<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
NEOWARE SYSTEMS, INC.
- -----------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
___________________________________________________________________________
3) Filing Party:
___________________________________________________________________________
4) Date Filed:
___________________________________________________________________________
<PAGE>
Neoware Systems, Inc.
400 Feheley Drive
King of Prussia, Pennsylvania 19406
November 6, 1998
TO OUR STOCKHOLDERS:
You are cordially invited to attend the Annual Meeting of Stockholders
to be held on Thursday, December 10, 1998, at 10:00 a.m., at the offices of the
Company, 400 Feheley Drive, King of Prussia, Pennsylvania 19406.
The accompanying Notice of Meeting and Proxy Statement describe the
matters to be acted upon during the Annual Meeting. You are welcome to present
your views on these items and other subjects related to the Company's
operations. Your participation in the activities of the Company is important,
regardless of the number of shares you hold.
To ensure that your shares are represented at the Annual Meeting,
whether or not you are able to attend, please complete the enclosed proxy and
return it to us in the postage-paid envelope.
I hope you will attend the Annual Meeting.
Sincerely,
Arthur R. Spector
Chairman of the Board
<PAGE>
NEOWARE SYSTEMS, INC.
----------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 10, 1998
----------
TO THE STOCKHOLDERS:
The Annual Meeting of the Stockholders of Neoware Systems, Inc. (the
"Company"), a Delaware corporation, will be held on Thursday, December 10, 1998,
at 10:00 a.m., at the offices of the Company, 400 Feheley Drive, King of
Prussia, Pennsylvania, for the following purposes:
1. To elect six Directors of the Company.
2. To vote upon a proposal to ratify the selection of Arthur
Andersen LLP as the Company's independent accountants for the
fiscal year ending June 30, 1999.
3. To transact such other business as may properly come before
the Annual Meeting or any adjournments thereof.
Stockholders of record at the close of business on October 28, 1998 are
entitled to notice of, and to vote at, the Annual Meeting and any adjournments
thereof.
All stockholders are cordially invited to attend the Annual Meeting in
person, but whether or not you plan to attend, please promptly sign, date and
mail the enclosed proxy in the return envelope. Returning your proxy does not
deprive you of the right to attend the Annual Meeting and vote your shares in
person.
By Order of the Board of Directors,
Edward T. Lack, Jr
Secretary
King of Prussia, Pennsylvania
November 6, 1998
<PAGE>
NEOWARE SYSTEMS, INC.
---------------
PROXY STATEMENT
---------------
This Proxy Statement is furnished in connection with the solicitation
of proxies at the direction of the Board of Directors of Neoware Systems, Inc.
(the "Company") for use at the Annual Meeting of Stockholders to be held on
December 10, 1998.
Stockholders of record at the close of business on October 28, 1998
will be entitled to vote at the Annual Meeting. At the close of business on
October 28, 1998, 6,264,158 shares of the Company's $0.001 par value common
stock ("Common Stock") were outstanding. The presence at the meeting, in person
or by proxy, of a majority of the outstanding shares, is necessary to constitute
a quorum for the meeting. A stockholder is entitled to one vote for each share
of Common Stock held by such stockholder. For purposes of the quorum and the
discussion below regarding the vote necessary to take stockholder action,
stockholders of record who are present at the meeting in person or by proxy and
who abstain, including brokers holding customers' shares of record who cause
abstentions to be recorded at the meeting, are considered stockholders who are
present and entitled to vote and they count toward the quorum. This Proxy
Statement and the enclosed form of proxy are being mailed to the Company's
stockholders on or about November 6, 1998.
Shares represented by a proxy in the accompanying form, unless
previously revoked, will be voted at the Meeting if the proxy is returned to the
Company properly executed and in sufficient time to permit the necessary
examination and tabulation before a vote is taken. A proxy may be revoked at any
time prior to its exercise by giving written notice to the Secretary of the
Company, by giving a later dated proxy, or by voting in person at the meeting.
Mere attendance at the Annual Meeting will not revoke the proxy. Any specific
instructions indicated on your proxy will be followed. Unless contrary
instructions are given, your proxy will be voted FOR each of the proposals
described in this Proxy Statement and in the discretion of the proxy holders on
such other business as may properly come before the Annual Meeting.
Brokers holding shares for beneficial owners must vote their shares
according to the specific instructions they receive from the owners. If specific
instructions are not received, brokers may vote these shares in their
discretion, except if they are precluded from exercising their voting discretion
on certain proposals pursuant to the rules of the New York Stock Exchange. In
such a case, the broker may not vote on the proposal absent specific voting
instructions. This results in what is known as a "broker non-vote." A broker
non-vote has the effect of a negative vote when a majority of the shares issued
and outstanding is required for approval of the proposal. A broker non-vote has
the effect of reducing the number of required affirmative votes when a majority
of the shares present and entitled to vote or a majority of the votes cast is
required for approval of the proposal. The election of each nominee for director
(Proposal 1) requires a plurality of votes cast. Abstentions and broker
non-votes will not be taken into account in determining the outcome of the
election. Approval of the ratification of the selection of the auditors
(Proposal 2) requires the approval of a majority of the outstanding shares of
Common Stock represented and entitled to vote at the meeting. Shares for which
brokers do not receive instructions are entitled to vote on this matter.
Therefore, abstentions and broker non-votes
<PAGE>
have the effect of negative votes. The New York Stock Exchange determines
whether brokers have discretionary authority to vote on a given proposal.
The cost of proxy solicitation, including the cost of reimbursing banks
and brokers for forwarding proxies and proxy statements to beneficial owners of
the Common Stock, will be paid by the Company. Proxies will be solicited without
extra compensation by certain officers and regular employees of the Company by
mail and, if found to be necessary, by telephone and personal interviews. All
shares represented by valid proxies will be voted.
ELECTION OF DIRECTORS
The By-Laws of the Company presently provide that the Board of
Directors shall designate the number of directors constituting the Board of
Directors. Currently, that number has been fixed by the Board of Directors at
six for the election of directors at the 1998 Annual Meeting. All of the
directors have been selected by the Board of Directors to be elected at the
meeting to serve for one-year terms expiring at the 1999 Annual Meeting and
until their respective successors are elected and qualified.
The names and biographical summaries of the six persons who have been
nominated to stand for election at the 1998 Annual Meeting appear below.
All nominees have indicated that they are willing and able to serve as
directors if elected. In the event that any nominee should become unavailable,
the proxy will be voted for the election of any substitute nominee designated by
the Board of Directors.
The Board of Directors recommends that you vote FOR the election of
each of the nominees for director.
The following biographical information is furnished as to each person
nominated for election as a director.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arthur R. Spector 58 Chairman of the Board
Edward C. Callahan, Jr. 52 President and Chief Executive Officer and Director
Michael G. Kantrowitz 38 Executive Vice President and Director
John M. Ryan (1)(2) 63 Director
Carl G. Sempier (2) 67 Director
Christopher G. McCann 37 Director
</TABLE>
- ----------------------
(1) Member of the Compensation and Stock Option Committee
(2) Member of the Audit Committee
Mr. Spector has been Chairman of the Board of the Company since its
inception. He has been
2
<PAGE>
a Managing Director and a general partner of the management company of Safeguard
International Fund, L.P. since March 1998. Mr. Spector served as Managing
Director of TL Ventures, a venture capital firm, from January 1997 until March
1998. Mr. Spector also served as President and Chief Executive Officer of the
Company from inception until March 2, 1995, the date of the consummation of the
merger (the "Merger") of the Company with Human Designed Systems, Inc. ("HDS"),
and from May 1996 to June 1997. He was affiliated with Safeguard Scientifics,
Inc. from January 1993 until December 1996. From July 1992 until May 1995, he
was Vice Chairman of Casino & Credit Services, Inc., a company which operated
nationwide debt collection and credit database businesses. From October 1991
until December 1996, Mr. Spector served as Chief Executive Officer and a
director of Perpetual Capital Corporation, a merchant banking organization. Mr.
Spector is also a Director of USDATA Corporation, a developer of software tools
for real-time data collection and control, DocuCorp, a developer of document
automation software, Metallurg, Inc., Metallurg Holdings, Inc. and Broadreach
Consulting, Inc. (formerly The Reohr Group, Inc.). See "Certain Transactions."
Mr. Callahan has been President and Chief Executive Officer and a
Director of the Company since June 1997. Prior to joining the Company, Mr.
Callahan was President and Chief Operating Officer of Summa Four, Inc. of
Manchester, NH, a provider of telecommunications switches, from June 1995 until
November 1996. Beginning in 1985, Mr. Callahan also held various executive
positions during a ten year tenure at Sun Microsystems Computer Corporation. He
was most recently Vice President of Global Telecom and Cable; previously, he was
Vice President of Strategic Accounts and Vice President of Northeast Area.
Mr. Kantrowitz has been Executive Vice President and a Director of the
Company since March 2, 1995. Prior to that, he was an employee of HDS from 1983,
holding the positions of Executive Vice President from 1991 until March 1995 and
Vice President of Marketing and Sales from 1987 until 1991. Prior to joining
HDS, Mr. Kantrowitz held positions with Raytheon Company and Adage Corporation.
Mr. Ryan has served as a director of the Company since March 2, 1995.
He is currently the principal in Devon Hill Ventures, a venture investing and
consulting firm which focuses on technology investments. Mr. Ryan is also a
director of a number of private companies, including DTX Corporation, Quadritek
Systems, Inc. and Control Software, Inc. Mr. Ryan was the founder of SunGard
Data Systems, Inc., a publicly-held computer services company, and served as its
Chairman and Chief Executive Officer from 1976 to 1987. From 1987 to 1989, he
was the President of Devon Hill Company, a merger and acquisition and venture
investing firm. From 1989 to 1991, Mr. Ryan was the Chairman of PC Concepts,
Inc., a computer training company, and President and Chief Executive Officer of
Analytics, Inc., a technical services company. From 1995 to 1997, Mr. Ryan was
Chairman and Chief Executive Officer of DLB Systems, Inc., a software company.
Mr. Sempier has served as a director of the Company since March 2,
1995. He has been associated with Safeguard Scientifics, Inc. since 1990 and
currently serves as Vice Chairman of Safeguard International Group, Inc. Mr.
Sempier also serves as Managing Director of Ditec AG Germany, an information
technology services company. From 1980 until his retirement in 1988, he was the
President and Chief Executive Officer of Mannington Mills, Inc., a manufacturer
of flooring.
3
<PAGE>
He is also a director of Premier Solutions Limited, a supplier of asset
management solutions to financial institutions, and Tangram Enterprise
Solutions, Inc., a publicly-traded company providing network and connectivity
software to corporations and government entities.
Mr. McCann has been Senior Vice President of 1-800-FLOWERS, a florist
company which operates nationwide through franchised retail stores, telecenters
and the Internet, since 1988. Mr. McCann is responsible for overseeing
operations of 1-800-FLOWERS' telecenters and franchised stores and for its
Interactive Services Division. Prior to his association with 1-800-FLOWERS, he
was President of Flora Plenty, a floral retail chain located in the New York
metropolitan area. See "Certain Transactions."
Board of Directors and Committees
The Company's Board of Directors held seven meetings during the year
ended June 30, 1998. Each of the current directors attended at least 78% of the
meetings of the Board and Committees on which they serve held during the period
for which such persons have been directors or committee members.
The standing committees of the Board of Directors are the Compensation
and Stock Option Committee and the Audit Committee. These committees held three
meetings and two meetings, respectively, during the year ended June 30, 1998.
The responsibilities of the Compensation and Stock Option Committee
include the review of compensation practices, the determination of salaries and
bonus awards of executive officers and the administration of the Company's 1995
Stock Option Plan of the Company.
The duties of the Audit Committee include the selection of independent
accountants subject to the approval of the stockholders, the review of the scope
and results of the audit and the review of the organization and scope of the
Company's internal auditing and financial controls.
Compensation of Directors
Directors (other than those who are employees of the Company) receive a
cash payment of $1,000 for each Board meeting attended, and receive a one-time
grant of 10,000 options upon a director's initial election. Thereafter
non-employee directors receive an annual grant of 5,000 options.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during the fiscal years ended June 30, 1998, 1997 and 1996 to
the Company's Chief Executive Officer and each of the Company's three other most
highly compensated executive officers whose total salary and bonus earned during
the 1998 fiscal year exceeded $100,000.
4
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------------- --------------------------------
Other Annual Securities
Name and Principal Fiscal Compensation Underlying All Other
Position Year Salary ($) Bonus($) ($)(1) Options(#)(2) Compensation $
- --------------------------- ------- ---------- -------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Callahan, Jr. 1998 210,000 42,000 --- 385,000 (2) ---
President and 1997 8,077 60,000 --- 385,000 ---
Chief Executive Officer
Michael G. Kantrowitz 1998 168,210 --- --- 220,000 (2) 1,081 (3)
Executive Vice President 1997 150,000 62,999 --- 20,000 3,000 (3)
1996 125,000 9,431 --- --- 500 (3)
Edward M. Parks 1998 134,231 --- --- 170,000 (2) 1,450 (3)
Vice President of 1997 130,000 32,570 --- 20,000 2,600 (3)
Engineering 1996 100,000 26,275 --- --- 500 (3)
Steven Ahlbom 1998 114,171 --- --- 110,000 (2) 1,573 (3)
Vice President of 1997 111,134 15,875 --- 20,000 2,223 (3)
Operations 1996 97,500 --- --- --- 500 (3)
</TABLE>
- -------------------
(1) Amount does not exceed the lesser of $50,000 or 10% of total salary and
bonus.
(2) Includes options reissued as replacements for prior options which were
canceled as a result of a repricing program as follows: Mr. Callahan,
385,000 options; Mr. Kantrowitz, 220,000 options; Mr. Parks, 120,000
options; and Mr. Ahlbom, 90,000 options.
(3) Consists of amounts contributed by the Company under the 401(k) Plan.
Option Grants During 1998 Fiscal Year
<TABLE>
<CAPTION>
Potential Realization Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term(1)
- -------------------------------------------------------------------------------------- -----------------------------------------
No. of % of Total
Securities Options Granted
Underlying to
Options Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price($) Date 0%($) 5%($) 10%($)
- --------------- ----------- -------------- -------- ---------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Edward C. Callahan, Jr. 385,000(2) 32.2 3.00 03/03/03 --- --- 279,167
Michael G. Kantrowitz 220,000(2) 18.4 3.00 03/03/03 --- --- 159,524
Edward M. Parks 120,000(2) 10.0 3.00 03/03/03 --- --- 87,013
50,000 4.2 3.00 06/30/03 --- 33,465 81,511
Steven Ahlbom 90,000(2) 7.5 3.00 03/03/03 --- --- 65,260
20,000 1.7 3.00 06/30/03 --- 13,386 32,604
</TABLE>
- ---------------
(1) These amounts, based on assumed appreciation rates of 0%, 5% and 10%
prescribed by the Securities and Exchange Commission rules, are not
intended to forecast possible future appreciation, if any, of the Company's
stock price.
(2) Reflects a replacement option issued as a part of a repricing program. See
"Compensation and Stock Option Report on Repricing."
5
<PAGE>
Aggregated Option Exercises During 1998 Fiscal Year
and Fiscal Year-End Option Values
The following table provides information related to options exercised
by the named executive officers during fiscal 1998 and the number of the
Company's options held at fiscal year-end.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year-End(#) at Fiscal Year End ($)(1)
Shares Acquire Value ---------------------- ----------------------------
Name on Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Callahan, Jr. --- --- --- 385,000 --- ---
Michael G. Kantrowitz --- --- 50,000 170,000 --- ---
Edward M. Parks --- --- 25,000 145,000 --- ---
Steven Ahlbom --- --- 17,500 92,500 --- ---
</TABLE>
- ------------------
(1) Value based on the closing price of $2.875 on June 30, 1998, less the
option exercise price.
Compensation and Stock Option Committee Report on Option Repricing
Notwithstanding anything to the contrary set forth in any of the
Company's filings under the securities acts, which incorporates this Proxy
Statement, the following report on option repricing shall not be incorporated
into any such filings.
During fiscal 1998, the Compensation and Stock Option Committee (the
"Committee") reviewed the exercise prices of outstanding stock options, which
ranged from $5.50 to $8.75, as they related to the current market price of
approximately $2.50 per share of Common Stock and concluded that such a
disparity in prices substantially defeated the purposes of the stock option
program to attract, retain and provide meaningful financial incentives to
employees who contribute to the continued growth, development and long-term
success of the Company. In light of these circumstances, the Company determined
that it was in the best interest of the Company and its stockholders to adjust
the exercise prices of certain stock options which were then "out-of-the-money"
to restore the equity incentive which the options were originally intended to
provide. Accordingly, in March 1998, the Committee offered to holders of
employee stock options previously granted under the plan (including the four
named executive officers, but excluding the non-employee directors) the
opportunity to exchange their outstanding options for new options with an
exercise price of $3.00 per share, which was in excess of the fair market value
of the Common Stock on the date of grant. All of the terms and conditions of the
new options remained the same, except that the vesting schedules for new options
to acquire in excess of 500 shares re-commenced as of the new grant date in a
manner comparable to the vesting schedules under the old options instead of
retaining the previous vesting schedule. See "Option Grants in Fiscal Year Ended
June 30, 1998" for information regarding the options granted to the named
executive officers.
6
<PAGE>
On August 28, 1998, the Committee again reviewed the exercise price of
outstanding stock options in relation to the current market price of
approximately $1.00 per share of Common Stock. As a result of that review and a
review of the competitive environment for experienced software management and
engineers in relation to the Company's financial situation, the Committee
determined that replacing the existing options having exercise prices higher
than market value with options at fair market value was necessary to retain key
employees and have such employees exert maximum efforts on behalf of the
Company. The Committee extended to key employees (other than non-employee
directors) the opportunity to receive new options under the Plan, exercisable at
the $1.063 market price on the date of grant, upon the cancellation of the
optionee's existing options. All other terms and conditions of the existing
options, including vesting, remained the same.
The Compensation and Stock Option Committee
Howard L. Morgan
John M. Ryan
Agreements with Executive Officers and Change in Control Arrangements
In connection with the Merger, the Company entered into a three-year
employment contract, which automatically continues on a year-to-year basis, with
Michael Kantrowitz. During the current one year term, the agreement provides for
a base salary of $151,000 for the 1999 fiscal year. Mr. Kantrowitz also is
provided with an automobile, at the Company's expense, and is entitled to
participate in the Company's bonus and stock option plans at the discretion of
the Compensation and Stock Option Committee of the Board of Directors. The
agreement contains confidentiality and non-competition agreements from Mr.
Kantrowitz. The agreement permits the Company to terminate Mr. Kantrowitz's
employment with or without cause; however, in the event of a termination without
cause, Mr. Kantrowitz is entitled to severance benefits equivalent to the
compensation he would have received for the remaining term of the agreement.
When Mr. Callahan joined the Company, the Company agreed to pay him an
initial annual base salary of $210,000, an annual bonus of 40% of his base
salary based on satisfying certain management objectives and $60,000 to assist
in his relocation, and to grant him non-qualified options to acquire 385,000
shares of Common Stock at an exercise price equal to the fair market value on
the date of grant, vesting at the rate of 25% per year beginning one year after
the commencement of his employment. Mr. Callahan is entitled to severance
benefits in the event of termination without cause equal to his base salary,
benefits and bonus, subject to certain limitations, for one year. The Company
has also agreed that in the event of a sale of the Company, if Mr. Callahan is
not employed by the new owners immediately following such transaction, he is
entitled to payment equal to his base salary, benefits and bonus, subject to
certain limitations, for one year, and to acceleration of vesting of 50% of his
stock options if the sale occurs in his first year of employment or 100% of his
options if the sale occurs thereafter. The arrangement also contains a
non-competition agreement by Mr. Callahan for the period during which payments
are made by the Company.
In June 1997, the Company entered into an employment agreement with
Edward Parks which initially provided for an annual base salary of $130,000. Mr.
Parks is entitled to participate in the Company's employee bonus and stock
option plans at the discretion of the Compensation and Stock Option Committee of
the Board of Directors. The agreement contains confidentiality and
non-competition agreements and permits either party to terminate the agreement
with or without cause. If the Company terminates the agreement without cause
during the first two years of its term, Mr. Parks is entitled to severance
benefits equal to his then current annual base salary for a period of one year.
7
<PAGE>
Mr. Kantrowitz, Mr. Parks, Mr. Ahlbom and Edward T. Lack, Jr., Vice
President-Finance and Administration, are also entitled to severance benefits in
the event that they are not offered continued employment upon a change in
control of the Company. Mr. Kantrowitz and Mr. Parks are entitled to a
continuation of salary and benefits for a one-year period, and Mr. Ahlbom and
Mr. Lack are entitled to six months of such benefits.
Options granted under the Company's 1995 Stock Option Plan contain
provisions pursuant to which all outstanding options granted under such plan
shall become fully vested and immediately exercisable upon a "change in control"
as defined in such plan.
COMPENSATION AND STOCK OPTION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee (the "Committee") of the
Board of Directors establishes the general compensation policies and specific
compensation levels regarding salaries and the award of stock options under the
Company's 1995 Stock Option Plan. The Committee currently consists of two
non-employee directors.
The Company's compensation program includes annual salary and incentive
compensation, consisting of bonuses and possible long-term incentives, in the
form of stock options, designed to attract, motivate and retain highly qualified
executives who will effectively manage the Company and maximize stockholder
value. In establishing total compensation, the Committee considers individual
and Company performance, as well as compensation levels in comparable companies.
Annual Compensation
Annual salary levels are established based upon an evaluation of
individual performance and comparable compensation levels, although the
Committee has not made formal comparisons with peer group companies and has not
used specific criteria to evaluate individual performance. The Committee bases
incentive compensation on the Company achieving certain financial objectives.
These objectives are generally established at the beginning of the fiscal year
and are a function of revenues and operating income. During fiscal 1998 the
Company did not achieve the targeted objectives. As a result, no bonuses were
paid to the Company's executives, except for Mr. Callahan who was paid a bonus
in accordance with the provisions of his agreement. The Committee relies on the
foregoing evaluation and exercises subjective judgment and discretion in light
of the Company's general compensation policies and practices described above to
determine salaries and bonuses.
Long-Term Compensation
Long-term incentives are provided through the grant of stock options
under the Company's stock option plan. The Committee reviews and approves the
participation of executive officers of the Company under the Company's stock
option plan. The Committee has the authority to determine the individuals to
whom stock options are awarded, the terms of the options and the number of
shares subject to each option. Options typically vest in four equal annual
installments beginning one year from the date of grant and are exercisable at an
exercise price equal to or greater than the fair market value of shares
8
<PAGE>
of the Common Stock on the date of grant. The size of option grants are
generally based upon the executive officer's level of responsibility. Through
the grant of stock options, the objective of aligning executive officers'
long-range interests with those of the stockholders are met by providing the
executive officers with the opportunity to build a meaningful stake in the
Company. The Committee evaluates the individual's and the Company's performance
and the data of comparable companies, although it has not relied on formal
comparisons, and exercises subjective judgment and discretion in view of this
information and the Company's general compensation policies and practices.
Chief Executive Officer Compensation
As discussed under "Agreements with Executive Officers and Change in
Control Arrangements" above, Mr. Callahan's compensation consists of base salary
and incentive compensation, consisting of a short-term bonus and long-term stock
options. Mr. Callahan's fiscal 1998 compensation included a base salary of
$210,000 and a bonus of $42,000 in accordance with the terms of his agreement
dated June 1997. In addition, Mr. Callahan participated in the option repricing
discussed under "Compensation and Stock Option Committee Report on Option
Repricing."
Deductibility of Executive Compensation
Federal tax laws impose requirements in order for compensation payable
to certain executive officers to be fully deductible. The Company intends, to
the extent practicable, to preserve deductibility under the Internal Revenue
Code of compensation paid to its executive officers while maintaining
compensation programs to attract and retain highly qualified executives in a
competitive environment.
The foregoing report has been furnished by the Compensation and Stock
Option Committee of the Board of Directors. The current membership of the
Committee is as follows:
Howard L. Morgan
John M. Ryan
9
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the
Company's Common Stock for the period July 1, 1993 to June 30, 1998 with similar
returns for the (i) S&P Technology-500 and the S&P 500 Index.
TOTAL SHAREHOLDER RETURN
500 |--------------------------------------------------------------------|
| |
| |
450 |--------------------------------------------------------------------|
| # |
| |
400 |--------------------------------------------------------------------|
| |
| |
350 |--------------------------------------------------------------------|
D | |
| # |
O 300 |--------------------------------------------------------------------|
| & |
L | |
250 |--------------------------------------------------------------------|
L | |
| # & |
A 200 |--------------------------------------------------------------------|
| |
R | # & |
150 |--------------------------------------*-----------------------------|
S | & |
| # * |
100 |*#&-----------------------------------------------------------------|
| * * |
| |
50 |------------------------------------------------------------*-------|
| |
| |
0 |--------------------------------------------------------------------|
June 1993 June 1994 June 1995 June 1996 June 1997 June 1998
*Neoware Systems Inc. & S&P 500 Index # Technology 500
Total Return To Shareholders
(Dividends reinvested monthly)
ANNUAL RETURN PERCENTAGE
Years Ending
<TABLE>
<CAPTION>
Company / Index Jun94 Jun95 Jun96 Jun97 Jun98
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NEOWARE SYSTEMS INC -6.82 0.60 69.71 -25.71 -55.77
S&P 500 INDEX 1.41 26.07 26.00 34.70 30.16
TECHNOLOGY-500 8.30 62.70 19.15 52.02 34.35
INDEXED RETURNS
Base Years Ending
Period
YEARS ENDED Jun93 Jun94 Jun95 Jun96 Jun97 Jun98
- ---------------------------------------------------------------------------------------------------------
NEOWARE SYSTEMS INC 100 93.18 93.74 159.08 118.17 52.27
S&P 500 INDEX 100 101.41 127.84 161.08 216.98 282.42
TECHNOLOGY-500 100 108.30 176.20 209.95 319.17 428.82
</TABLE>
CERTAIN TRANSACTIONS
In October 1997, the Company's wholly-owned subsidiary, Information
Technology Consulting, Inc. ("ITC") and Global Consulting Group, a company
controlled by TL Ventures, merged into Broadreach Consulting, Inc. (formerly The
Reohr Group, Inc.), an information technology staffing and consulting company.
Pursuant to the merger, the Company, as the sole stockholder of ITC, received
stock of the surviving entity representing ownership of approximately 2% of the
surviving entity. The Company was also reimbursed for the expenses in the amount
of $1,000,000 incurred by it and ITC in connection with ITC's efforts to
complete these acquisitions. Of the reimbursement, $300,000 was paid in cash and
the balance by a note.
10
<PAGE>
Since January 1, 1998, 1-800-FLOWERS, of which Mr. McCann is the Senior
Vice President, director and principal shareholder, purchased $604,340 of
products and services from the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission reports about their beneficial ownership of the Company's Common
Stock. All such persons are required by the Commission to furnish the Company
with copies of all reports that they file.
Based solely upon a review of the copies of such reports furnished to
the Company, or written representations from certain reporting persons that no
other reports were required, the Company believes that during the fiscal year
ended June 30, 1998, all of its officers, directors and persons who own more
than ten percent of the Company's Common Stock complied with all filing
requirements applicable to them, except with respect to the late filing of a
Form 3 by Karl E. Holzthum, former Vice President World Wide Sales and Service,
and the filing of a Form 5 by Terri Gelberg, formerly a ten percent holder of
the Company's Common Stock, which reported three transactions that were not
reported on a timely basis.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of the shares of Common Stock of the Company as of June 30, 1998 by
(i) each stockholder known by the Company to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each director and nominee for
director of the Company, (iii) each named executive officer and (iv) all
directors and executive officers as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the shares of Common Stock listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
Number of Shares Percentage
Principal Stockholders Beneficially Owned Beneficially Owned
---------------------- ------------------ ------------------
<S> <C> <C>
Arthur R. Spector .............................. 142,000 (1)(3) 2.2%
Edward C. Callahan, Jr.......................... 6,000 (3) *
Michael G. Kantrowitz........................... 203,930 (1)(3) 3.2%
Christopher G. McCann........................... -0- *
Howard L. Morgan................................ 42,588 (1)(3) *
John M. Ryan.................................... 23,500 (1) *
Carl G. Sempier .............................. 23,500 (1) *
Steven B. Ahlbom................................ 66,914 (1)(3) 1.0%
Edward M. Parks................................. 94,414 (1)(3) 1.5%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Warren V. Musser (4)............................. 500,000 (3) 7.4%
Mark A. Gelberg (2).............................. 696,205 (1)(3) 10.9%
Terri N. Gelberg (5)............................. 622,517 (3) 9.8%
Motorola, Inc. (6)............................... 396,226 6.3%
All Executive Officers and Directors.............
as a Group (9 persons)........................... 602,846 (1)(3) 9.2%
</TABLE>
- --------------------------
* Less than 1%
(1) Includes options exercisable within 60 days of June 30, 1998 to purchase
the Company's Common Stock issued pursuant to the Company's 1995 Stock
Option Plan: Mr. Spector, 22,500 shares; Mr. Kantrowitz, 50,000 shares;
Mr. Morgan, 22,500 shares; Mr. Ryan, 22,500 shares; Mr. Sempier, 22,500
shares; Mr. Ahlbom, 17,500 shares; Mr. Parks, 25,000 shares; all officers
and directors as a group, 182,500 shares.
(2) The stockholder's address is RR 1, Box 171-6, Warren, Vermont 05674.
Includes 119,200 shares held by a foundation of which Mr. Gelberg is the
trustee. The information presented is based upon information provided to
the Company in October 1997 in connection with the preparation of its
1997 Proxy Statement.
(3) Includes Warrants exercisable within 60 days of June 30, 1998 to purchase
the Company's Common Stock: Mr. Callahan, 5,000 shares; Mr. Spector,
29,500 shares; Mr. Gelberg, 115,863 shares; Mr. Kantrowitz, 31,293
shares; Mr. Morgan, 3,442 shares; Mr. Ahlbom, 12,517 shares; Mr. Parks,
12,517 shares; Mr. Musser, 500,000 shares; Ms. Gelberg, 115,863 shares;
all officers and directors as a group, 94,269 shares.
(4) The stockholder's address is 435 Devon Park Drive, Building 800, Wayne,
Pennsylvania 19087. This information is presented in reliance on
information disclosed in a Schedule 13D filed with the Securities and
Exchange Commission (the "SEC") on February 3, 1994.
(5) The stockholder's address is 235 S. Van Pelt Street, Philadelphia,
Pennsylvania 19103. The information is presented in reliance on
information disclosed in a Schedule 13D filed with the Securities and
Exchange Commission on February 7, 1996.
(6) The stockholder's address is 1303 East Algonquin Road, Schaumsburg,
Illinois 60196. The information is presented in reliance on information
disclosed in a Schedule 13D filed with the Securities and Exchange
Commission on July 7, 1998.
PROPOSAL TO RATIFY ACCOUNTANTS
The Board of Directors has selected the firm of Arthur Andersen LLP as
the Company's independent public accountants for the year ending June 30, 1999.
The Board of Directors has proposed that the stockholders ratify the selection
of Arthur Andersen LLP. The Company has requested that a representative of
Arthur Andersen LLP attend the Annual Meeting. Such representative will have an
opportunity to make a statement, if he or she desires, and will be available to
respond to appropriate questions of stockholders.
The Board of Directors recommends that you vote FOR the ratification of
Arthur Andersen LLP as independent public accountants.
12
<PAGE>
STOCKHOLDERS PROPOSALS FOR
NEXT ANNUAL MEETING
Any properly submitted proposal which a stockholder intends to present at
the next Annual Meeting of Stockholders must be received by the Company by July
9, 1999 if it is to be included in the Company's proxy statement and form of
proxy relating to the next Annual Meeting.
Stockholders who wish to submit a proposal for consideration at the
Company's next Annual Meeting of Stockholders, but who do not wish to submit the
proposal for inclusion in the Company's proxy statement, must deliver a written
copy of such proposal in accordance with the Company's bylaws no later than
September 22, 1999.
13
<PAGE>
NEOWARE SYSTEMS, INC.
Proxy
This Proxy is Solicited by the Board of Directors of the Company
for the Annual Meeting of Stockholders, December 10, 1998
The undersigned holder of Common Stock of Neoware Systems, Inc. hereby
appoints Edward C. Callahan, Jr. and Michael G. Kantrowitz, and each of them,
proxies, with powers of substitution in each, to vote on behalf of the
undersigned at the Annual Meeting of Stockholders to be held at 10:00 a.m. on
Thursday, December 10, 1998, at the Company's offices at 400 Feheley Drive, King
of Prussia, Pennsylvania, and at all adjournments thereof, according to the
number of shares which the undersigned would be entitled to vote if then
personally present, and in their discretion upon such other business as may come
before the Meeting.
Shares will be voted as instructed, but if no instruction is given,
shares will be voted FOR all the nominees for director named in the Proxy
Statement, for the proposal described in the Proxy Statement and with
discretionary authority on such other matters as may come before the meeting.
The undersigned acknowledges receipt of this proxy with a copy of the
Notice of Annual Meeting of Stockholders and the Proxy Statement of the Board of
Directors.
(Continued, and to be signed, on the other side)
<TABLE>
<CAPTION>
<S> <C> <C>
1. Election of Directors
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
to vote for all nominees listed below
Nominees: Arthur R. Spector, Edward C. Callahan, Jr., Michael G. Kantrowitz, John M. Ryan, Carl G. Sempier and Christoper G. McCann
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, write that nominee's name in the space provided below.)
____________________________________________________________________________________________________________________________________
2. Ratify the selection of Arthur Andersen LLP as Independent Auditors.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, upon such other matters as may properly come before the meeting.
Votes must be indicated |X| or|X| in Black or Blue ink. Please sign and return promptly in the enclosed postage paid envelope.
Change of Address or [ ]
Comments Mark Here
NOTE: Please sign exactly as name(s) appears hereon.
Executors, administrators, trustees, etc. should give full
title as such.
DATE:_______________________________________
____________________________________________
SIGNATURE
____________________________________________
SIGNATURE
</TABLE>
