to serve as a Non-Employee Director. (c) Each year on January 1, each Non-Employee Director on such date shall be granted an Annual Option. SECTION 7. Types of Options. All options granted under Part III of the Plan shall be non-qualified Stock Options for purposes of the Code. SECTION 8. Option Price. The purchase price of each share of Stock issuable upon exercise of an Option will be equal to the Fair Market Value of the Stock on the date of grant. SECTION 9. Option Term and Rights to Exercise. 9.1 Period of Option and Rights to Exercise. Except as set forth herein, each Non-Employee Director who receives options under this Plan must continue to hold office as a Non-Employee Director of the Company for six months from the date that the Initial Option is granted and six months from the date each Annual Option is granted before he can exercise any part thereof. Thereafter, subject to the provisions of the Plan, options will vest and be exercisable as follows: (a) Initial Options. (i) Each Initial Option will vest and be exercisable in full six months from the date of grant. (ii) The right to exercise an Initial Option will expire on the fifth anniversary of the date on which the option was granted. 10 (iii) Once an Initial Option has become exercisable, such option may be exercised in whole at any time or in part from time to time until the expiration of the option, whether or not any option granted previously to the optionee remains outstanding at the time of such exercise. (b) Annual Options. (i) Each Annual Option will vest and be exercisable on a cumulative basis as to 2,500 shares beginning six months from the date of grant and 2,500 additional shares beginning on the first anniversary of the date of grant. (ii) The right to exercise an Annual Option will expire on the fifth anniversary of the date on which the option was granted. (iii) Once each installment of an Annual Option has become exercisable, it may be exercised in whole at any time or in part from time to time until the expiration of the option, whether or not an option granted previously to the optionee remains outstanding at the time of such exercise. SECTION 10. Payment of Option Price. Payment or provision for payment of the purchase price shall be made as follows: (i) in cash or check; (ii) by exchange of Stock valued at its Fair Market Value on the date of exercise; (iii) by means of a cashless exercise procedure by the delivery to the Company of an exercise notice and irrevocable instructions to the Securities Broker to sell a sufficient number of shares of Stock to pay the purchase price of the shares of Common Stock as to which such exercise relates and to deliver promptly such amount to the Company; or (iv) by any combination of the foregoing. Where payment of the purchase price is to be made with shares of Stock acquired through exercise of a non-qualified Stock Option or of an option under a similar plan of the Company, such Stock shall have been held by the optionee for a period of more than one year on the date of exercise, and further provided that the optionee shall not have tendered Stock in payment of the exercise price of any other Option under the Plan or any other stock option plan of the Company within six calendar months of the date of exercise. SECTION 11. Termination of Service. Upon cessation of service as a Non-Employee Director (for reasons other than retirement or death), including cessation of service due to physical or mental disability that prevents such person from rendering further services as a Non-Employee Director, only those options exercisable at the date of cessation of service shall be exercisable by the Non-Employee Director. Such options shall be exercisable for a period of three months from cessation of service of the Non-Employee Director or the expiration of the Option, whichever period is shorter. 11 Upon the retirement or death of a Non-Employee Director, options shall be exercisable as follows: (a) Retirement. Upon retirement as a Non-Employee Director after the Non-Employee Director has served for at least six consecutive years as a director, all Options shall continue to be exercisable during their terms as if such person had remained a Non-Employee Director. (b) Death. In the event of the death of a Non-Employee Director while a member of the Board, or within the period after termination of service referred to in the first paragraph of Section 11, the Options granted to him shall be exercisable, to the extent then exercisable, for a period of one year from the date of the Non-Employee Director's death, or until the expiration of the Option, whichever period is shorter. SECTION 12. No Guaranteed Term of Office. Nothing in this Plan or any modification thereof, and no grant of an option, or any term thereof, shall be deemed an agreement or condition guaranteeing to any Non-Employee Director any particular term of office or limiting the right of the Company, the Board or the stockholders to terminate the term of office of any Non-Employee Director under the circumstances set forth in the Company's Certificate of Incorporation or Bylaws, or as otherwise provided by law. SECTION 13. Other Restrictions. Sections 5.5, 5.7 and 5.15 of the Plan shall apply to options granted pursuant to Part III of the Plan. PART IV MISCELLANEOUS SECTION 14. Change in Control. A "Change in Control" for purposes of this Plan shall mean any one of the events described below: 14.1 at any time during a period of two (2) consecutive years, at least a majority of the Board shall not consist of Continuing Directors. "Continuing Directors" shall mean directors of the Company at the beginning of such two-year period and directors who subsequently became such and whose selection or nomination for election by the Company's shareholders was approved by a majority of the then Continuing Directors; or 14.2 any person or "group" (as determined for purposes of Regulation 13D-G promulgated by the Commission under the Exchange Act or under any successor regulation), but excluding any majority-owned subsidiary or any employee benefit plan sponsored by the Company or any subsidiary or any trust or investment manager for the account of such a plan, shall have acquired "beneficial ownership" (as determined for purposes of such regulation) of the Company's securities representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities unless such acquisition is approved in advance by a majority of the directors of the Company who were in office immediately preceding such acquisition and any individual selected to fill any vacancy created by reason of the death or disability of any such director; or 12 14.3 the Company becomes a party to a merger, consolidation or share exchange in which either (i) the Company will not be the surviving corporation or (ii) the Company will be the surviving corporation and any outstanding shares of Common Stock will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change in ownership of the Company or other securities or cash or other property (excluding payments made solely for fractional shares); or 14.4 the Company's shareholders (i) approve any plan or proposal for the disposition or other transfer of all, or substantially all, of the assets of the Company, whether by means of a merger, reorganization, liquidation or dissolution or otherwise or (ii) dispose of, or become obligated to dispose of, 50% or more of the outstanding capital stock of the Company by tender offer or otherwise. If a Change in Control has occurred, all outstanding options granted under the Plan shall be immediately exercisable by the holder of the option for the total remaining number of Shares covered by the option and shall survive any such event. SECTION 15. Amendments and Termination. The Board may amend, alter or discontinue the Plan at any time and from time to time, but no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee or Participant under a Stock Option award theretofore granted, without the optionee's or Participant's consent, or which, without the approval of the Company's stockholders, would require stockholder approval under the Rules. Except for awards made pursuant to Part III, the Committee or the Board may amend the terms of any Stock Option theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without the holder's consent. Except for awards made to Non-Employee Directors pursuant to Part III, the Committee may also substitute new Stock Options for previously granted Stock Options, including previously granted Stock Options having higher option prices. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable tax laws, securities laws and accounting rules, as well as other developments. 13 SECTION 16. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan of incentive and deferred compensation. With respect to any payments not yet made to a Participant or optionee by the Company, nothing contained herein shall give any such Participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 17. General Provisions. 17.1 All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee or the Board may deem advisable under the rules, regulations and other requirements of the Securities Act, the Exchange Act, any stock exchange or over-the-counter market upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee or the Board may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 17.2 Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required, and such arrangements may be either generally applicable or applicable only in specific cases. 17.3 The adoption of the Plan shall not confer upon any Participant any right to continued employment with the Company nor shall it interfere in any way with the right of the Company to terminate its relationship with any of its Employees, directors or Independent Contractors at any time. 17.4 No later than the date as of which an amount first becomes includable in the gross income of the Participant for federal income tax purposes with respect to any award under the Plan, the Participant who is an Employee of the Company shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. To the extent permitted by the Committee, in its sole discretion, the minimum required withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. 17.5 The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid. 14 17.6 The Plan shall be governed by and subject to all applicable laws and to the approvals by any governmental or regulatory agency as may be required. SECTION 18. Effective Date and Term of Plan. The Plan shall be effective as of the effective date of the merger of Human Designed Systems, Inc. with and into ISAC Acquisition Co., a wholly-owned subsidiary of the Company (the "Effective Date"), subject to the consent or approval of the Company's stockholders as provided below. No Stock Option award shall be granted pursuant to the Plan on or after ten years from the Effective Date, but Stock Options granted prior to such tenth anniversary may be exercised after such date. If the Plan is not approved by a majority of the votes cast at a duly held meeting at which a quorum representing a majority of all outstanding voting stock of the Company is, either in person or by proxy, present and voting on the Plan, within 12 months after such effective date, any Incentive Stock Options that have been granted shall automatically become Non-Qualified Stock Options. SECTION 19. Interpretation. A determination of the Committee or the Board as to any question which may arise with respect to the interpretation of the provisions of this Plan or any Options shall be final and conclusive, and nothing in this Plan, or in any regulation hereunder, shall be deemed to give any Participant, his legal representatives, assigns or any other person any right to participate herein except to such extent, if any, as the Committee or the Board may have determined or approved pursuant to this Plan. The Committee or the Board may consult with legal counsel who may be counsel to the Company and shall not incur any liability for any action taken in good faith in reliance upon the advice of such counsel. SECTION 20. Governing Law. With respect to any Incentive Stock Options granted pursuant to the Plan and the agreements thereunder, the Plan, such agreements and any Incentive Stock Options granted pursuant thereto shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the laws of the State of Delaware shall govern the operation of, and the rights of Participants under, the Plan, the agreements and any Options granted thereunder. SECTION 21. Compliance With The Rules. 21.1 Unless an Insider could otherwise transfer shares of Stock issued hereunder without incurring liability under Section 16(b) of the Exchange Act, at least six months must elapse from the date of grant of an Option to the date of disposition of the Stock issued upon exercise of such Option. 21.2 It is the intent of the Company that this Plan comply in all respects with the Rules in connection with any grant of Options to, or other transaction by, an Insider. Accordingly, if any provision of this Plan or any agreement relating to an Option does not comply with the Rules as then applicable to any such Insider, such provision will be construed or deemed amended to the extent necessary to conform to such requirements with respect to such person. In addition, neither the Committee nor the Board shall have authority to make any amendment, alteration, suspension, discontinuation, or termination of the Plan or any agreement hereunder, or take other action if such authority would cause an Insider's transactions under the Plan not to be exempt under the Rules. 15 21.3 Certain restrictive provisions of the Plan have been implemented to facilitate the Company's and Insiders' compliance with the Rules. The Committee or the Board, in its discretion, may waive certain of these restrictions, provided the waiver does not relate in any way to an Insider and, provided further, such waiver or amendment is carried out in accordance with Section 6 hereof. SECTION 22. Substitution of Options in a Merger, Consolidation or Share Exchange. In the event that the Company becomes a party to a merger, consolidation or share exchange (a "Business Combination") and in connection therewith substitutes options under the Plan for options of another party to such Business Combination, notwithstanding the provisions of the Plan, the terms of such substituted options may have the same terms and conditions (provided that the number of shares issuable and the exercise prices are adjusted in accordance with the terms of the Business Combination) as the former options of such other party to the Business Combination, provided, however, that the exercise price of the Options to be granted under the Plan shall be lawful consideration as determined by the Committee or the Board. 16 EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 February 14, 2000 By EMAIL - -------- Edward C. Callahan, Jr. 515 Day Spring Lane West Chester, PA 19382-8554 Re: Separation Agreement -------------------- Dear Ed: This letter is to confirm your voluntary resignation from your position as President and Chief Executive Officer and as a director of Neoware Systems, Inc. (the "Company") effective as of the date hereof, your agreement to remain as a non-officer employee of the Company for the period from February 14, 2000 until April 30, 2000, and your termination of employment with the Company effective on April 30, 2000 (the "Termination Date"). In an effort to provide you with certain benefits relating to your voluntary resignation from your position as President and Chief Executive Officer, the Company proposes the following agreement ("Agreement"), which includes a general release: 1. In consideration for your general release and your fulfillment of the various undertakings set forth in this Agreement, the Company agrees as follows: (a) During the period from February 14, 2000 until April 30, 2000, the Company will employ you as a non-officer employee of the Company and will pay you your current base salary and benefits, at regular pay intervals and less taxes and other deductions required by law to be withheld. In addition, as previously agreed, the Company will pay you a total of $10,500, for the reduction in your 1999 wages, payable in two equal payments of $5,250 on March 31, 2000 and June 30, 2000. (b) During the period from May 1, 2000 until the earlier of (i) April 30, 2001 and (ii) the date you first become eligible for group health plan coverage not maintained by the Company, the Company will pay you $518.90 per month toward your payment for personal health care insurance. Edward C. Callahan, Jr. February 14, 2000 Page 2 (c) The Company has previously granted to you options to acquire a total of 385,000 shares of the Company's common stock. Notwithstanding the release set forth in paragraph 2(a), and subject to your agreement in paragraph 2(d), the Company acknowledges that the provisions of the Company's 1995 Stock Option Plan and your option agreement (including the vesting schedule) will continue to apply to your options in accordance with the terms of the Plan and your option agreement. (d) The Company agrees that you may keep the following property that was provided to you for use: pager, Toshiba Portege laptop computer and its ethernet adaptor, and the two refurbished NeoStations that you keep at home. (e) The Company, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby releases and forever discharges you from any and all claims or causes of action of any type or nature whatsoever, known or unknown, the Company now has or hereafter can or shall have against you or may have arising out of or relating to your employment relationship and position as a director of the Company and the termination thereof. 2. In consideration for the Company's promises in paragraph 1, and intending to be legally bound, you represent, warrant and agree as follows: (a) You agree that you hereby voluntarily resign as President and Chief Executive Officer and as a director of the Company effective as of the date hereof. (b) Subject to paragraph 3, you agree that from and after February 14, 2000 until April 30, 2000 you will serve as an employee of the Company, and will provide such services as may be reasonably requested by the Company. You agree that in such position, you will no longer be an officer of the Company. (c) By your signature on this Agreement, you release and forever discharge the Company and its affiliates, and the past, present and future officers, directors, attorneys, employees, shareholders and agents of each of the foregoing, as well as their respective heirs, legal representatives, successors and assigns (collectively "Released Parties"), jointly and severally, from any and all actions, charges, causes of action or claims of any kind (collectively "claims"), know or unknown, which you, your heirs, legal representatives, agents, or anyone claiming by or through you, ever had, now have or hereafter may have against any of the Released Parties arising out of any matter, occurrence or event existing or occurring prior to the date you execute this Agreement; whether known or unknown, asserted or not, regarding any alleged violation of any statute or common law, now existing or hereafter recognized and including but not limited to any claims for attorneys' fees. The general release provided for in this paragraph 2(a) does not apply to (i) any claims to enforce this Agreement; any rights to indemnification by the Company for acts or matters occurring prior to the Termination Date to the extent required pursuant to the Company's Bylaws or the Delaware General Corporation Law, in each case as in effect on the Termination Date; or your rights, if any, under any directors and officers insurance policy purchased by the Company and in effect in respect of periods on or prior to February 14, 2000. Edward C. Callahan, Jr. February 14, 2000 Page 3 (d) You agree that your options to purchase 192,500 shares of the Company's common stock are hereby canceled and that you will have no further rights to such options. (e) You shall not at any time after the date of this letter disparage or deprecate the Company or its affiliates or any of their officers, directors, employees, stockholders or principals, or any of their operations, assets, services, work product, character, motives or financial standing. Further, you agree to keep the terms and conditions of this Agreement secret and confidential and not to disclose them voluntarily to any third party, except to the extent required by law, to enforce the Agreement or to obtain confidential legal, tax or financial advice. You shall maintain the confidentiality of and not reveal to any third parties any information (including but not limited to financial information, pricing information, customer lists or information), documents, plans, programs, policies or other material of the Company which are confidential or secret to the Company or in which the Company has a proprietary interest. In making this agreement, you acknowledge that any violation or breach of this commitment by you will cause immediate, irreparable and substantial harm to the Company and that the Company will be entitled to appropriate injunctive and other relief, including monetary damages, against you in a court of competent jurisdiction. This undertaking to preserve confidential information is not intended to serve as a covenant against competition. (f) You agree that you will return to the Company on the Termination Date all memoranda, notes, records, reports, manuals, drawings and other documents (and all copies thereof whether in written form or on computer disk or tape) relating to the business of the Company and/or its affiliates and all property associated therewith, which you possess or have under your control on the Termination Date. Without limiting the generality of the foregoing, you agree to return to the Company all copies of all data bases containing information about the Company and/or its affiliates, regardless of whether such information is in hard copy or stored electronically or on tape. You agree that on and after the Termination Date, you will not seek to access the information systems of the Company or its affiliates for any purpose whatsoever. (g) (i) Until April 30, 2001, you shall not, unless acting with the prior written consent of the board of directors of the Company, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, adviser, employee, partner, principal, agent, representative, consultant or otherwise with or use or permit your name to be used in connection with, any of the Company's Competitors (as hereinafter defined). You recognize that the Company's business is and will continue to be international in scope, and that geographical limitations on this non-competition covenant (and the non-solicitation covenant set forth in paragraph 2(g) hereof) are therefore not appropriate. For purposes of this Agreement, the term "Competitors" shall be defined as WYSE Technology, Inc., Network Computing Devices, Inc., Boundless Technologies and the network computer division of International Business Machines Corporation. Edward C. Callahan, Jr. February 14, 2000 Page 4 (ii) The foregoing restriction shall not be construed to prohibit your ownership of not more than 5% of any class of securities of any of the Competitors having a class of securities registered pursuant to the Securities Exchange Act of 1934 as amended (the "Exchange Act"), provided that such ownership represents a passive investment and that neither you nor any group of persons including yourself in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business other than exercising your rights as a shareholder, or seeks to do any of the foregoing. (h) Until April 30, 2001, you shall not, either directly or indirectly, (i) call on or solicit any person, firm, corporation or other entity who or which at any time during the period from the date hereof to April 30, 2001 was a customer of the Company or any of its subsidiaries or affiliates with respect to the business conducted by or anticipated to be conducted by the Company on February 14, 2000 or (ii) solicit the employment of any person who was employed by the Company or any of its subsidiaries or affiliates on a full or part-time basis at anytime during the period from the date hereof to April 30, 2001. (i) You agree that the release set forth in paragraph 2(a) above specifically includes a release of any and all claims arising under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), and any state or local discrimination laws. You acknowledge that you are being given twenty-one (21) days in which to consider whether you wish to sign this Agreement and to decide whether to enter it to it. Once you sign this Agreement, you shall then have seven (7) days in which to change your mind and revoke it. If you choose to revoke this Agreement, you must send your revocation in writing by facsimile or overnight mail to Vincent T. Dolan, Vice President-Finance and Administration, 400 Feheley Drive, King of Prussia, Pennsylvania 19406 (j) You and your attorneys, accountants and other advisers have been provided with full and free access and opportunity to inspect, review, examine and inquire about all books, records and information of the Company and your options, and the shares issuable upon exercise of the options, and you and your advisers have made such inspection, review, examination and inquiry as you have deemed appropriate. (k) You and your advisers have been offered the opportunity to ask such questions and obtain additional information concerning the Company, its business and affairs, and the options, and the shares issuable upon exercise of the options, as you have requested so as to understand the consequences of the exercise of the options, and the shares issuable upon exercise of the options, and to verify the accuracy of the information obtained as a result of your investigation. Edward C. Callahan, Jr. February 14, 2000 Page 5 3. If you terminate your employment with the Company prior to April 30, 2000, your salary and benefits will continue from the date of termination until April 30, 2000 (the "Consulting Term"), provided that during the Consulting Term, you will be available to provide consulting services to the Company, as reasonably requested by the Company. You will have complete discretion to select the specific date and times for performance of such consulting services. During the Consulting Term, the Company will pay you your compensation at such times as the Company pays its executive officers. In addition, you understand that if you terminate your employment on or before March 3, 2000, you will only be entitled to exercise options to acquire 96,250 shares of the Company's common stock. 4. The Company's obligations under paragraph 1 above will cease if you: (1) initiate an action against any of the Released Parties with respect to a claim that has been released pursuant to paragraph 2(c) above; or (2) breach any of the representations, warranties or agreements set forth in paragraph 2. 5. You acknowledge and agree that the benefits you will receive under paragraph 1 above exceed the money and benefits to which you otherwise would be entitled, and that such excess is sufficient consideration to support the grant of the general release in paragraph 2(c) above and to support your other undertakings set forth in paragraph 2 above. More specifically, if you do not execute this Agreement, which includes a general release, or if you revoke your acceptance, your employment will be deemed to be terminated on February 14, 2000 and you will only be entitled to receive your base salary and standard Company benefits for a period of one year. 6. Consistent with Company policy, and notwithstanding anything to the contrary in this Agreement, you understand that your final regular paycheck will include payment for all accrued and unused vacation. 7. This Agreement sets forth our complete understanding and agreement and supersedes all prior agreements between us, oral or written, express or implied. 8. This Agreement is being offered for the purpose of assisting you in your transition. This Agreement should not be construed as an admission or concession of liability or wrongdoing by the Company or by you. 9. If any provision of this Agreement is deemed unlawful or unenforceable by a court of competent jurisdiction, the remaining provisions shall continue in full force and effect. 10. By your execution of this Agreement, your represent, warrant and agree that: Edward C. Callahan, Jr. February 14, 2000 Page 6 (a) You have read carefully the terms of this Agreement, including the general release. (b) You have had an opportunity to and have been encouraged to review this Agreement, including the general release, with an attorney. (c) You understand the meaning and effect of the terms of this Agreement, including the general release. (d) You were given sufficient time to determine whether you wished to enter into this Agreement, including the general release. (e) The entry into and execution of this Agreement, including the general release, is your own free and voluntary act without compulsion of any kind. (f) No promise or inducement not expressed herein has been made to you. You have from February 14, 2000 through and including March 6, 2000 to consider this offer. You are encouraged to review this Agreement with an attorney. If you agree with the proposed terms as set forth above, please sign this Agreement indicating your understanding and agreement and the attached Acknowledgment of Rights under the Older Workers Benefit Protection Act and return them to me on or before the close of business on March 6, 2000. The additional copies are for your records. Please note that if you sign this Agreement, you will retain the right to revoke it for seven (7) days. The Agreement will not be effective until the revocation period has expired. To revoke the Agreement, you must send a certified letter to my attention. This letter must be post-marked within seven (7) days of you execution of this Agreement. If I do not receive a signed copy of this Agreement by the close of business on March 6, 2000, I will assume that you have rejected this offer. If this offer is rejected, your employment shall nevertheless be deemed to have terminated effective February 14, 2000. We wish you the best in the future. Sincerely, Understood and Agreed, intending to be legally bound: Edward C. Callahan, Jr. _____________________________________ Date:________________________________ Witness:_____________________________ ACKNOWLEDGMENT OF RIGHTS UNDER OLDER WORKERS BENEFIT PROTECTION ACT I, ___________________, acknowledge that I have read and understand the attached separation and consulting agreement ("Agreement"). I further understand that this Agreement is revocable by me for a period of seven (7) days following execution thereof, and that this Agreement shall not become effective or enforceable until this seven-day revocation period has ended. I understand that if I sign the attached Agreement and accept the agreed-upon payments described herein, I am giving up my right to file or pursue a complaint with the Equal Employment Opportunity Commission, the Department of Labor, state civil rights agencies and federal and state courts with respect to any claims relating to age discrimination arising under the Age Discrimination in Employment Act of 1967, as amended, or under any state or local discrimination laws. I acknowledge that I have been encouraged to discuss the release language in the Agreement with an attorney prior to executing the agreement and that I have thoroughly reviewed and understand the effect of the release. I further acknowledge that I have been given twenty-one (21) days in which to consider the Agreement and that, if I sign the Agreement before the end of the twenty-one day period, I am doing so freely, voluntarily and after having had full and fair opportunity to consult with my retained counsel. __________________________________ Date: ________________________ Edward C. Callahan, Jr. EX-27 5 FINANCIAL DATA SCHEDULE
5 9-MOS 9-MOS JUN-30-2000 JUN-30-1999 JUL-01-1999 JUN-30-1999 MAR-31-2000 MAR-31-1999 9,092,028 1,470,906 0 0 1,770,594 2,586,693 0 0 981,206 1,324,424 12,593,263 5,646,345 283,898 438,367 0 0 13,270,444 7,325,897 2,158,390 3,223,986 0 0 0 0 0 0 8,781 6,285 11,103,273 4,095,626 13,270,444 7,325,897 7,840,093 7,844,285 7,840,093 7,844,285 6,312,377 6,955,669 0 0 3,236,042 3,367,165 0 (406,930) (86,946) (13,610) (1,621,380) (2,058,009) 0 0 0 0 0 0 0 0 0 0 (1,621,380) (2,058,009) 0 0 0 0
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