<PAGE>
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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 Section 240.14a-11(c) or
Section240.14a-12
BASE TEN 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):
/ / No fee required
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4)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):
$6,500,000.00 (bona fide estimate of cash and value of the property to
be received by the Registrant).
(4) Proposed maximum aggregate value of transaction:
$6,500,000.00
(5) Total fee paid:
$1,300.00
/X/ 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:
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<PAGE>
[LOGO]
December 15, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting (the "Meeting") of
Shareholders of Base Ten Systems, Inc., (the "Company" or "Base Ten") which will
be held at 9:00 a.m., local time, on Wednesday, December 31, 1997, at the
executive offices of Base Ten Systems, Inc., One Electronics Drive, Trenton, New
Jersey.
At the Meeting, holders of outstanding shares of the Company's Class A
Common Stock ("Class A Stock") and Class B Common Stock ("Class B Stock"; the
Class A Stock and Class B Stock are hereinafter sometimes referred to
collectively as the "Common Stock") voting as a class with respect to certain of
the proposed matters (each share of Class A stock having one-tenth of a vote on
each matter and each share of Class B Stock having one vote on each matter) will
be asked to consider and approve three separate proposals, including a proposal
concerning the sale (the "Sale") of the Government Technology Division of Base
Ten to Strategic Technology Systems, Inc., a newly organized company that will
be managed by certain members of the Company's senior management who have been
over time, and are currently, significantly involved in the business and
development of the Government Technology Division.
At July 31, 1997 and October 31, 1996, the assets of the GTD represented
approximately 28% and 30%, respectively, of total Company assets. For the nine
months ended July 31, 1997, revenues from the GTD represented approximately 83%
of total Company revenues, compared with approximately 90% of total Company
revenues for the year ended October 31, 1996. If the Sale is consummated, the
Company will receive aggregate cash consideration of $3.5 million, a promissory
note in a principal amount presently estimated to be between approximately $2.0
million and $2.2 million, and certain other consideration. See "The Proposal
Sale of the Government Technology Division--The Purchase Agreement, Note and
Warrant" in the accompanying Proxy Statement. The total consideration to be
received by the Company from the sale is believed by the Company to be
approximately $6.9 million (the present value assigned to the consideration by
the financial advisor retained by the Special Committee of the Board of
Directors for purposes of rendering an opinion with regard to the fairness from
a financial point of view, to Base Ten of the Sale; see "The Proposed Sale of
the Government Technology Division--Opinion of Financial Advisor to the Special
Committee" in the accompany Proxy Statement), which amounts to approximately
$0.85 per share of outstanding Common Stock of the Company.
The proposed Sale is described in the accompanying Proxy Statement. Also
included in the accompanying Proxy Statement are proposals (i) to approve, in
order to comply with ongoing listing requirements of NASDAQ, the possible future
issuance, upon conversion of certain convertible preferred stock that is
proposed to be issued on the terms described in the accompanying Proxy
Statement, of shares of Class A Stock that may represent twenty percent (20%) or
more of the outstanding shares of Class A Stock of Base Ten at a price which
will be determined as of the date of conversion of such convertible preferred
stock, that may therefore be below the market price of the Class A Stock on the
date the convertible preferred stock is initially issued by the Company; and
(ii) to approve and adopt amendments to four Company stock option plans (the
Base Ten Stock Option Plan, 1990 Incentive Stock Option, the 1992 Stock Option
Plan and the 1995 Incentive Stock Option Plan; hereinafter sometimes
collectively referred to as the "Incentive Option Plans"), concerning an
extension of the period within which certain options may be exercised following
termination of employment. I urge you carefully to review the Proxy Statement
and the Exhibits thereto.
<PAGE>
THE BASE TEN BOARD OF DIRECTORS HAS DETERMINED THAT THE SALE OF THE
GOVERNMENT TECHNOLOGY DIVISION, THE APPROVAL OF A POSSIBLE FUTURE ISSUANCE OF
ADDITIONAL SHARES OF CLASS A STOCK UPON CONVERSION OF CONVERTIBLE PREFERRED
STOCK AND APPROVAL OF THE PROPOSED AMENDMENTS TO THE BASE TEN INCENTIVE OPTION
PLANS ARE EACH IN THE BEST INTERESTS OF BASE TEN AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY APPROVED EACH OF THE THREE PROPOSALS AND
RECOMMENDS THAT THE HOLDERS OF BASE TEN COMMON STOCK VOTE IN FAVOR OF EACH AT
THE MEETING.
I hope you will attend the Meeting. HOWEVER, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY CARD
PROMPTLY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. IF YOU ARE PRESENT AT
THE MEETING YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE IN PERSON.
Sincerely,
MYLES M. KRANZLER
Chairman of the Board
ii
<PAGE>
BASE TEN SYSTEMS, INC.
ONE ELECTRONICS DRIVE
TRENTON, NEW JERSEY 08619
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 31, 1997
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Base Ten
Systems, Inc., a New Jersey corporation (the "Company" or "Base Ten"), will be
held on Wednesday, December 31, 1997, at 9:00 a.m. local time at the executive
offices of the Company, One Electronics Drive, Trenton, New Jersey (the
"Meeting"), for the following purposes:
1. To approve and adopt that certain Asset Purchase Agreement that provides
for the sale ("Sale") of all of the assets, subject to certain
liabilities, of the Government Technology Division of the Company to
Strategic Technology Systems, Inc., a newly formed corporation that will
be managed by certain members of the Company's senior management who have
been over time, and are currently, significantly involved in the business
and development of the Government Technology Division;
2. To approve the possible future issuance, upon conversion of certain
convertible preferred stock that is proposed to be issued on the terms
described in the accompanying Proxy Statement, of shares of Class A Stock
that may represent twenty percent (20%) or more of the outstanding shares
of Class A Stock of Base Ten at a price which will be determined as of
the date of conversion of such convertible preferred stock, that may
therefore be below the market price of the Class A Stock on the date the
convertible preferred stock is initially issued by the Company, which
approval is necessary in order to meet the continued listing requirements
for the Class A Common Stock on the NASDAQ National Market System
("NASDAQ");
3. To approve amendments to four Company stock option plans (the Base Ten
Stock Option Plan, the 1990 Incentive Stock Option, the 1992 Stock Option
Plan and the 1995 Incentive Stock Option Plan) concerning the extension
of the period within which certain options may be exercised following
termination of employment; and
4. To transact such other business as may properly come before the Meeting
or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on November 14, 1997,
as the record date for the Meeting. Only shareholders of record at that time are
entitled to notice of, and to vote at, the Meeting and any adjournment or
postponement thereof. A list of shareholders entitled to vote at the Meeting
will be available for examination 10 days before the Meeting during ordinary
business hours at the offices of the Company. Management is of the view that the
Company's shareholders are not entitled to dissenters' rights of appraisal in
connection with any of the proposals covered by this Proxy Statement, including
the Sale.
The enclosed proxy is solicited by the Board of Directors of the Company.
Reference is made to the attached Proxy Statement for further information with
respect to the business to be transacted at the Meeting. The Board of Directors
urges you to date, sign and return the enclosed proxy promptly. A reply
iii
<PAGE>
envelope is enclosed for your convenience. You are cordially invited to attend
the Meeting in person. The return of the enclosed proxy will not affect your
right to vote if you attend the Meeting in person.
By Order of the Board of Directors
[LOGO]
EDWARD J. KLINSPORT
Chief Financial Officer,
Executive Vice President and
Secretary
Dated: December 15, 1997
YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES, PLEASE SIGN, DATE
AND COMPLETE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED RETURN ENVELOPE
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
LETTER TO SHAREHOLDERS......................... i
NOTICE OF SPECIAL MEETING...................... iii
TABLE OF CONTENTS.............................. v
THE SPECIAL MEETING............................ 1
General...................................... 1
Matters to be Considered at the Meeting...... 1
Voting at the Meeting; Record Date........... 2
Security Ownership of Management and Certain
Beneficial Owners.......................... 2
Proxies...................................... 4
THE PROPOSED SALE OF THE GOVERNMENT TECHNOLOGY
DIVISION...................................... 5
Overview..................................... 5
Background................................... 5
Recommendation of the Base Ten Board and Base
Ten's Reasons for the Sale................. 9
Opinion of Financial Advisor to the Special
Committee.................................. 10
Certain Projected Financial
Information................................ 14
Interests of Certain Persons in the Sale and
Certain Arrangements Regarding Certain
Directors and Management of Base Ten
Following the Sale; Conflicts of
Interest................................... 16
Certain Tax Consequences of the Sale......... 18
The Purchase Agreement, Note and Warrant..... 18
Regulatory Filings and Approvals............. 22
Accounting Treatment......................... 22
Expenses and Other Fees...................... 22
Appraisal Rights............................. 22
Required Vote................................ 22
The Government Technology Division........... 22
Unaudited Pro Forma Financial Statements of
the Company................................ 27
Information Concerning the Purchaser......... 32
<CAPTION>
PAGE
---------
<S> <C>
INFORMATION CONCERNING BASE TEN SYSTEMS, INC... 32
Selected Financial Data...................... 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 34
Business..................................... 41
Legal Proceedings............................ 47
Market for the Company's Common Stock and
Related Shareholder Matters................ 47
THE PROPOSED ISSUANCE.......................... 49
Background................................... 48
Terms of the Issuance........................ 48
Reasons for the Proposal..................... 48
Risk Factors................................. 49
Use of Proceeds.............................. 50
Interests of Certain Persons in the Issuance;
Conflicts of Interests..................... 50
Required Vote................................ 50
THE PROPOSED OPTION PLAN AMENDMENTS............ 51
General...................................... 51
Description of the Plans..................... 51
Administration of the Plans.................. 52
Amendment of the Plans....................... 52
Principal Federal Income Tax Consequences.... 52
Benefits to Certain Persons of the Proposed
Amendments................................. 53
Accounting Treatment......................... 53
Required Vote................................ 53
ATTENDANCE OF AUDITORS AT THE MEETING.......... 53
SHAREHOLDER PROPOSALS.......................... 53
APPRAISAL RIGHTS............................... 54
INDEX TO FINANCIAL
STATEMENTS.................................... F-1
EXHIBITS:
A. Opinion of Financial Advisor to the Special
Committee................................... A-1
B. New Jersey Appraisal Statute................ B-1
</TABLE>
v
<PAGE>
BASE TEN SYSTEMS, INC.
ONE ELECTRONICS DRIVE
TRENTON, NEW JERSEY 08619
------------------------
PROXY STATEMENT
------------------------
Special Meeting of Shareholders to
be held on Wednesday, December 31, 1997
------------------------
THE SPECIAL MEETING
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Base Ten Systems, Inc., a New Jersey
corporation ("Base Ten" or the "Company"), to be used at a Special Meeting of
Shareholders, and any adjournment or postponement thereof (the "Meeting"), to be
held on the date, at the time and place, and for the purposes set forth in the
foregoing notice. This Proxy Statement, the accompanying notice and the enclosed
proxy card are first being mailed to shareholders on or about December 15, 1997.
The Board of Directors of the Company (the "Board" or the "Base Ten Board")
does not intend to bring any matter before the Meeting except as specifically
indicated in the notice, nor does the Board know of any matters that anyone else
proposes to present for action at the Meeting. However, if any other matters
properly come before the Meeting, the persons named in the enclosed proxy, or
their duly constituted substitutes acting at the Meeting, will be authorized to
vote or otherwise act thereon in accordance with their judgment on such matters.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, holders of Base Ten Class A Common Stock ("Class A Stock")
and Base Ten Class B Common Stock ("Class B Stock"; the Class A Stock and Class
B Stock are hereinafter sometimes referred to collectively as the "Common
Stock") will consider and vote upon: (i) a proposal to approve and adopt the
Asset Purchase Agreement providing for the sale of all of the assets, subject to
certain liabilities, of the Government Technology Division of the Company to
Strategic Technology Systems, Inc. (the "Purchaser"), a newly formed corporation
that will be managed by certain members of the Company's senior management who
have been over time, and are currently, significantly involved in the business
and development of the Government Technology Division (the "Sale"); (ii) a
proposal to approve the possible future issuance, upon conversion of certain
convertible preferred stock that is proposed to be issued on the terms described
in the accompanying Proxy Statement, of shares of Class A Stock that may
represent twenty percent (20%) or more of the outstanding shares of Class A
Stock of Base Ten at a price which will be determined as of the date of
conversion of such convertible preferred stock, that may therefore be below the
market price of the Class A Stock on the date the convertible preferred stock is
initially issued by the Company (the "Issuance"), which approval is necessary in
order to meet the continued listing requirements for the Class A Common Stock on
the NASDAQ National Market System ("NASDAQ"); and (iii) a proposal to approve
and adopt amendments to four of the Company's stock option plans (the Base Ten
Stock Option Plan, the 1990 Incentive Stock Option Plan, the 1992 Stock Option
Plan and the 1995 Incentive Stock Option Plan; hereinafter sometimes
collectively referred to as the "Incentive Option Plans"), concerning an
extension of the period within which certain options may be exercised following
termination of employment (the "Option Plan Amendments").
At July 31, 1997 and October 31, 1996, the assets of the GTD represented
approximately 28% and 30%, respectively, of total Company assets. For the nine
months ended July 31, 1997, revenues from the GTD represented approximately 83%
of total Company revenues, compared with approximately 90% of total Company
revenues for the year ended October 31, 1996. If the Sale is consummated, the
Company will receive aggregate cash consideration of $3.5 million, a promissory
note in a principal amount presently estimated to be between approximately $2.0
million and $2.2 million, and certain other consideration. See "The Proposed
Sale of the Government Technology Division-- The Purchase Agreement, Note and
Warrant," below. The total consideration to be received by the Company from the
sale is believed by the Company to be approximately $6.9 million (the present
value assigned to the consideration by the financial advisor retained by the
Special Committee of the Board of Directors for purposes of rendering an opinion
with regard to the fairness from a financial point of view, to Base Ten of the
Sale; see "The Proposed Sale of the Government Technology Division--Opinion of
Financial Advisor to the Special Committee"), which amounts to approximately
$0.85 per share of outstanding Common Stock of the Company.
The directors of Base Ten have unanimously approved each of the three
proposals and recommend a vote in favor of each of the proposals by the
shareholders.
1
<PAGE>
VOTING AT THE MEETING; RECORD DATE
The Board has fixed November 14, 1997, as the record date (the "Record
Date") for the determination of shareholders of Base Ten entitled to notice of
and to vote at the Meeting. Accordingly, only holders of record of the Company's
outstanding Common Stock on the Record Date are entitled to notice of, and to
vote at, the Meeting. As of the Record Date, there were 7,643,952 shares of
Class A Stock and 445,121 shares of Class B Stock of the Company outstanding and
entitled to vote, and such shares were held by approximately 800 holders of
record. Each holder of record of shares of Class A Stock on the Record Date is
entitled to one-tenth of a vote per share on all matters properly presented at
the Meeting. Each holder of record of shares of Class B Stock is entitled to one
vote per share on all matters properly presented at the Meeting. The presence,
in person or by proxy, of the holders of a majority of the issued and
outstanding shares of Common Stock entitled to vote at the Meeting will
constitute a quorum. Abstentions will be counted as present in determining
whether a quorum exists, but will not be counted as a vote, for or against, the
proposal to approve and adopt the Purchase Agreement providing for the Sale.
The approval and adoption of the Purchase Agreement providing for the Sale
requires the affirmative vote of seventy-five percent (75%) of the votes cast by
holders of shares of Common Stock entitled to vote thereon, and, in addition,
the affirmative vote of seventy-five percent (75%) of the votes cast by holders
of Class B Stock. The proposal relating to the Issuance requires the approval of
a majority of the holders of the Company's Class A Stock and Class B Stock
voting together as a class. The approval and adoption of the Option Plan
Amendments require the affirmative vote of a majority of the holders of the
Company's Class A Stock and Class B Stock voting together as a class. Therefore,
abstentions and broker non-votes with respect to the second and third proposals
will have the same effect as a vote against those proposals.
As of November 14, 1997, the Base Ten directors and executive officers and
their affiliates as a group held shares representing approximately 18% of the
outstanding shares of Class A Stock and 38% of the outstanding shares of Class B
Stock. Each of the directors and executive officers of Base Ten who owns shares
of Class A Stock or Class B Stock has advised Base Ten that he intends to vote
or direct the vote of all such shares over which he has voting control, subject
to and consistent with any fiduciary obligations in the case of shares held as a
fiduciary, for approval and adoption of the Purchase Agreement providing for the
Sale, for approval of the Issuance and for approval and adoption of the Option
Amendments.
Shares voted against any proposal will not be voted in favor of any
adjournment of the Meeting for the purpose of additional solicitation of proxies
with respect to that proposal.
Under New Jersey law, it is unclear whether shareholders who vote in favor
of the Sale are precluded from pursuing litigation opposing the Sale or
otherwise challenging it. It is similarly unclear under New Jersey law whether
the Company may assert estoppel or other equitable defenses against a
shareholder who votes in favor of the proposed Sale and simultaneously, or
thereafter, challenges the Sale. However, although management is of the view
that shareholders of the Company do not have statutory appraisal rights with
respect to the proposed Sale, if it were determined that shareholders have
appraisal rights with respect to the Sale, a vote in favor of the Sale would
disqualify a shareholder from pursuing those rights. See "Appraisal Rights."
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of October 31, 1997, with
respect to the Class A and Class B Stock beneficially owned, directly or
indirectly, by each of the Company's directors, executive
2
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officers and all of its directors and executive officers as a group, and by each
person who, to the knowledge of the Company, was a beneficial owner of 5% or
more of the Class A Stock or Class B Stock.
<TABLE>
<CAPTION>
SHARES PERCENT OF VOTING POWER
BENEFICIALLY PERCENT REPRESENTED BY CLASS A
NAME AND ADDRESS OWNED(1) OF CLASS AND CLASS B COMBINED(2)
- ------------------------------------------ ----------------------- ----------- -----------------------
<S> <C> <C> <C> <C>
Myles M. Kranzler (3)(4) Class A - 510,423 6.23% 15.57%
Class B - 160,144 35.98
Edward J. Klinsport (3)(4) Class A - 267,886 3.32 2.56
Class B - 7,136 1.59
Alan J. Eisenberg (3)(4) Class A - 235,145 2.93 1.69
Class B - 282 0.06
Richard J. Farrelly (4) Class A - 56,520 0.74% 0.41%
Class B - -- --
Frank W. Newdeck (4) Class A - 38,480 0.50 0.31
Class B - -- --
Alexander M. Adelson (4) Class A - 467,916 6.03 3.47
Class B - -- --
David Batten Class A - 28,900 0.37 0.15
Class B - -- --
Alan S. Poole Class A - 20,000 0.26 0.08
Class B - -- --
Jesse L. Upchurch Class A - 2,050,400(5) 24.21 19.42
Class B - 53,500 11.98
Bruce D. Cowen Class A - 686,250 8.42 10.10
Class B - 78,800 17.51
Herzog, Heine, Geduld, Inc. Class A - 28,895 3.80 2.36
Class B - 28,895 6.49
Directors and executive officers as Class A - 1,625,265 17.65 22.78
a group (8 persons) (3)(4) Class B - 167,562 37.23
</TABLE>
- ------------------------
(1) Ownership of shares of Class A Stock reflected in the above table includes
shares issuable upon (a) conversion of Class B Stock in accordance with the
terms thereof (one share of Class A Stock for each share of Class B Stock),
(b) exercise of outstanding options and warrants to purchase Class A Stock,
(c) conversion of Class B Stock issuable upon exercise of outstanding
options to purchase Class B Stock, and (d) conversion of outstanding
convertible debentures. Ownership of Class B Stock included in the above
table includes shares issuable upon exercise of outstanding options to
purchase Class B Stock.
(2) Assumes exercise of options and warrants exercisable within 60 days of
October 6, 1997, but not the conversion of Class B Stock to Class A Stock.
(3) Includes (a) as to Mr. Kranzler, 45,300 shares of Class A Stock and 62,823
shares of Class B Stock owned by his wife, (b) as to Mr. Klinsport, 10
shares of Class A Stock owned by his wife and 11,000 shares of Class A Stock
issuable upon exercise of options held by his wife and (c) as to Mr.
Eisenberg, 1,700 shares of Class A Stock and 282 shares of Class B Stock
owned by his wife and children.
(4) Includes as to (a) Mr. Kranzler, 236,000 shares, (b) Mr. Klinsport, 254,686
shares,(c) Mr. Eisenberg, 233,163 shares; (d) Mr. Farrelly, 55,520 shares;
(e) Mr. Newdeck, 38,480 shares; (f) Mr. Adelson,
3
<PAGE>
395,500 shares; (g) Mr. Batten, 20,000 shares; (h) Mr. Poole, 20,000 shares;
and (i) all directors and executive officers as a group, 1,253,349 and 4,946
shares, of Class A Stock and Class B Stock, respectively, issuable upon the
exercise of outstanding options or warrants.
(5) Based in part on a Statement on Schedule 13D and a Statement of Changes in
Beneficial Ownership on Form 4 filed with the SEC, represents (i) 968,200
shares of Class A Stock held directly by the Estate of Constance Upchurch,
of which Mr. Upchurch is the executor and beneficiary (the "Estate"), (ii)
209,900 shares of Class A Stock held by a corporation of which Mr. Upchurch
is the sole shareholder, (iii) 18,400 shares of Class A Stock held directly
by Mr. Upchurch, (iv) 53,900 shares of Class A Stock issuable upon
conversion of the same number of shares of Class B Stock held directly by
the Estate, and (v) 800,000 shares of Class A Stock issuable upon conversion
of the Company's 9.01% Convertible Subordinated Debentures due August 31,
2003.
PROXIES
All shares of Common Stock that are entitled to vote and are represented at
the Meeting by properly executed proxies received by the Company prior to or at
the Meeting, and not revoked, will be voted at the Meeting in accordance with
the instructions indicated on such proxies. IN THE ABSENCE OF SUCH INSTRUCTIONS,
THE SHARES WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT
PROVIDING FOR THE SALE; "FOR" APPROVAL OF THE ISSUANCE; AND "FOR" APPROVAL AND
ADOPTION OF THE OPTION PLAN AMENDMENTS.
If any other matters are properly presented at the Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment. A properly executed proxy
marked "ABSTAIN," although counted for purposes of determining whether there is
a quorum present at the Meeting, will not be voted. SINCE THE REQUIRED VOTE OF
HOLDERS OF COMMON STOCK WITH RESPECT TO THE SECOND AND THIRD PROPOSALS IS BASED
UPON THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK, RATHER THAN UPON THE
SHARES ACTUALLY VOTED, THE FAILURE BY THE HOLDER OF ANY SUCH SECURITIES TO
SUBMIT A PROXY OR TO VOTE IN PERSON AT THE MEETING (INCLUDING ABSTENTIONS) WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE ISSUANCE AND AGAINST
APPROVAL AND ADOPTION OF THE OPTION PLAN AMENDMENTS.
The accompanying form of proxy is being solicited on behalf of the Board of
Directors of the Company. All expenses of this solicitation, including the cost
of preparing and mailing this Proxy Statement, will be borne by the Company. In
addition to the mailing of the proxy material, such solicitation may be made in
person or by telephone by directors, officers and employees of the Company, who
will receive no additional compensation therefor. The Company has retained
Innisfree M&A Incorporated, a proxy solicitation firm, to assist with the
solicitation at customary rates, plus reimbursement of out-of-pocket expenses.
Upon request, the Company will reimburse brokers, dealers, banks and trustees,
or their nominees, for reasonable expenses incurred by them in forwarding
material to beneficial owners of shares of Common Stock of the Company.
Any proxy may be revoked at any time prior to its exercise by notifying the
Secretary in writing, by delivering a duly executed proxy bearing a later date
or by attending the Meeting and voting in person.
4
<PAGE>
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY STATEMENT
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS
AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE
MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IMPORTANT
FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN
THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS IN THIS
PROXY STATEMENT AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S PREVIOUS
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN ASSESSING
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY
ALL CAUTIONARY STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND IN THOSE OTHER
FILINGS WITH THE SEC.
THE PROPOSED SALE
OF THE GOVERNMENT TECHNOLOGY DIVISION
(PROPOSAL 1)
THE MATERIAL ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. THIS SUMMARY DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
COMPLETE TEXT OF THE ASSET PURCHASE AGREEMENT, A COPY OF WHICH IS ON FILE IN THE
OFFICES OF THE CORPORATION, AND WHICH IS ALSO AN EXHIBIT TO THE COMPANY'S
CURRENT REPORT ON FORM 8-K FILED WITH THE SEC ON NOVEMBER 12, 1997. THE SEC
MAINTAINS A WEB SITE THAT CONTAINS REPORTS, PROXY AND INFORMATION STATEMENTS AND
OTHER INFORMATION REGARDING COMPANIES THAT FILE ELECTRONICALLY WITH THE SEC,
INCLUDING THE COMPANY, AND THE ADDRESS IS (http://www.sec.gov). SHAREHOLDERS ARE
ALSO URGED TO READ THE EXHIBITS TO THIS PROXY STATEMENT IN THEIR ENTIRETY.
OVERVIEW
The Company and Strategic Technology Systems, Inc., a recently organized
Nevada corporation (the "Purchaser") which is to be managed and partially owned
by certain members of the Company's senior management who have been over time,
and are currently, significantly involved in the business and development of its
Government Technology Division (the "GTD"), have entered into an Asset Purchase
Agreement, dated as of October 27, 1997 (the "Purchase Agreement") pursuant to
which the Purchaser will acquire substantially all of the operating assets of
the GTD in exchange for the consideration and the assumption of certain
liabilities as set forth below (the "Sale"). At July 31, 1997, the assets of the
GTD represented approximately 28% of total Company assets. For the nine months
ended July 31, 1997, revenues from the GTD represented approximately 83% of
total Company revenues, compared with approximately 90% of total Company
revenues for the year ended October 31, 1996. If the Sale is consummated, the
Company will receive aggregate cash consideration of $3.5 million, a promissory
note in a principal amount presently estimated to be between approximately $2.0
million and $2.2 million, and certain other consideration. See "The Purchase
Agreement, Note and Warrant," below. At the Meeting, the shareholders will be
asked to approve and adopt the Purchase Agreement providing for the Sale.
BACKGROUND
As part of a strategic planning process begun in 1990, the Company commenced
applying its technological expertise in safety-critical applications, which was
derived from its historical focus on designing electronic systems used primarily
in weapons management systems for military aircraft, to a broader array of uses.
This effort was in part the result of a recognition by management that the end
of the "cold war" and declines in U.S. and NATO military spending required the
Company to develop commercial lines of business.
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As the Company pursued its chosen area of commercial product development,
the development of software solutions for the pharmaceutical and medical device
manufacturing industries, it became evident to management that the differing
development, marketing, sale and manufacturing needs of the commercial sector
required a separate division within the Company. The Company therefore
established the Medical Technology Division ("MTD") to pursue its commercial
product developments while continuing its historical defense-related products
manufacturing operations and its general corporate overhead and administration
as part of the GTD.
The reduction in defense-related revenues and increasing price
competitiveness encountered in connection with the bid process as the defense
industry consolidated in the early 1990's resulted in a reduction in Company
revenues, the incurrence of operating losses, and the need to fund those
operating losses. The adverse effects of these factors were increased as a
result of the operating losses incurred by the MTD as its product development
and initial marketing efforts were pursued.
Consideration was given to the possibility of a "spin-off" of the GTD in the
form of a distribution to shareholders. This alternative had been considered as
early as 1994, when it was abandoned because efforts to obtain a ruling from the
Internal Revenue Service as to the tax-free nature of such a transaction were
unsuccessful. The Company believed it would achieve the same result in 1997, and
therefore did not pursue this alternative. The only other alternatives
considered by the Company were the continuance of its business in substantially
the same form as is currently the case or the dissolution of the GTD, neither of
which were as attractive as the proposed Sale.
In June 1997, during the course of a meeting of the Company's Board of
Directors, the possibility of a sale of the GTD was discussed. Thereafter, in
late June 1997, the Company's Chief Financial Officer, Mr. Edward J. Klinsport,
who was also President of the GTD, indicated to the Company's Chief Executive
Officer, Mr. Myles M. Kranzler, that a group led by Mr. Klinsport and including
certain other senior management personnel of the GTD (the "Management Group")
was contemplating extending an offer to purchase the GTD.
At a special meeting of the Company's Board of Directors on August 4, 1997,
after discussion of the future prospects of the GTD as well as consideration of
the MTD's current product and marketing efforts and future capital needs and the
likely benefits of a sale of the GTD, the directors authorized the Company to
pursue efforts to sell the GTD on terms that reflected fair value, and to do so
in an expeditious manner so as to minimize disruption to the Company, its
employees and customers. In view of the prospects of a bid from the Management
Group and the significance of the GTD's revenues and operations to the Company
as a whole, the directors determined to establish a Special Committee,
consisting of Messrs. David Batten and Alan J. Eisenberg, to pursue the sale of
the GTD, and in furtherance of that goal, to retain special legal counsel and to
engage an outside investment banking firm for the purpose of advising on the
sale of the GTD and rendering an opinion as to the fairness of the financial
terms of any proposed sale, respectively. Mr. Eisenberg has been employed by the
Company since 1980 and became President of the MTD in 1994. He has been a Vice
President of the Company since 1983 and is responsible for the Company's
software activities. Mr. Eisenberg has been a director of the Company since
1992. Mr. Batten has been a director of the Company since May 1997. From 1968 to
1990, Mr. Batten was employed with The First Boston Corporation ("First
Boston"), and was a Managing Director of that firm from 1977 to 1990, executive
director of Credit Suisse First Boston (London) from 1986 to 1988, head of First
Boston's capital markets division from 1979 to 1986, and a member of that firm's
management committee from 1981 to 1990. From 1990 to 1992, Mr. Batten was a
general partner with The Blackstone Group, in charge of partnership capital and
new business, and from 1992 to 1994 Mr. Batten was a general partner of Lazard
Freres & Co., in charge of capital markets. Since 1994 Mr. Batten has been a
private investor in venture capital investments in start-up and early-stage
companies. In selecting Messrs. Batten and Eisenberg for the Special Committee,
the directors determined that Messrs. Batten and Eisenberg had the appropriate
background knowledge and experience for the task that was presented, including a
substantial base of information concerning all aspects of the GTD's operations
and, in the case of Mr. Batten, a background in
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investment banking and business valuation, and that neither of them had any
material potential conflicts of interest in evaluating a Management Group bid,
inasmuch as neither was an employee of the GTD, was associated with the
Management Group bid, or was otherwise potentially related to the Sale
transaction, whereas the other directors who were not members of the Management
Group had potential conflicts of interest, including fee arrangements. Mr. Alan
S. Poole, a non-officer director, was then contemplating investing in the
Purchaser (he subsequently determined not to do so) and Mr. Alex A. Adelson was
originally to receive a success fee in connection with the Sale.
Following the August 4th Board meeting, the Special Committee retained and
conferred with Battle Fowler LLP, its special legal counsel, which had not
previously acted as counsel to the Company or the Management Group.
Subsequently, Battle Fowler LLP has served as counsel to the Company in
connection with the transaction described under the caption "The Proposed
Issuance" (Proposal 2) in this Proxy Statement. Battle Fowler LLP does not serve
as the Company's counsel generally, at this time, and the Company retains
various counsel to assist its various needs for legal services. Battle Fowler
LLP does not represent the Management Group (one of whose members is an
executive officer and director of the Company) or any individual member thereof.
Battle Fowler LLP has advised the Company that, in view of the foregoing, it
does not consider its representation of the Special Committee in connection with
the Sale and its representation of the Company in connection with the
transaction described under the caption "The Proposed Issuance" to represent a
conflict of interest. The Special Committee also met with Cowen & Company
("Cowen"), which had recently been retained by the Base Ten Board as the
Company's financial advisor, and retained Cowen as the Special Committee's
financial advisor in connection with the possible sale of the GTD. The Special
Committee was authorized to select any financial advisor, but engaged Cowen
after consideration of Cowen's credentials (which are described in the third
paragraph under "Opinion of Financial Adviser to the Special Committee," below),
and determining that Cowen's engagement by the Company did not present any
material potential conflicts of interest. Based on its review of Cowen's
credentials, the Special Committee did not believe it necessary to consider or
interview other financial advisors, and did not do so. During August, detailed
due diligence information regarding the GTD was delivered to The Edo Corporation
("Edo"), a third-party defense contractor that had, earlier in the summer of
1997, indicated tentative interest in (but had not pursued) a possible
acquisition of the GTD. The Special Committee, with the advice of its special
counsel and Cowen, determined that an auction of the GTD should not be pursued
because of the risk of an adverse effect on the GTD's business and prospects
that was believed by the Special Committee to be likely if that path were
undertaken, and in particular the risks that key employees would defect during
an extended auction process, that such a procedure and attendant public
disclosure would allow competitors to disparage the GTD as unstable, that
potential customers would delay any future contract awards during the pendency
of an auction, and that the process would thereby interfere with bids on new or
additional contracts. The Special Committee also took into consideration a
statement by Edo that it would not participate in an auction process.
Consequently, the Special Committee determined that it was prudent to limit
solicitation to the Management Group and to Edo, thereby assuring the
possibility of at least two competing bids. In view of its business, as well as
its earlier indication of interest, Edo was believed by the Special Committee to
be a logical potential bidder. The Management Group also objected to an auction
process, based on an assessment of the same risks as those considered by the
Special Committee. At the same time, the Company's management considered what
minimum requirements as regards (i) continued occupancy by the GTD of the
existing facilities in Trenton and (ii) transitional accounting, personnel and
other services would be necessary in order to permit the Company to conduct
operations following a sale with minimal disruption. In addition, the Company's
management considered employee morale and reaction to a sale, and reached an
initial determination during this period that in order to retain valued
employees of both the GTD and the MTD during the sale process and to encourage
certain GTD employees to agree to be employed by a buyer of the GTD, it would be
in the best interests of the Company and its shareholders to extend the exercise
period of certain employees' incentive stock options granted under four Base Ten
stock option plans for a two-year period following any termination of
employment, even if voluntary. See "The Option Plan
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Amendments," below, for a more complete description of the proposed amendments
effecting such extensions and the consequences thereof. If those amendments are
approved, the exercise period of incentive stock options held by certain members
of the Management Group (but not Mr. Klinsport's) will be extended for a
two-year period following the Sale.
In late August 1997, a formal letter soliciting proposals for the purchase
of the assets and liabilities of the GTD was issued by Cowen to the Management
Group and to Edo, requesting that preliminary proposals containing their
indications of interest be submitted by September 8, 1997. The date for response
was subsequently extended to September 15th at the request of Edo. For the
reasons described above, no other parties were solicited to submit proposals to
purchase the GTD.
On September 15th, Cowen received the Management Group's proposal and Edo's
tentative bid. The Management Group's bid included (i) an aggregate purchase
price equal to the net asset value of the GTD, plus $400,000 (estimated to be
between $5 and $6 million), of which $3.5 million would be payable in cash, and
the balance in the form of a five-year note, (ii) a contingent payment of
$400,000 if certain orders were received by the GTD, (iii) an agreement to
sub-lease the existing GTD facilities for three years, and (iv) a three-month
transitional arrangement for certain services. Edo's tentative offer was for a
purchase price of between $4 million and $5 million, with the form of
consideration unspecified, but expected to be all cash, and a one-year sub-lease
arrangement. The Special Committee was advised by Cowen that the present value
of the Management Group's bid exceeded the upper limit of Edo's tentative bid.
Edo also declined to increase its bid when offered the opportunity to do so by
Cowen. Upon analysis of the financial terms and of the provisions of each
proposal, the Special Committee concluded that the Management Group's proposal
offered higher value to the Company and was therefore preferable from a
financial point of view. In addition, the Management Group's offer was not
subject to further due diligence while Edo conditioned its offer on the results
of further due diligence and investigation, which would have required additional
time to conclude and for which Edo did not establish a firm timetable. It was
further noted that in addition to a higher purchase price, the Management
Group's offer included a provision for occupancy of the Company's premises for
the three year minimum period sought by the Company compared to one year for
Edo, thereby providing the Company with the benefits of three years' rental
income.
Based on the foregoing, the Special Committee, after consultation with other
Base Ten Board members who were not affiliated with the Management Group,
determined to pursue the Management Group's offer. The Special Committee also
concluded, however, that although the Management Group's initial proposal met
most of the Company's basic financial and structural requirements, certain
aspects required further negotiation. In particular, the Special Committee came
to the view that it would be appropriate for Base Ten to retain an equity
interest in the GTD or acquire an equity interest in the Purchaser so as to
afford Base Ten the opportunity to benefit if the GTD were to achieve a
substantial increase in its business in the future, particularly in view of the
Management Group's request that a portion of the purchase price be in the form
of a promissory note. In addition, a break-up fee of $850,000 requested by the
Management Group was viewed as excessive in amount.
The Special Committee and Cowen therefore met with representatives of the
Management Group on September 19th and proposed that Base Ten retain a 19.9%
minority interest in the GTD, and that the break-up fee be reduced to 3% of the
aggregate purchase price paid. The representatives of the Management Group
accepted a reduction in the break-up fee but rejected the proposal for Base Ten
to retain an equity interest in the GTD, and the discussions were suspended.
Further conversations ensued over the next two days between Base Ten's
Vice-Chairman, Mr. Alexander Adelson, and representatives of the Management
Group, but no agreement was reached. A special meeting of the Base Ten Board was
convened on Monday, September 22nd, with a representative of Battle Fowler LLP
present, and all Board members were briefed on the status of the negotiations.
After extensive deliberations (with Mr. Klinsport absent), including a
presentation by Mr. Kranzler regarding the likelihood of continued operating
losses by the GTD and the possible adverse effects on the Company and the GTD if
a sale were not concluded expeditiously, followed by negotiations with
representatives of the Management Group, a compromise was
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reached in which it was proposed that Base Ten receive, as additional
consideration, a warrant to purchase common stock of the Purchaser on the terms
described below (the "Warrant"). Cowen did not participate in any of the
foregoing meetings or negotiations (other than the meeting on September 15th)
because its services with respect thereto were not deemed necessary and it was
believed that its independence and objectivity could be better maintained by its
not participating as a negotiator on behalf of any party. Nor did Cowen
"approve" the price or other terms of the Sale; its services were limited to
rendering the fairness opinion described elsewhere in this Proxy Statement.
Special counsel was asked to participate in the meetings, however, solely to
enable it to explore and advise on legal issues and to properly prepare any
agreements that were reached.
Further negotiations continued throughout mid-October on these and other
issues while an initial draft of a definitive purchase agreement was prepared
and negotiated. During the course of those negotiations, the Purchaser agreed to
increase the term of the sublease to five years. At a meeting of Base Ten's
Board on October 13, 1997, the Base Ten Board unanimously approved the Sale,
subject to receipt of a favorable opinion from Cowen and final review and
approval by the Special Committee and subject to shareholder approval,
authorized the execution and delivery of a definitive purchase agreement
providing for the Sale, and authorized filing of preliminary proxy solicitation
materials seeking shareholder approval and adoption of the Purchase Agreement
providing for the Sale. At a meeting of the Special Meeting on October 16, 1997,
Cowen delivered its preliminary oral opinion to the Special Committee, and the
Special Committee thereafter completed its final review and approved the Sale.
The definitive Purchase Agreement was signed on October 27, 1997, on which date
Cowen delivered its written opinion to the Special Committee described below,
and Base Ten publicly announced that its Board of Directors had approved the
Sale and had entered into a definitive agreement.
RECOMMENDATION OF THE BASE TEN BOARD AND BASE TEN'S REASONS FOR THE SALE
In considering the Sale, Base Ten shareholders are urged to read in its
entirety the discussion under the caption "Interests of Certain Persons in the
Sale; Conflicts of Interest" in this Proxy Statement.
The Board of Directors of Base Ten believes that the terms of the Sale are
fair to, and in the best interests of, Base Ten and its shareholders.
Accordingly, the Board of Directors of Base Ten has unanimously approved the
Sale and unanimously recommends the approval and adoption of the Purchase
Agreement providing for the Sale by Base Ten shareholders. In reaching its
conclusions, the Base Ten Board considered a number of factors, including the
following which it considered to be material: (i) information concerning the
financial performance, condition, business operations and prospects of each of
the Company as a whole, and each of the GTD and the MTD, viewed separately; (ii)
anticipated limitations on future growth of GTD revenues, the prospects for
continuing losses, and the need for substantial cash resources to fund those
losses; (iii) the benefits that could reasonably be expected to be realized by
Base Ten from the Sale, which are described in the three immediately following
paragraphs; (iv) the financial and other terms and structure of the Sale,
including the fact that the Purchaser would sub-lease a substantial portion of
the Trenton facilities for a five-year period; and (v) the opinion of Cowen, to
the Special Committee described below, that the proposed Sale was fair to Base
Ten from a financial point of view. The Base Ten Board regarded the first four
of the aforementioned factors as primarily supporting its conclusion that the
terms of the Sale are in the best interests of Base Ten and its shareholders,
the last of the aforementioned factors as primarily supporting its conclusion
that the terms of the Sale are fair to Base Ten and its shareholders, and the
fourth of the aforementioned factors as also supporting its conclusion as to
fairness because of the inclusion in the terms and structure of the Sale of a
contingent future interest in the Purchaser, a five-year sublease and a
transitional service agreement.
A prime motivation for the Sale was a concern that the GTD's recent past
losses would continue with no foreseeable opportunities for significant sales
growth in the future. In addition, the Board was concerned that the Company's
previously declared focus on the MTD, and lower level of investment in new GTD
products, had created low morale among GTD personnel, with a consequent risk of
significant
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loss of senior and key technical and engineering personnel. In the Board's
opinion, significant personnel losses would have left the Company unable to meet
its contractual commitments, and could have resulted in further, and large,
losses.
A factor which weighed against the Sale was the possibility of a significant
upturn in GTD defense business. However, the Board viewed this possibility as
unlikely and, to date, no new significant orders have been booked by the GTD
since the execution of the Purchase Agreement. In addition, the Board, in order
to retain a limited participation in the results of any such upturn, negotiated
a contingent future interest in the Purchaser as part of the terms of the Sale.
It did so in the form of (i) a contingent $400,000 payment dependent on the
Purchaser receiving certain orders from Daimler Benz Aerospace for the Tornado
Stores Management System (See "The Government Technology Division--Products and
Programs--Tornado Program"), (ii) the Warrant, and (iii) a right to receive 15%
of the gross proceeds of a sale of the Purchaser prior to its initial public
offering. See "The Purchase Agreement, Note and Warrant", below. One factor
which weighed against the Sale was the possibility of future GTD revenue growth
from commercial applications. A possible adverse consequence of the Sale was the
risk that the Company would be losing a source of cash flow to fund MTD
operations. Another factor which weighed against the Sale was the assumption by
the Company, through its acceptance of a Purchaser note as part payment of the
purchase price, of some of the risk that the Purchaser would not succeed as a
stand-alone entity.
Base Ten believes that the Sale offers it an opportunity to focus its
management and financial resources on the MTD, and to enhance its marketing and
sales efforts to address the potential market for its global Computerized
Manufacturing Execution Systems ("MES"). In reviewing the reasons for the Sale,
the Base Ten Board noted that the Sale would provide $3.5 million in immediate
cash resources to the Company, as well as a limited opportunity (through the
Warrant and other contingent future interests in the Purchaser) for
participating in any future growth of the GTD business without continuing to
fund the operating losses of the GTD business, and for continued occupancy of
the leased GTD Trenton facilities by the Purchaser for a five-year period.
Management also noted the likely benefits of having the financial community and
investors presented with a company focused on a single industry segment that is
associated with possible prospects for a relatively high rate of growth.
The foregoing discussion of the information and all the material factors
considered and given weight by the Base Ten Board is not intended to be
exhaustive. In reaching the determination to approve and recommend the Sale, the
Base Ten Board did not assign any relative or specific weights to the foregoing
factors and individual directors may have given differing weights to different
factors. The Base Ten Board is, however, unanimous in its recommendation to the
holders of Base Ten Common Stock that the Purchase Agreement providing for the
Sale be approved and adopted.
THE BASE TEN BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF BASE TEN
COMMON STOCK VOTE "FOR" THE APPROVAL AND ADOPTION OF THE PURCHASE AGREEMENT
PROVIDING FOR THE SALE.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
Cowen has acted as financial advisor to the Special Committee in connection
with the Sale. Pursuant to an engagement letter dated August 27, 1997 (the
"Cowen Engagement Letter"), Base Ten retained Cowen to serve as the financial
advisor to the Special Committee with respect to the Sale. As part of this
assignment, Cowen was asked to render an opinion to the Special Committee as to
the fairness, from a financial point of view, to Base Ten of the financial terms
of the Sale pursuant to the Purchase Agreement.
On October 16, 1997 Cowen delivered certain of its written analysis and a
preliminary oral opinion to the Special Committee to the effect that, as of such
date, the financial terms of the Sale pursuant to the Purchase Agreement were
fair, from a financial point of view, to Base Ten. THE FULL TEXT OF THE WRITTEN
OPINION OF COWEN, DATED OCTOBER 27, 1997, IS ATTACHED HERETO AS EXHIBIT A AND IS
INCORPORATED BY REFERENCE. HOLDERS OF COMPANY COMMON STOCK ARE URGED TO READ THE
OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER
MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY COWEN. THIS SUMMARY OF THE
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WRITTEN OPINION OF COWEN SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. COWEN'S ANALYSIS AND OPINION WERE
PREPARED FOR AND ADDRESSED TO THE SPECIAL COMMITTEE AND ARE DIRECTED ONLY TO THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE FINANCIAL TERMS OF THE SALE
PURSUANT TO THE PURCHASE AND DO NOT CONSTITUTE AN OPINION AS TO THE MERITS OF
THE SALE CONTEMPLATED BY THE PURCHASE AGREEMENT OR A RECOMMENDATION TO ANY
HOLDERS OF BASE TEN COMMON STOCK AS TO HOW TO VOTE AT THE MEETING.
Cowen was selected by Base Ten as the financial advisor to the Special
Committee, and to render an opinion to the Special Committee, because Cowen is a
nationally recognized investment banking firm and because the principals of
Cowen have substantial experience in transactions similar to the Sale and are
familiar with Base Ten and its businesses. As part of its investment banking
business, Cowen is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions and valuations for
corporate and other purposes. Cowen and its affiliates are providing financing
services for the Company and will receive customary fees for rendering such
services. In addition, in the ordinary course of its business, Cowen and its
affiliates trade the equity securities of Base Ten for their own account and for
the accounts of their customers, and accordingly, may at any time hold a long or
short position in such securities.
In arriving at its opinion, Cowen (a) reviewed the Agreement; (b) reviewed
the Company's consolidated financial statements for the nine months ended July
31, 1997 and the fiscal years ended October 31, 1996, 1995 and 1994, certain
publicly available filings with the Securities and Exchange Commission and
certain other relevant financial and operating data of the Company; (c) reviewed
GTD's financial statements as prepared by management of the Company for the nine
months ended July 31, 1997 and the fiscal years ended October 31, 1996 and 1995
and certain other relevant financial and operating data of GTD; (d) held
meetings and discussions with management and senior personnel of the Company to
discuss the business, operations, historical financial results and future
prospects of GTD; (e) reviewed financial projections furnished to us by the
management of the Company, including among other things, the capital structure,
sales, net income, cash flow, capital requirements and other data of GTD we
deemed relevant; (f) reviewed the historical prices of the Class A and Class B
common stock of the Company from October 13, 1996 to October 13, 1997 and
compared those trading histories with those of market indices which we deemed
relevant; (g) reviewed the valuation of GTD in comparison to other similar
publicly traded companies; (h) compared the financial terms, to the extent
publicly available, of the Transaction to selected business transactions deemed
to be comparable in whole or in part; (i) conducted a discounted cash flow
analysis of GTD based on financial projections provided to us by management of
the Company; (j) analyzed potential pro forma financial effects of the
Transaction contemplated by the Agreement; and (k) conducted such other studies,
analysis, inquiries and investigations as we deemed appropriate. All of the
significant financial analyses performed by Cowen in arriving at its opinion are
summarized below. See "--Analysis of Certain Public Traded Companies";
"--Analysis of Certain Transactions"; "--Discounted Cash Flow Analysis"; "--Pro
Forma Analysis" and "--Stock Trading History." Cowen also considered the
estimated potential value based on management's estimates of the Daimler Benz
contract in rendering its opinion. See "The Purchase Agreement, Note and
Warrant." At the request of the Company, Cowen, on behalf of the Special
Committee, solicited an indication of interest to acquire substantially all of
the assets of GTD from a third party. See "Background."
In rendering its opinion, Cowen relied upon the Company's management with
respect to the accuracy and completeness of the financial and other information
furnished to Cowen as described above. Cowen assumed that financial forecasts,
projections and estimates reflected the best currently available estimates and
judgments of the Company's management as to the expected future financial
performance of GTD. Cowen has not assumed any responsibility for independent
verification of such information, including financial information, nor has Cowen
made an independent evaluation or appraisal of any of the properties or assets
of GTD. With respect to all legal matters relating to the Company and Buyer,
Cowen has relied on the advice of legal counsel to the Company.
The opinion of Cowen is necessarily based on general economic, market
financial and other conditions as they exist on, and can be evaluated as of, the
date hereof, as well as the information currently available to Cowen. It should
be understood that, although subsequent developments may affect Cowen's opinion,
Cowen does not have any obligation to update, revise or reaffirm its opinion.
Cowen's opinion does not constitute a recommendation to any stockholder as to
how such stockholder should vote on the proposed Sale. The Cowen opinion does
not imply any conclusion as to the likely trading range for the
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common stock of the Company following consummation of the Sale or otherwise,
which may vary depending on numerous factors that generally influence the price
of securities.
Cowen's opinion is limited to the fairness, from a financial point of view,
of the terms of the Sale. Cowen expresses no opinion with respect to any other
reasons, legal, business or otherwise, that may support the decision of the
Special Committee to approve, or the Company's decision to consummate, the Sale.
For purposes of rendering its opinion Cowen has assumed in all respects
material to the analysis, that the representations and warranties of each party
contained in the Agreement are true and correct, that each party will perform
all of the covenants and agreements required to be performed by it under the
Agreement and that all conditions to the consummation of the Transaction will be
satisfied without waiver thereof. Cowen has also assumed that all governmental,
regulatory or other consents and approvals contemplated by the Agreement will be
obtained and that in the course of obtaining any of those consents no
restrictions will be imposed or waivers made that would have an adverse effect
on the contemplated benefits of the Sale.
The following is a summary of all of the significant financial analyses
performed by Cowen to arrive at its opinion. Cowen performed certain procedures,
including each of the financial analyses described below, and reviewed with the
management of Base Ten the assumptions on which such analyses were based and
other factors, including the historical and projected financial results of the
GTD. No limitations were imposed by the Special Committee with respect to the
investigations made or procedures followed by Cowen in rendering its opinion.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES. To provide contextual data
and comparative market information, Cowen compared selected historical operating
and financial ratios for GTD to the corresponding data and ratios of certain
other companies (the "Selected Companies") whose securities are publicly traded
and which Cowen believes have operating, market valuation and trading valuations
similar to what might be expected of the GTD. These companies included: Boonton
Electronics Corp., Industrial Technologies Inc., Lifschultz Industries Inc.,
Novitron International Inc. and Scientific Industries Inc. Such data and ratios
include the Enterprise Value of such Selected Companies as multiples of revenues
for the LTM period and the market capitalization of common stock of such
Selected Companies as a multiple of the book value of common shareholders'
equity.
Such analysis indicated that, for the Selected Companies, (i) the median
values of Enterprise Value as a multiple of LTM revenue was .2 times and (ii)
the median of market capitalization of common stock as a multiple of the book
value of common shareholders' equity was .8 times.
The corresponding multiples of LTM revenues for the GTD implied by the
Purchaser's offer is .5 times. The corresponding multiple of market
capitalization of common stock as a multiple of the book value of common
shareholders' equity for the GTD implied by the Purchaser's offer is 1.3 times.
Although the Selected Companies were used for comparison purposes, none of
such companies is directly comparable to the GTD. Accordingly, an analysis of
the results of such a comparison is not purely mathematical but instead involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the Selected Companies and other factors that could
affect the trading value of the Selected Companies or the GTD to which they are
being compared.
In addition, Cowen also compared selected historical operating and financial
ratios for the GTD to the corresponding data and ratios of certain publicly
traded companies in the defense industry. Cowen, however, found these defense
industry companies not comparable to the GTD based on their relative size and
revenue and profitability characteristrics.
ANALYSIS OF CERTAIN TRANSACTIONS. Cowen reviewed the financial terms, to
the extent publicly available, of seven selected transactions (collectively, the
"Selected Transaction Types") which Cowen deemed relevant, based on the size of
the transactions and revenue and profitability characteristics of the acquired
companies, involving the acquisition of micro capitalization general
manufacturing companies, which were announced or completed since January 13,
1995. The transactions include, in reverse chronological order,
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the acquisitions of: NetFrame Systems, Inc. by Micron Electronics, Inc.; David
White, Inc. by Choucroute Partners; MDT Corp. by Getinge Acquisition Corp;
ASCOR, Inc. by Giga-Tronics, Inc.; International Jensen, Inc. by Recoton Corp.;
IDC Systems Inc. by Hi-Rise Recycling Systems, Inc.; and Community Health
Computing Corporation by ADAC Laboratories. Cowen reviewed the market
capitalization of common stock plus total debt less cash and equivalents
("Enterprise Value") paid in the Selected Transactions as a multiple of latest
reported twelve month ("LTM") revenues, and examined the multiples of equity
value paid in the Selected Transactions to book value.
Such analyses indicated that, (i) on the basis of the Enterprise Value paid,
the Selected Transactions had a median valuation of .5 times LTM revenues and
(ii) on the basis of equity value paid, the Selected Transactions had a median
valuation of 1.1 times book value.
The corresponding multiple of LTM revenues implied by the Purchaser's offer
is .5 times. The corresponding multiple of LTM book value implied by the
Purchaser's offer is 1.3 times.
Although the Selected Transactions were used for comparison purposes, none
of such transactions is directly comparable to the Transaction, and none of the
companies in such transactions are directly comparable to the GTD. Accordingly,
an analysis of the results of such a comparison is not purely mathematical but
instead involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies involved and other
factors that could affect the acquisition value of such companies or the GTD to
which they are being compared.
In addition, Cowen also reviewed the financial terms, to the extent publicly
available, of certain selected transactions in the defense industry. Cowen,
however, found the acquired companies in these transactions not comparable to
the GTD based on their relative size and revenue and profitability
characteristics.
DISCOUNTED CASH FLOW ANALYSIS. Cowen estimated the range of values for the
GTD based upon the discounted present value of the projected after-tax free cash
flows of the GTD for the fiscal years ended October 31, 1997 through 2001, and
of the terminal value of the GTD at October 31, 2001, based upon perpetual
growth rates of the GTD's revenue. After-tax cash flow was calculated by taking
projected EBIT and subtracting from such amount projected taxes, capital
expenditures, changes in non-cash working capital and changes in other assets
and liabilities and adding projected and historical depreciation and
amortization. This analysis was based upon certain assumptions described by,
projections supplied by and discussions held with the management of Base Ten.
See "Certain Projected Financial Information," below. In performing this
analysis, Cowen utilized discount rates ranging from 15% to 25%, which were
selected based on the estimated industry weighted average cost of capital
including a private market liquidity premium. Utilizing this methodology, GTD's
value ranged from $2.5 million to $11.9 million. The aggregate consideration
implied by the Purchaser's offer of $6.9 million is in the midrange of these
values.
PRO FORMA ANALYSIS. Cowen reviewed the projected income statements for the
fiscal years ended 1997 and 1998 of Base Ten including the operations of the GTD
and of Base Ten pro forma the Sale which excluded the operations of the GTD.
Such analysis indicated that Base Ten pro forma the Sale which excluded the
operating results of the GTD would have higher revenue growth rates in 1998 over
1997 and higher operating margins in 1998 than Base Ten including the GTD. Cowen
also reviewed the pro forma balance sheet effects as of July 31, 1997 which
indicated that the ratio of total debt to total book capitalization for Base Ten
including the GTD was 77% as compared with 78% for Base Ten pro forma the Sale
excluding the GTD.
STOCK TRADING HISTORY. Cowen reviewed the historical market prices and
trading volumes of Base Ten Class A and Class B Common Stock from October 13,
1996 to October 13, 1997. Cowen also compared Base Ten's closing stock prices
with the NASDAQ Composite and Russell 2000 indices. This information was
presented solely to provide the Special Committee with background information
regarding the stock prices of Base Ten over the period indicated. Cowen noted
that over the indicated periods the high and low prices for shares of Base Ten
Class A Common Stock were $12.25 and $9.63, respectively, and the high and low
prices of Base Ten Class B Common Stock were $14.75 and $10.50, respectively,
and that the average daily trading volume of Base Ten's Class A and Class B
shares traded were approximately 39,441 and 204,
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respectively. During the indicated period, Base Ten's stock prices
underperformed the NASDAQ Composite and Russell 2000 indices.
The summary set forth above does not purport to be a complete description of
the analyses performed by Cowen. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Cowen did not attribute any particular
weight to any analyses or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, notwithstanding the separate factors summarized above, Cowen
believes, and has advised the Special Committee, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of Base Ten. These analyses performed by Cowen are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold.
Accordingly, such analyses and estimates are inherently uncertain and,
though considered reasonable by Base Ten, are subject to significant business,
economic, competitive, regulatory and other uncertainties and contingencies all
of which are difficult or impossible to predict and many of which are beyond the
control of Base Ten. As mentioned above, the analyses supplied by Cowen and its
opinion were among several factors taken into consideration by the Special
Committee in making its decision to approve the Sale and should not be
considered as determinative of such decision.
Pursuant to the Cowen Engagement Letter, Base Ten has agreed to pay Cowen
$300,000 for its financial advisory services provided in connection with the
Sale. Additionally, Base Ten has agreed to reimburse Cowen for its out-of-pocket
expenses (including the reasonable fees and expenses of its counsel) incurred or
accrued during the period of, and in connection with Cowen's engagement. Base
Ten has also agreed to indemnify Cowen against certain liabilities, including
liabilities under the federal securities laws, relating to or arising out of
services performed by Cowen as financial advisor to the Special Committee in
connection with the Sale, unless it is finally judicially determined that such
liabilities arose out of Cowen's gross negligence or willful misconduct. The
terms of the fee arrangement with Cowen, which are customary in transactions of
this nature, were negotiated at arm's length between Base Ten and Cowen, and the
Special Committee was aware of such arrangement. Cowen has consented to the use
of its name and description of its opinion in this Proxy Statement.
In addition, in July 1997, Cowen was retained to provide various financial
advisory and investment banking services to Base Ten in connection with the
transaction that relates to the Issuance, which is described separately
elsewhere in this Proxy Statement (see "The Proposed Issuance Overview"), for
which it received $432,216, and five-year warrants to purchase 43,983 shares of
Common Stock, exercisable at $15.625 per share. The Special Committee was aware
of the terms of such fee arrangement, which were customary for transactions of
such nature.
CERTAIN PROJECTED FINANCIAL INFORMATION
The following projections were prepared by the Company's management in
August 1997, and were furnished to Cowen in connection with Cowen's analysis of
the proposed Sale and the preparation of a fairness opinion to the Special
Committee as to whether or not the proposed Sale is fair to the Company from a
financial point of view. The members of the Company's management and Board of
Directors and Cowen received the projections; they were also made available to
the Purchaser and Edo. The Company's management believes that the projections
were prepared on a reasonable basis and reflected its best estimates and
judgment as to the GTD's expected future performance in light of the information
available to it and its understanding of the Company's business strategies and
practices at the time the projections were prepared. In voting to approve, and
recommend shareholder approval of, the Sale, the Company's
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Board of Directors relied on the judgment of the Company's management as to the
reasonableness of the projections. In preparing its opinion, Cowen assumed that
the financial forecasts furnished to it by the Company were reasonably prepared
and reflected the best currently available estimates and judgment of the
Company's management as to the expected future financial performance of the GTD.
Cowen relied on the accuracy and completeness of all information supplied or
otherwise made available to it, including but not limited to the projections,
and did not independently verify such information. The Company is not aware of
any forecasts of the GTD's future performance prepared by financial analysts.
THESE PROJECTIONS WERE PREPARED IN AUGUST 1997, BASED UPON A NUMBER OF
ESTIMATES AND ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT AT THAT TIME. SUCH
ESTIMATES ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE
COMPANY'S CONTROL, AND UPON ASSUMPTIONS WITH RESPECT TO FUTURE BUSINESS
STRATEGIES AND PRACTICES THAT ARE SUBJECT TO CHANGE. THE PROJECTIONS AND ACTUAL
RESULTS WILL VARY, AND THOSE VARIATIONS MAY BE MATERIAL. BASED UPON THE GTD'S
PERFORMANCE SINCE JULY 1997, THE COMPANY'S MANAGEMENT BELIEVES THAT THE
PROJECTIONS WERE NOT REALIZED DURING THE FISCAL YEAR ENDED OCTOBER 31, 1997.
The following material assumptions were used by the Company's management in
preparing the projections:
1. The GTD being a stand-alone entity with sole focus on sales to prime
contractors or subcontractors of the U.S. or foreign governments.
2. Sufficient cash could be obtained from external sources for investment in
the GTD to fund receivables, development, and proposals.
3. A sufficient level of business could be achieved from continued business
relationships with existing customers such as McDonnell Douglas and Daimler Benz
Aerospace.
4. A significant level of qualified employees who worked in the GTD could be
maintained in order to achieve satisfactory performance on existing contracts
and provide competent competitive proposals for future work.
THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR
COMPLIANCE WITH GUIDELINES ESTABLISHED BY THE COMMISSION OR THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. THE COMPANY DID NOT ENGAGE ANY
INDEPENDENT AUDITORS OR ACCOUNTANTS TO EXAMINE, COMPILE OR OTHERWISE BECOME
INVOLVED WITH THE PREPARATION OF THE PROJECTIONS.
THE PROJECTIONS ARE INCLUDED IN THIS PROXY STATEMENT SOLELY BECAUSE THEY
WERE PROVIDED TO COWEN IN CONNECTION WITH THE PREPARATION OF COWEN'S OPINION,
AND THE PROJECTIONS SHOULD NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO
ASSIST IN AN UNDERSTANDING OF THE ANALYSIS ON WHICH THAT OPINION WAS BASED. THE
INCLUSION OF THE PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION
BY THE COMPANY OR ANY OTHER PERSON THAT THE PROJECTIONS WILL BE ACHIEVED IN THE
EVENT THE GTD REMAINS PART OF THE COMPANY. THE COMPANY DOES NOT INTEND TO UPDATE
OR OTHERWISE REVISE THE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE
DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT
THAT ANY OR ALL OF PROJECTIONS ARE SHOWN TO BE INACCURATE.
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CERTAIN FINANCIAL INFORMATION, INCLUDING PROJECTIONS
(ALL AMOUNTS IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1995 1996 1997E 1998E 1999E
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Total Sales............................................................. $ 16.4 $ 14.1 $ 10.7 $ 9.0 $ 14.0
Cost of Goods Sold...................................................... 11.9 10.7 8.9 6.0 9.0
--------- --------- --------- --- ---------
Gross Profit............................................................ 4.5 3.4 1.8 3.0 5.0
Selling & Administrative Expenses....................................... 3.5 4.2 3.1 2.5 3.5
MD & Rental Expense Adjustments......................................... (0.0) (0.0) 0.2 0.0 (0.3)
--------- --------- --------- --- ---------
Operating Profit........................................................ $ 1.0 $ (0.9) $ (1.2) $ 0.5 $ 1.2
</TABLE>
It should be noted that these projections are predicated on the GTD being
separated from the Company and operated under reduced salary and operating
costs, a circumstance not considered possible at the Company.
Management believes that had it been required to retain the GTD, a reduction
in salaries and staff members in the GTD would have been mandatory to minimize
losses. It was believed that such actions would have created a difficult morale
condition in the MTD, whose employees would have been concerned that such cost
reduction methods were to be imposed on them. The consequences of such a morale
problem were forecast to be defections of important software development
personnel and the consequent reduction in the MTD's ability to perform when it
was already fully committed on existing contracts.
Management's view is that the retention of the GTD as part of the Company,
even if cost reduction methods were implemented, would have resulted in
continuing losses in the ensuing years and absorbed both capital and management
time better spent in the development of the MTD. Forecasts showing a profit of
$.5 million in fiscal 1998, if the GTD were to be sold, would have changed to
losses of at least $1 million based on historical data for 1997 even if the MTD
were able to meet the $9 million revenue projection.
AS INDICATED ABOVE, THE COMPANY'S MANAGEMENT BELIEVES THAT THE PROJECTIONS
WERE NOT REALIZED DURING THE FISCAL YEAR ENDED OCTOBER 31, 1997. AMONG THE
IMPORTANT FACTORS THAT THE COMPANY BELIEVES MAY CAUSE THE PROJECTIONS TO DIFFER
MATERIALLY FROM THE ACTUAL RESULTS ARE: (I) LOWER SALES THAN THOSE FORECAST,
(II) CANCELLATION OF EXISTING CONTRACTS, AND (III) CHANGES IN THE COST OR
AVAILABILITY OF MATERIALS, (IV) UNEXPECTED OR ADVERSE CHANGES THAT COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE GTD AND THE DEFENSE INDUSTRY GENERALLY,
ESPECIALLY THE CYCLICAL NATURE OF THE DEFENSE INDUSTRY AND A CONTINUED EXTENDED
DOWNTURN IN THE DEFENSE INDUSTRY RESULTING FROM, AMONG OTHER THINGS, THE END OF
THE "COLD WAR"; AND (V) ADVERSE EFFECTS ON THE GTD'S ABILITY TO CARRY OUT ITS
CURRENT BUSINESS STRATEGY, WHICH DEPENDS UPON SUCH FACTORS AS ITS ABILITY TO
COMPETE EFFECTIVELY FOR GOVERNMENT CONTRACTS AND THE AVAILABILITY OF ADDITIONAL
FINANCING TO FINANCE DEVELOPMENT EFFORTS.
IN ASSESSING THE PROJECTIONS, READERS ARE URGED TO READ CAREFULLY ALL OF THE
FOREGOING CAUTIONARY STATEMENTS.
INTERESTS OF CERTAIN PERSONS IN THE SALE AND CERTAIN ARRANGEMENTS REGARDING
CERTAIN DIRECTORS AND MANAGEMENT OF BASE TEN FOLLOWING THE SALE; CONFLICTS OF
INTEREST
In considering the recommendation of the Special Committee and Base Ten's
Board with respect to the Sale, shareholders should be aware that certain
members of management and the Board of Directors of Base Ten have certain
interests in the Sale that are in addition to and, in the case of certain
officers and directors, potentially adverse to, the interests of shareholders of
Base Ten generally. The Board of Directors of Base Ten was aware of these
interests and considered them, among other matters, in
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<PAGE>
approving the Purchase Agreement and recommending its approval and adoption by
the shareholders of Base Ten at the Meeting.
THE MANAGEMENT GROUP. The Management Group is led by Mr. Klinsport and
consists primarily of senior operating personnel of the GTD, certain of whom
will own equity interests in, and all of whom will be employed by, the
Purchaser. The senior executive officers of the Purchaser will initially consist
of Mr. Klinsport, who will serve as President and Chief Executive Officer, and
four other individuals, Jeffrey Billie, Marguerite Cole, Edwin Struble and
Rodney Wurst, all of whom are presently employees of the GTD and all of whom are
presently officers of the Company except for Jeffrey Billie. Each of the senior
executive officers of the Purchaser will own an equity interest in the
Purchaser, in the following percentages: Mr. Klinsport (3.6%), Mr. Billie
(0.875%), Ms. Cole (0.875%), Mr. Struble (0.875%), and Mr. Wurst (0.875%); and
each may also participate in the Purchaser's employee stock option plan.
Consequently, members of the GTD's management and, in particular, Mr. Klinsport,
may be deemed to have a conflict between their duties as employees of Base Ten
and their interests in the Purchaser. However, evaluation and negotiation of the
Management Group's proposal was conducted by the Special Committee, and
evaluations and discussions of the Management Group's offer by the Base Ten
Board at its meetings were conducted without Mr. Klinsport being present.
LEASE OF PREMISES. The Company entered into a sale and leaseback agreement
on October 28, 1994. Under the arrangement, the Company sold its main building
at One Electronics Drive, Trenton, New Jersey, and agreed to lease it back for a
period of 15 years under terms that qualify the arrangement as a capital lease.
The buyer/lessor of the building was a partnership and Mr. Myles M. Kranzler,
the Company's chairman and chief executive officer, is a minority partner in
that partnership. The Purchase Agreement provides that the Purchaser and the
Company will enter into a sub-lease, pursuant to which the Company will, for a
term of five years, sub-lease to the Purchaser approximately 40,000 square feet
(including 10,000 square feet of common space) at such building. See "The
Purchase Agreement, Note and Warrant--Sublease", below.
The Sale will not constitute a "change of control" of the Company under any
applicable corporate instruments or agreements.
CONSULTING AGREEMENTS. Base Ten has executed consulting agreements with
each of Messrs. Klinsport and Kranzler.
The Special Committee had rejected an initial proposal that Mr. Klinsport
receive one year's salary as a termination payment, taking into consideration
Mr. Klinsport's probable voluntary resignation upon a sale of the GTD. However,
the Company's Special Committee recognized the Company's need for transitional
financial accounting services and for continuity of chief financial officer
functions, in order both to achieve an orderly transition and preserve the
benefits of Mr. Klinsport's long years of experience as Base Ten's chief
financial and accounting officer. Consequently the Special Committee proposed,
and the Base Ten Board approved, a consulting agreement on the terms described
below. The Board of Directors and the Special Committee believe the consulting
arrangement with Mr. Klinsport is necessary to make certain of the Company's
short-term requirements, as described above, and that the terms of the
arrangement are fair to the Company under the circumstances, it being unlikely
in the opinion of the Board and the Special Committee that it could have
obtained the services of any persons with Mr. Klinsport's knowledge and
background for a short-term consulting arrangement on similar or more favorable
terms.
Mr. Klinsport's consulting agreement will take affect upon the closing of
the Sale. The consulting agreement with Mr. Klinsport provides for Mr. Klinsport
to be available as a consultant to Base Ten for two years following the Sale
with respect to events and matters which occurred during Mr. Klinsport's tenure
as chief financial officer of Base Ten, provided such consulting services do not
interfere with Mr. Klinsport's other employment duties. In consideration of such
services, Base Ten will pay to
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Mr. Klinsport, immediately following his termination of employment with Base
Ten, $225,000, an amount equal to his current annual base salary.
The Company recently appointed Thomas E. Gardner as the Company's new chief
executive officer and President. Mr. Gardner comes to Base Ten with more than 25
years of management experience in the healthcare, pharmaceutical and information
technology industries. Mr. Gardner was most recently President, chief executive
officer, chief operating officer and a director of Access Health, Inc. in Rancho
Cordova, California. Access Health is a publicly traded health information
services company. As a top level executive with Johnson & Johnson from 1974
through 1987, Mr. Gardner headed up a number of the company's major domestic and
international divisions and instituted a number of programs that advanced the
company's markets and profitability. Subsequently, Mr. Gardner took his
technological skills and medical knowledge into the publishing field. From 1987
until 1990, he was Group President of Simon & Schuster a subsidiary of Paramount
Communications, Inc., where he instituted electronic management technology as
part of a productivity improvement program. In 1992 he joined The Dunn &
Bradstreet Corporation where as Corporate Vice President, and President and
chief executive officer of its subsidiary, Dun & Bradstreet Health Care
Information, he helped develop an integrated information and decision support
technology. Mr. Gardner had additional experience as President, chief executive
officer and chief operating officer of IMS America, Ltd. during his tenure at
Dun & Bradstreet.
Mr. Gardner's employment with Base Ten commenced on November 1. At that
time, Mr. Kranzler resigned as chief executive officer. Mr. Kranzler's
consulting agreement took effect on November 1.
The consulting agreement with Mr. Kranzler provides for Mr. Kranzler to be
available as a consultant to Base Ten for one year, but not in excess of 65
working days, for which services Mr. Kranzler will receive $100,000. For
consulting services in excess of 65 working days per year, Mr. Kranzler would
receive a fee of $1,600 per day. Mr. Kranzler will receive payment of all
accrued and unpaid salary and vacation pay, and Mr. Kranzler and his spouse
shall be entitled to continue their existing health and dental insurance
coverages, at the Company's expense, for the remainder of their respective
lives. Mr. Kranzler will agree not to compete with Base Ten for a two-year
period.
Also as part of such consulting agreement, the Company has agreed to pay to
Mr. Kranzler a fee of $300,000 in consideration of the consulting and
non-compete covenants and commitments by Mr. Kranzler described above, of which
$150,000 will be due and payable upon the consummation of a financing in which
the gross proceeds to the Company exceeds $5 million, and the remainder upon the
consummation of one or more financings in which the gross proceeds to the
Company (including proceeds of all financings consummated after October 6, 1997)
exceed $10 million. The financing transaction described under the caption "The
Proposed Issuance", if consummated in full, would result in the full fee being
payable to Mr. Kranzler.
CERTAIN TAX CONSEQUENCES OF THE SALE
Although the Sale will constitute a taxable transaction, the Company
anticipates that after giving effect to expenses of the transaction it will
incur a taxable loss in an amount the Company does not believe will be material.
THE PURCHASE AGREEMENT, NOTE AND WARRANT
GENERAL. Pursuant to the terms of the Purchase Agreement, in consideration
of the transfer to the Purchaser of substantially all of the operating assets of
the GTD (the "Assets"), which comprise specified inventory, fixed assets and
tangible personal property, intangible personal property and contract rights.
The Purchaser has agreed to pay the Company the consideration described below
and to assume certain liabilities associated with the GTD (the "Assumed
Liabilities").
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<PAGE>
CONSIDERATION. In consideration of the Assets and assumption of the Assumed
Liabilities, at the closing of the Sale (the "Closing") the Company will receive
the following from the Purchaser:
A. CASH. $3,500,000 in cash.
B. NOTE. A promissory note (the "Note") dated as of the Closing, to be
issued by the Purchaser in favor of the Company, in a principal amount equal to
the difference between (x) the amount of the net assets of the GTD as of the
Closing (as such amount shall be determined jointly by the Purchaser and the
Company on the basis of the Company's books of account) plus $400,000, and (y)
$3,500,000. The Note will have a term of five years and will bear interest at
the rate of 7.5% per annum, compared with the Company's existing debt (all of
which is unsecured), which bears interest at annual rates of 8.5% or 9.1%.
Principal payments under the Note will amortize over a three year period
beginning on the second anniversary of the Closing. Interest on the Note will be
payable quarterly beginning at the end of the first fiscal quarter following the
Closing. Net assets of the GTD will be the amount equal to difference between
the monetary value of the Assets reduced by the monetary value of the Assumed
Liabilities. The Note will be unsecured. Payment of the outstanding principal
and accrued interest under the Note will be accelerated upon the occurrence of
certain events including (a) any repayment of the principal of any indebtedness
of the Purchaser to affiliates of the Purchaser, and (b) certain customary
events of default.
It is anticipated that the Purchaser will pay the principal of and interest
on the Notes out of cash flow from the Purchaser's operations. Its ability to
make these payments (as well as payments under the sub-lease described below)
may be adversely affected by future operating losses, its obligations under
other indebtedness (including indebtedness which may be secured by certain of
the Assets), the Assumed Liabilities and claims of the Purchaser's creditors.
The Note is not secured by any collateral. Therefore, the Company's ability
to obtain payment of the Note in the event of a default may be substantially
impaired by claims of any secured creditors of the Purchaser. CONSEQUENTLY, THE
NET REALIZABLE VALUE OF THE NOTE MAY BE SUBSTANTIALLY LESS THAN ITS FACE AMOUNT.
C. RIGHTS ON SALE OR MERGER. In the event that the Purchaser is sold,
merged, or liquidated prior to its initial underwritten public offering, the
Company will receive 15% of the gross proceeds of such transaction that are in
excess of $7 million, and the Warrant described below will be canceled.
D. WARRANT. A warrant (the "Warrant") exercisable for that number of shares
of voting common stock of the Purchaser as equals 5% of the Purchaser's issued
and outstanding shares of common stock and common-stock equivalents (giving
effect to all outstanding convertible debt securities, warrants and options
issued in financing transactions, but not to options or warrants issued or
issuable to employees or others that are in the place of compensation for
services) immediately following and giving effect to the Purchaser's initial
underwritten public offering, with respect to which there can be no assurance.
The exercise price of the Warrant shall be 5% of two (2) times the current
valuation of the Purchaser, such valuation being the sum of (w) $3,500,000, (x)
the principal amount of the Note, (y) any payments made in connection with the
Daimler Benz Aerospace contract as described below, and (z) the amount of any
additional cash contributed or loaned to the Purchaser by any person prior to or
within 30 days of the Closing. The Warrant will be exercisable, commencing
immediately following the closing of the Purchaser's initial underwritten public
offering, for a five-year term, and will contain customary anti-dilution
protection against subsequent stock splits, stock dividends and combinations
(but not against subsequent additional sales of capital stock, whether or not
dilutive). The shares issuable on exercise of the Warrant will be restricted
from sale for a one-year period following an initial public offering, but not
more than 180 days beyond the termination of any lock-up period imposed on the
Purchaser's executive officers, directors and principal shareholders. The
Purchaser will register the shares issuable on exercise of the Warrant under the
Securities Act of 1933 for resale by the Purchaser commencing when the
restriction expires. The Warrant includes a cashless exercise feature which may
be utilized only with the Purchaser's consent and provisions
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for tendering indebtedness of the Purchaser to the Company as all or part
payment for the Warrant exercise price.
THE WARRANT WILL HAVE NO VALUE UNLESS (I) THE PURCHASER CONSUMMATES AN
INITIAL PUBLIC OFFERING, AND (II) THE SHARES ISSUED ON EXERCISE OF THE WARRANT
CAN BE SOLD AT A PRICE IN EXCESS OF THE WARRANT EXERCISE PRICE PER SHARE.
E. CONTINGENT PAYMENT. If, within twelve months of the Closing, the
Purchaser enters into an agreement with Daimler Benz Aerospace pursuant to which
Daimler Benz Aerospace agrees to purchase 600 or more Pylon Decoder Units, then,
as additional consideration, the Purchaser will pay the Company $400,000, which
amount will be payable in the amount of $100,000 per fiscal quarter beginning
three months after the Purchaser receives the initial order under such
agreement.
CLOSING. The closing of the Sale (the "Closing") will occur as soon as
practicable following the approval and adoption of the Purchase Agreement
providing for the Sale and the Option Amendments by the Company's shareholders
at the Meeting. The obligations of the parties to consummate the Sale are
subject to certain customary conditions such as (i) the continued accuracy of
representations and warranties in the Purchase Agreement, (ii) the performance
in all material respects of each party's respective obligations under the
Purchase Agreement required to be performed at or prior to Closing, (iii) all
governmental and third party consents required under the Purchase Agreement
shall have been obtained, and (iv) no action by any government authority or
other person shall have been instituted or threatened challenging the validity
or legality of the transactions contemplated by the Purchase Agreement or which
could reasonably be expected to damage the other parties to the Purchase
Agreement.
ASSETS AND LIABILITIES TO BE TRANSFERRED. The Assets to be transferred to
the Purchaser include all accounts receivable, contract rights, inventory, fixed
assets, and equipment and technology used or needed for use by the GTD Division.
Assumed liabilities include all liabilities incurred in the ordinary course of
the GTD's business.
SUB-LEASE. The Company entered into a sale and leaseback agreement on
October 28, 1994. Under the arrangement, the Company sold its main building at
One Electronics Drive, Trenton, New Jersey, and agreed to lease it back for a
period of 15 years under terms that qualify the arrangement as a capital lease.
The buyer/lessor of the building was a partnership and the Company's chairman
and chief executive officer, Mr. Myles M. Kranzler, is a minority partner in the
partnership. The Purchase Agreement provides that the Purchaser and the Company
will enter into a sub-lease, dated as of the Closing, pursuant to which the
Company will, for a term of five years, sub-lease to the Purchaser approximately
40,000 square feet at such building (the "Leased Space"). The Leased Space will
be comprised of (i) office and manufacturing space occupying approximately
30,000 square feet, and (ii) common area space, which space will be shared with
the Company, occupying approximately 10,000 square feet. The initial rent that
the Purchaser will pay the Company for the Leased Space will be at the rate of
(x) $7.00 per square foot for the office and manufacturing space, and (y) $3.00
per square foot for the shared common areas, or a total of approximately
$240,000 annually. In addition, the Purchaser will be responsible for its pro
rata portion, based on the amount of space occupied by the Purchaser, of the
building's electric, heating, insurance, tax and maintenance expenses.
TRANSITION AGREEMENT. The Purchase Agreement provides that the Purchaser
and the Company will enter into an agreement, dated as of the Closing (the
"Transition Agreement"), pursuant to which the Purchaser will continue to
provide the Company with accounting, reception, personnel and facilities and
janitorial services for a period of three months from Closing. To the extent
that those services have heretofore involved or been provided by the Company's
employees, those employees (including, principally, Mr. Klinsport) are in the
Management Group or among the Company employees who will be employed by the
Purchaser. The fees for such services will be determined by the Purchaser and
the Company at or prior to Closing.
20
<PAGE>
REPRESENTATIONS AND WARRANTIES. The Purchase Agreement contains various
representations and warranties of the Company including, among others,
representations and warranties relating to organization and similar corporate
matters; authorization, performance, enforceability and related matters;
requisite consents; absence of brokers; compliance with applicable environmental
law; transferability of contracts; and intellectual property.
The Purchase Agreement contains various representations and warranties of
the Purchaser including, among others, representations and warranties related to
organization and similar corporate matters; authorizations, performance,
enforceability and related matters; requisite consents; accuracy of information
provided for inclusion in this Proxy Statement, and absence of brokers.
COVENANTS. Pursuant to the Purchase Agreement, (i) the Company has agreed,
among other things, to satisfy all conditions to its obligations to consummate
the transactions contemplated by the Purchase Agreement, and (ii) the Purchaser
has agreed, among other things, to satisfy all conditions to its obligations to
consummate the transactions contemplated by the Purchase Agreement and to pay
and perform all of its obligations under the Assumed Liabilities.
INDEMNIFICATION. The Company has agreed to indemnify the Purchaser from and
against damages arising out of or based upon (i) the breach by the Company of
any representation or warranty made by the Company pursuant to the Purchase
Agreement relating to environmental matters; (ii) the non-performance of any
covenant made by it pursuant to the Purchase Agreement; and (iii) any other
liabilities of the GTD not assumed by the Purchaser.
The Purchaser has agreed to indemnify the Company from and against any
damages which arise out of or are based upon (i) the non-performance of any
covenant made by it pursuant to the Purchase Agreement; and (ii) the failure to
satisfy any of the Assumed Liabilities.
TERMINATION; BREAK-UP FEE. The Purchase Agreement may be terminated (i) by
either the Purchaser or the Company if, upon a vote at a duly-held meeting of
the Company's shareholders, any required approval of the Company's shareholders
is not obtained, (ii) by the mutual written consent of the Purchaser and the
Company, (iii) by either the Company or the Purchaser if the Closing has not
occurred on or before the last to occur of (x) 30 days after the staff of the
Securities and Exchange Commission has advised the Company that it has no
further comments with respect to any preliminary filings of this Proxy
Statement, or (y) January 7, 1998, provided that the delay or failure to
consummate the Closing by that date is not because of a breach of the Purchase
Agreement by the party seeking to terminate it, and (iv) by either party in the
event of a material breach by the other party of any representation, warranty,
covenant or agreement contained in the Purchase Agreement, which breach cannot
be or has not been cured within 30 days after the giving of written notice to
the breaching party of such breach. If the Company terminates the Purchase
Agreement pursuant to clause (i) above or other than as set forth above or if
the Purchaser terminates the Purchase Agreement pursuant to clause (i), (iii) or
(iv) above, then the Company will pay to the Purchaser upon demand an amount in
cash equal to the sum of (x) 3% of the net assets of the GTD as of the date of
termination, plus (y) 3% of $400,000. This fee will serve as the exclusive
remedy to the Purchaser in the event of a breach by the Company of any provision
of the Purchase Agreement, without regard to the Purchaser's actual
out-of-pocket loss or consequential damages. As of July 31, 1997 (the date of
the last available Company balance sheet), the amount of the fee, if then due,
would have been approximately $204,000. The Company believes that, because of
subsequent losses, the net asset value of the GTD, and thus the fee which may be
payable, may be substantially lower as of the date of this Proxy Statement. The
Purchaser has advised the Company that its actual out-of-pocket expenses through
that date were approximately $125,000, and that it anticipates incurring an
additional $40,000 of expenses prior to the Meeting.
21
<PAGE>
REGULATORY FILINGS AND APPROVALS
The Company is not aware of any Federal or state regulatory filing
requirements to which the Sale is subject.
ACCOUNTING TREATMENT
For financial reporting purposes, the transaction will be recorded as a sale
of a segment of the Company's business and reported as a discontinued operation.
EXPENSES AND OTHER FEES
Each party will bear its own expenses in respect of the Sale transaction,
whether or not consummated.
APPRAISAL RIGHTS
The Company's shareholders are not entitled to dissenters' rights of
appraisal in connection with the Sale.
REQUIRED VOTE
Assuming a quorum is present, the affirmative vote of seventy-five percent
(75%) of the vote cast by holders of shares of Common Stock entitled to vote
thereon, and in addition, the affirmative vote of seventy-five percent (75%) of
the votes cast by holders of Class B Stock, will be required for approval and
adoption of the Purchase Agreement providing for the Sale.
THE GOVERNMENT TECHNOLOGY DIVISION
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY STATEMENT
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS
AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE
MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IMPORTANT
FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN
THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS IN THIS
PROXY STATEMENT AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S PREVIOUS
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. IN ASSESSING
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY
ALL CAUTIONARY STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND IN THOSE OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
The Company, through its Government Technology Division, develops,
manufactures and markets complex precision electronic systems for defense
applications and provides contract manufacturing services for prime defense
contractors. These products primarily relate to weapons management in high
performance military aircraft and employ the Company's safety critical
technology and software. The GTD designs products internally, in conjunction
with defense contractors, and under U.S. government contracts.
PRODUCTS AND PROGRAMS
TORNADO PROGRAM. Since 1976, the GTD has been involved in the design and
production of weapons control systems for the German and Italian versions of the
Tornado aircraft. These systems are designed to aid the operator of a
sophisticated combat aircraft in deploying highly complex weapons. The Tornado
program is a joint program of the governments of Germany, United Kingdom, and
Italy for a multi-role combat aircraft to meet the particular defense missions
of these three countries. The GTD's participation in Tornado programs has also
included contracts to supply certain elements of the system to British Aerospace
for sale to the United Kingdom and Saudi Arabia.
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The most important and complex weapons control system manufactured by the
GTD for the Tornado program is the Stores Management System ("SMS"). The SMS
employs a visual display to communicate the current status of weapons on board
the aircraft to the operator. It permits the operator to select appropriate
weapons, to confirm or change the selection of weapons, and to execute other
functions such as weapon jettison and fault detection. All of these actions are
regulated by a weapons programming unit containing multiple microprocessors and
their memories. The SMS has up to seven electronic units, remotely located from
the weapons programming unit, to receive and decode release instructions and
activate switches connected to weapon release mechanisms.
The Company, through the GTD, manufactures the SMS for the Tornado program
under a contract with Daimler Benz Aerospace (DASA). The Tornado program extends
beyond the year 2000 and could offer the GTD significant additional business. In
fiscal 1994, 1995, and 1996, and the nine months ended July 31, 1997, sales
under the Tornado program accounted for approximately 36%, 36%, 37% and 9.5%,
respectively, of the Company's total revenues. In 1995, the Company received
full funding for additional production of weapons control products for the
Tornado program under contracts valued at approximately $6.3 million. This
contract was completed in early 1997. Commencing in the first quarter of fiscal
1996, initial funding was received for Tornado software upgrades under a
contract valued at $1.8 million which extended into 1997 and is expected to be
completed by early 1998. During the fiscal quarter ended July 31, 1997, the GTD
was provided cost and pricing information for additional production for the
Tornado Stores Management System and was advised that the customer anticipates
placing an $11.4 million order before the end of 1997. No order has been
received to date. The award of this contract is dependent on, among other
factors, the defense budget of the German government. Efforts to secure the
released funds for this contract have been unsuccessful in the past due to
budget allocations for other priorities and there currently can be no assurance
of the award of such contract.
If the $11.4 million Tornado order is received prior to the Meeting, the
Company intends to provide to its shareholders information concerning the
receipt of the order and adjourn the meeting for up to two weeks to afford
shareholders an opportunity to recast their votes if they wish to do so.
OTHER PROGRAMS. The GTD has designed and manufactured Sidewinder control
systems for the U.S. Air Force A-10 aircraft, the A-4 modernization programs for
the Royal Air Force of New Zealand and certain aircraft flown by the Greek Air
Force, and the F-5 aircraft for delivery to the Taiwan Air Force.
Since 1980, the Company as a contract manufacturer has, through the GTD,
supplied electronic systems to McDonnell Douglas Helicopter Systems for use
aboard the U.S. Army's Apache helicopter. The Company is also a contract
manufacturer for SPD Technologies, Inc., a circuit breaker manufacturer.
The Company has funded research and development of technology used for the
control of air-to-air and air-to-ground missiles such as Sidearm, Stinger and
Mistral and has provided a missile control system for the Stinger missile for
experimental use aboard the U.S. Army's Apache helicopter.
NEW PROGRAMS. The GTD was notified by McDonnell Douglas Helicopter Systems
in April 1996 that it had been selected to provide the design, development, and
initial production of a maintenance data recorder (black box) for the U.S.
Army's Apache helicopter. Revenue for this contract, has been recognized in 1996
and 1997 to date, and additional revenue, a small portion of which will be
received by the Purchaser following the Sale, will be recognized in the
remainder of 1997 and 1998. Follow on production, if awarded to the GTD, is
expected to continue beyond the year 2000 assuming government funding.
In May 1996 the GTD was notified that it had been selected to provide the
engineering and initial production for an Interference Blanking Unit (IBU) used
aboard the F-18 fighter aircraft. This project has potential application for
usage aboard other aircraft for both the U.S. and its allies. If procured for
the F-18 alone the IBU could require production runs beyond the year 2000, which
would be undertaken by the Purchaser if the Sale is completed, providing
government funding and strategic defense decisions
23
<PAGE>
continue, neither of which can be assured. This project is nearing completion of
the development and qualification stage and production orders are anticipated
for 1998, although no assurances can be given that significant orders will be
placed.
SECURE COMMUNICATIONS PRODUCTS. The GTD has engaged in the development and
sale of products for secure communications systems to the National Security
Agency and the U.S. Navy. The GTD's initial product was a telecommunications
interface known as a TCIA for the transmission of encrypted data over a
conventional T1 telephone line. The TCIA was endorsed by the National Security
Agency in 1991 but has been restricted to government users.
In 1991, the GTD was awarded a contract to manufacture Bus Interface Units
for the U.S. Navy's communication system using the Navy's design. The GTD
subsequently created a proprietary device, known as the Bus Interface Card
("BIC"), to substitute for the Bus Interface Unit, and has since sold over 9,500
of these devices. The BIC connects external signals to a signal bus through
software driven control circuits. The software, programmed to prioritize signals
for processing, was designed by the Navy but includes BIC software which was
designed by the Company. The GTD anticipates further contracts for this product
over the next several years, although at a slower rate than in prior years. The
GTD also developed a proprietary device known as the Synchronous Line Interface
Card ("SLIC"). The SLIC is suitable for laptop computers and performs the same
functions as the BIC. The GTD has received a small quantity of orders for this
device but believes that SLIC may eventually replace the BIC as the device of
choice.
SALES AND MARKETING
The GTD currently markets its products a single vice president of sales. In
addition, certain officers of the Company, some of whom are members of the
Management Group, are responsible for maintaining relationships with specific
U.S. and foreign defense contractors. The Company relies and the Purchaser will
rely on established relationships with major defense contractors such as DASA,
McDonnell Douglas, Northrop, and various agencies within the U.S. Department of
Defense to develop further business based on past association and
familiarization with existing programs such as Tornado, F-5, Apache Helicopter,
and the A-10 combat aircraft.
RESEARCH AND DEVELOPMENT
GTD product development efforts consist of designing new weapon control
systems and upgrades for existing aircraft fleets based upon specifications
provided by defense contractors. Generally, such development projects are
undertaken pursuant to contractual arrangements with defense contractors, under
which the GTD receives full or partial funding. The GTD believes its
participation in development contracts provides an advantage in bidding for
subsequent production contracts.
The GTD research and development staff consists of approximately five
engineers who devote a portion of their time to defense product development.
COMPETITION
The defense business is also highly competitive and subject to rapid change.
The GTD competes, and the Purchaser will compete, primarily on its expertise in
designing safety critical applications. Competitors include large defense
contractors and specific departments of large electronic companies such as
McDonnell Douglas, Lockheed Martin, Hamilton Standard Company, a division of
United Technologies Corporation, GEC Marconi, Elbit and Smiths Industries. Many
of these competitors are larger and have more resources to devote to, among
other things, internally-funded development efforts that could provide
advantages in competitive bidding.
24
<PAGE>
MANUFACTURING
The GTD's operations involve assembling and testing final products from
components and subassemblies purchased from third parties. The GTD also designs
software used in the products manufactured pursuant to third-party requirements.
All of the GTD's design, assembly and production activities are conducted from
its Trenton, New Jersey, facility.
Electronic components, such as transistors, resistors, integrated circuits
and diodes, and subassemblies used in the GTD's products, are purchased by the
GTD from a large number of suppliers and are generally available from
alternative sources. However, for some components and subassemblies, the GTD
relies on a single source of supply. For such components and subassemblies, the
GTD attempts to maintain inventory levels sufficient to cover foreseeable
production requirements for a period the GTD believes will be sufficient to
locate alternative sources of supply or to develop alternative designs that
avoid reliance on those components or subassemblies.
As part of its contract manufacturing services, the GTD offers supporting
engineering services to develop a prime contractor's design and solve technical
and manufacturing problems.
BACKLOG
All of the GTD's sales and unbilled orders are with defense-related
customers. Total GTD backlog as of July 31, 1997, was approximately $4.7 million
(compared with $7.1 million of October 31, 1996 and $8.8 million at July 31,
1996) with $2.5 million scheduled for delivery in the remainder of the current
fiscal year, and $2.2 million scheduled for delivery in fiscal 1998. Unfilled
backlog as of the closing of the Sale will be assumed by the Purchaser.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, trade secret law, and contractual arrangements,
certain of which will be assigned or licensed on a royalty-free basis, to the
Purchaser. However, existing copyright laws offer only limited practical
protection for software. Furthermore, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. Customer access to source code may increase the possibility
of misappropriation or other misuse of the Company's software. Accordingly, it
may be possible for unauthorized third parties to copy certain portions of the
Company's software or to obtain and use information that the Company regards as
proprietary. There can be no assurance that the Company's or the Purchaser's
means of protecting its proprietary software will be adequate or that
competitors will not independently develop technologies similar to the
Company's.
While the Company has received certain patent protection for GTD designs,
all of which will be assigned to the Purchaser, there can be no assurances that
any additional patents will be issued, that the scope of any patent protection
will be adequate, or that any current or future issued patents will be held
valid if challenged.
The Company believes that the GTD's products and technology do not infringe
any existing proprietary rights of others, although there can be no assurance
that third parties will not assert infringement claims in the future.
REGULATIONS
The GTD's United States military contracts are subject to pricing
restrictions and audit procedures. After being selected as the successful bidder
for a government contract, profits for most products and systems developed for
domestic defense programs are subject to fact finding, with negotiated profits
limited to approximately 10% of costs, with some actual costs not recognized for
this purpose. The GTD has undergone routine government audits of its defense
contracts from time to time and these audits have
25
<PAGE>
upheld the GTD's pricing. Most of the GTD's foreign sales involve
defense-related products that are subject to export control through the
Department of State's Office of Munitions Control under the International
Traffic in Arms Regulations ("ITAR") adopted under the Arms Export Control Act.
All articles and services listed on the United States Munitions list, which may
be amended from time to time, fall under these regulations. In order to export
products or services subject to these regulations, the Company (and, after the
Sale, the Purchaser) must first acquire licenses from the Department of State
for each individual contract.
State Department policies, as supplemented or modified by the Department of
Defense or other applicable government agencies, identify products that cannot
be exported and certain countries to which export is prohibited or limited. ITAR
also imposes certain restraints on foreign customer contracts and defense
product development. Since the Purchaser intends to continue its pursuit of
foreign military sales as a source of revenues, ongoing compliance with ITAR
will be necessary.
Should government policy dictate that some of the GTD's products are of a
sensitive technological character in which the best interests of the United
States will be served by prohibiting their export, the Company (and after the
Sale, the Purchaser) could suffer a serious and immediate loss of business. The
Company's principal foreign markets for defense-related products are, and after
the Sale the Purchaser's principal foreign markets for defense-related products
will be, located in the NATO countries and other nations friendly to the United
States. To date, the United States government has not denied requests by the
Company for licenses to export any of its products or technical data to these
countries except in instances where all United States manufacturers of similar
products would be equally denied.
EMPLOYEES
The GTD currently employs a total work force of approximately 85 persons,
including 50 engineers, designers and technical staff, plus additional contract
labor. None of the GTD's employees are covered by collective bargaining
agreements. The GTD has never experienced any labor disruptions or work
stoppages and considers its employee relations to be good. The GTD has recently
effected a reduction in staff of approximately 30 persons.
SECURITY CLEARANCE
The Company, including the GTD, relies on the continuance of its security
clearances and clearances of its employees from agencies of the United States
government and from NATO for its defense products. Loss of these clearances
could have an immediate and adverse effect on the Company's (and after the Sale,
the Purchaser's) business. Clearance of the foregoing types must be secured by
the Purchaser prior to the Closing of the Sale, and the loss of any of them
following the Sale could adversely affect the business and prospects of the
Purchaser. The GTD has never experienced any material deficiencies in the manner
and method of complying with prescribed security regulations and the Purchaser
expects to continue as an approved facility following the Sale.
PROPERTIES
The GTD's sole facility is in Trenton, New Jersey. The Company occupies
82,000 square feet in Trenton for its corporate headquarters and engineering,
manufacturing and support activities. The lease for such space expires in
October 2009. Approximately 40,000 square feet of such space (including 10,000
square feet of common space) will be sub-leased by the Purchaser for five years.
See "The Proposed Sale-- The Purchase Agreement, Note and Warrant-Sublease".
Management believes that the GTD's facilities are adequate for its
operations and are maintained in good condition.
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<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF THE COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET OF THE COMPANY
The unaudited pro forma condensed consolidated balance sheet has been
derived from the historical consolidated balance sheet of the Company. The
unaudited pro forma condensed consolidated balance sheet of the Company has been
prepared assuming the Sale of the GTD occurred on July 31, 1997. The unaudited
pro forma condensed consolidated balance sheet should be read in conjunction
with the historical financial statements of the Company and the notes thereto
for the three years in the period ended October 31, 1996 and for the nine months
ended July 31, 1997 included in this Proxy Statement. The unaudited pro forma
condensed consolidated balance sheet is not necessarily reflective of the
financial position of the Company had the Sale of the GTD occurred on July 31,
1997.
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<PAGE>
BASE TEN SYSTEMS, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF JULY 31, 1997
<TABLE>
<CAPTION>
COMPANY PRO-FORMA COMPANY
HISTORICAL SALE(1) ADJUSTMENTS PRO-FORMA
---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash..................................................... $ 3,771 $ -- $ 3,500(2) $ 7,271
Accounts Receivable...................................... 7,181 (4,375) 2,806
Inventories.............................................. 3,868 (3,111) 757
Current portion of employee loan receivable.............. 128 -- 128
Other current assets..................................... 601 -- 601
---------- --------- ------ ----------
TOTAL CURRENT ASSETS................................... 15,549 (7,486) 3,500 11,563
PROPERTY, PLANT & EQUIPMENT................................ 5,209 (862) 4,347
EMPLOYEE LOAN RECEIVABLE................................... 47 -- 47
NOTES RECEIVABLE........................................... -- -- 3,322(2) 3,322
OTHER ASSETS............................................... 8,717 8,717
---------- --------- ------ ----------
TOTAL ASSETS........................................... $ 29,522 $ (8,348) $ 6,822 $ 27,996
---------- --------- ------ ----------
---------- --------- ------ ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts Payable......................................... $ 1,045 (592) $ $ 453
Accrued Expenses......................................... 3,693 (1,334) 625(3) 2,984
Current portion of capital lease obligation.............. 54 -- 54
---------- --------- ------ ----------
TOTAL CURRENT LIABILITIES.............................. 4,792 (1,926) 625 3,491
---------- --------- ------ ----------
LONG TERM LIABILITIES:
Other long-term liabilities.............................. 272 -- 272
Capital lease obligation................................. 3,441 -- 3,441
Long-term debt........................................... 15,500 -- 15,500
---------- --------- ------ ----------
TOTAL LONG-TERM LIABILITIES............................ 19,213 -- -- 19,213
---------- --------- ------ ----------
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, authorized and
unissued--1,000,000 shares
Class A Common Stock, $1.00 par value, 22,000,000 shares
authorized; issued and outstanding 7,497,360 in 1997... 7,497 -- 7,497
Class B Common Stock, $1.00 par value 2,000,000 shares
authorized; issued and outstanding 445,121 in 1997..... 445 -- -- 445
Additional paid-in capital............................... 25,603 -- 900(4) 26,503
Deficit.................................................. (27,885) (6,422) 5,297(2 (4) (29,010)
---------- --------- ------ ----------
5,660 (6,422) 6,197 5,435
Equity adjustment from foreign currency translation...... (143) -- (143)
---------- --------- ------ ----------
5,517 (6,422) 6,197 5,292
---------- --------- ------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 29,522 $ (8,348) $ 6,822 $ 27,996
---------- --------- ------ ----------
---------- --------- ------ ----------
</TABLE>
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<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET OF THE COMPANY:
- ------------------------
(1) Assets and liabilities of the Purchaser. Although the Sale transaction has
not been finalized, management believes that any remaining pro forma
adjustments would not have a material effect on the financial position of
the Company, except those described in Note 2 and 3.
(2) Reflects the receipt of cash and a note receivable for the book value of the
assets on the closing date in connection with the Sale. See "The Purchase
Agreement, Note and Warrant--Consideration" for a description of the terms
of the Note evidencing the note receivable.
(3) Reflects the liability for expenses in connection with the Sale of $625.
(4) Reflects the adjustment for the change in measurement date of certain
employee stock options of $900.
29
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME OF THE COMPANY
The unaudited pro forma condensed consolidated statements of income have
been derived from the historical consolidated statements of income of the
Company. The unaudited pro forma condensed consolidated statement of income for
the year ended October 31, 1996, and the unaudited pro forma condensed
consolidated statement of income for the nine months ended July 31, 1997, has
been prepared assuming the Sale occurred on November 1, 1995. The unaudited pro
forma condensed consolidated statements of income should be read in conjunction
with the historical financial statements of the Company and notes thereto for
the three years ended October 31, 1997 and for the nine months ended July 31,
1997 included in this Proxy Statement. The unaudited pro forma condensed
consolidated statements of income are not necessarily indicative of the
financial results of the Company had the Sale occurred at the beginning of the
period.
BASE TEN SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
COMPANY COMPANY
HISTORICAL SALE(1) PRO-FORMA
---------- --------- -----------
<S> <C> <C> <C>
REVENUES
Sales........................................................................ $ 14,591 $ 13,329 $ 1,262
Other Income................................................................. 300 -- 300
---------- --------- -----------
Total Revenues............................................................. 14,891 13,329 1,562
---------- --------- -----------
COST & EXPENSES
Cost of Goods Sold........................................................... 10,973 10,742 231
Research and Development..................................................... 998 594 404
Selling, General & Administrative............................................ 8,509 2,353 6,156
Amortization of Software Development Costs................................... 1,278 -- 1,278
Write-off of software development costs...................................... 2,429 -- 2,429
Interest Expense............................................................. 710 -- 710
---------- --------- -----------
Total Costs and Expenses................................................... 24,897 13,689 11,208
LOSS BEFORE INCOME TAXES....................................................... (10,006) (360) (9,646)
---------- --------- -----------
INCOME TAX BENEFIT............................................................. (1,047) -- (1,047)
---------- --------- -----------
NET LOSS $ (8,959) $ (360) $ (8,599)
---------- --------- -----------
---------- --------- -----------
LOSS PER SHARE................................................................. ($ 1.16) -- ($ 1.11)
---------- --------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING............................................ 7,743 -- 7,743
---------- --------- -----------
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT:
(1) Revenues and expenses of the Purchaser. Although the Sale transaction has
not yet been finalized, management believes that any remaining adjustments
will not have a material effect on the pro forma results of operations of
the Company. Does not include any adjustment for the change in measurement
date of certain employee stock options, resulting in compensation expense
charged to operations of $900. Also does not reflect $100 of non-recurring
expenses following the Sale.
30
<PAGE>
BASE TEN SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
COMPANY COMPANY
HISTORICAL SALE(1) PRO-FORMA
----------- --------- -----------
<S> <C> <C> <C>
REVENUES
Sales......................................................................... $ 9,808 $ 8,219 $ 1,589
Other Income.................................................................. 133 133
----------- --------- -----------
Total Revenues.............................................................. 9,941 8,219 1,722
COST & EXPENSES
Cost of Goods Sold............................................................ 8,322 6,816 1,506
Research and Development...................................................... 490 408 82
Selling General & Administrative.............................................. 6,114 2,353 3,761
Amortization of Software Development Costs.................................... 1,121 1,121
Interest Expense.............................................................. 1,139 1,139
----------- --------- -----------
Total Costs and Expenses.................................................... 17,186 9,577 7,609
----------- --------- -----------
LOSS BEFORE INCOME TAXES........................................................ $ (7,245) $ (1,358) $ (5,887)
----------- --------- -----------
----------- --------- -----------
INCOME TAXES/(BENEFIT).......................................................... -- --
----------- --------- -----------
NET LOSS........................................................................ $ (7,245) $ (1,358) $ (5,887)
----------- --------- -----------
LOSS PER SHARE.................................................................. ($ 0.92) ($ 0.75)
----------- --------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING............................................. 7,852 7,852
----------- --------- -----------
</TABLE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT:
(1) Revenues and expenses of the Purchaser. Although the Sale transaction has
not yet been finalized, management believes that any remaining adjustments
will not have a material effect on the pro forma results of operations of
the Company. Does not include any adjustment for the change in measurement
date of certain employee stock options, resulting in compensation expense
charged to operations of $900. Also does not reflect $100 of non-recurring
expenses following the Sale.
31
<PAGE>
INFORMATION CONCERNING THE PURCHASER
BUSINESS. The Purchaser, Strategic Technology Systems, Inc., is a newly
formed Nevada corporation whose principal assets will be those assets of the GTD
acquired pursuant to the Purchase Agreement. Thereafter, the Purchaser will
continue to carry on the businesses of the Government Technology Division under
its own management team at its principal executive offices located in the
Trenton facility.
MANAGEMENT. The senior executive officers of the Purchaser will initially
consist of Mr. Klinsport, who will serve as President and Chief Executive
Officer, and four other individuals, Jeffrey Billie, Marguerite Cole, Edwin
Struble and Rodney Wurst, all of whom are presently employees of the GTD and all
of whom are presently officers of the Company except for Jeffrey Billie.
The Board of Directors of the Purchaser currently consists only of Mr.
Klinsport. It is anticipated that the Purchaser's board of directors will be
expanded to include a representative of the Purchaser's non-employee
shareholders, and one or more other outside directors.
PRINCIPAL SHAREHOLDERS. The principal shareholders of the Purchaser will be
Mr. Klinsport, the other four executives described above, and certain outside
investors, some or all of whom are expected to be affiliates of Mr. Jesse L.
Upchurch, a principal shareholder of the Company. See "Security Ownership of
Management and Certain Beneficial Owners."
CAPITALIZATION. The Purchaser is expected to be initially capitalized
immediately prior to the sale with equity financing of approximately $5.5
million in cash, of which $3.5 million will be paid to the Company at the
Closing, and approximately $750,000 will be utilized to pay professional fees,
financial advisory fees and other expenses related to the Sale. The remaining
cash will be retained for working capital. The Purchaser may seek to obtain
third-party financing following the Closing. Any such financing, if obtained, is
likely to be secured by accounts receivable and inventory of the Purchaser,
including most or all of the Purchased Assets.
INFORMATION CONCERNING BASE TEN SYSTEMS, INC.
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROXY STATEMENT
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS
AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE
MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. IMPORTANT
FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH DIFFERENCES ARE DISCUSSED IN
THE CAUTIONARY STATEMENTS ACCOMPANYING THE FORWARD-LOOKING STATEMENTS IN THIS
PROXY STATEMENT AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S PREVIOUS
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. IN ASSESSING
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY
ALL CAUTIONARY STATEMENTS CONTAINED IN THIS PROXY STATEMENT AND IN THOSE OTHER
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
SELECTED FINANCIAL DATA
The following table presents selected financial data for Base Ten and its
subsidiaries. The financial data for the fiscal years ended October 31, 1994
through October 31, 1996 have been derived from the Company's audited
Consolidated Financial Statements included in this Proxy Statement and
previously filed with the Securities and Exchange Commission on Form 10-K and
10-K/A. The financial data for the nine months ended July 31, 1996 and July 31,
1997 have been derived from the Company's unaudited Consolidated Financial
Statements included in this Proxy Statement and previously filed with the
Securities and Exchange Commission on Form 10-Q. In the opinion of management,
all adjustments of a normal recurring nature necessary for a fair presentation
of the financial statements are reflected therein. The results reflected in the
unaudited statement of consolidated operations for the period ended July 31,
1997 are not necessarily indicative of the results to be expected for the entire
year. All of such data should be
32
<PAGE>
read in conjunction with the other financial statements, related notes and other
financial information included in this Proxy Statement.
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED OCTOBER 31,
--------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
JULY 31,
JULY 31, 1997 1996 1996 1995 1994 1993 1992
------------- ------------ --------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Revenues................................. $ 9,941 $ 10,502 $ 14,891 $ 18,307 $ 19,282 $ 22,262 $ 19,068
Earnings (Loss) from continuing
operations before income taxes and
extraordinary item (1) (3)............. (7,245) (7,936) (10,006) (1,851) 59 1,465 695
Income taxes (benefit)................... -- -- (1,047) (474) 24 507 198
Earnings (Loss) from continuing
operations before extraordinary item... (7,245) (7,936) (8,959) (1,377) 35 958 497
Extraordinary Item: Income tax/ benefit
from utilization of loss
carryforward........................... -- -- -- -- -- -- 198
Net earnings (Loss)...................... (7,245) (7,936) (8,959) (1,377) 35 958 695
Net earnings (Loss) per share............ (.92) (1.0) (1.16) (.20) .03 .17 .19
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF JULY
31, 1997 1996 1995 1994 1993 1992
------------ --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital...................................... $ 10,575 $ 13,916 $ 13,270 $ 5,860 $ 6,365 $ 1,858
Total assets......................................... $ 29,522 $ 30,348 $ 28,005 $ 17,609 $ 17,255 $ 13,054
Long term debt, net of current maturities (2)........ $ 19,213 $ 13,478 $ 3,525 $ 3,601 $ 3,212 $ 4,675
Shareholders' equity................................. $ 5,517 $ 12,091 $ 20,261 $ 9,431 $ 7,957 $ 1,974
</TABLE>
- ------------------------
(1) Included in 1992 financial data is a reversal of $.5 million of a prior
provision and a gain of $.4 million on previously written-off marketable
securities.
(2) Included in 1997, 1996, 1995 and 1994 financial data is a long term capital
lease.
(3) Included in 1996 financial data is a write-off of various capitalized
expenses amounting to $2.4 million and $.6 million of expenses incurred in
the preparation of a registration statement which was withdrawn.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company operates with a Medical Technology Division and a Government
Technology Division and designs, develops, manufactures and markets complex and
comprehensive software solutions for the pharmaceutical medical device
manufacturing industries and precision electronic systems for the defense
industry. The Company's products are used in safety critical applications
requiring consistent, highly reliable outcomes where an out-of-specification
event could have a catastrophic result. The Company developed a core competency
in safety critical applications from its historical focus on designing
electronic systems used primarily in weapons management systems for military
aircraft. The Company has applied this expertise to develop
PHARMASYST-Registered Trademark-, a computerized Manufacturing Execution System
("MES") used to automate, monitor, control and document highly regulated
manufacturing processes.
The Company has entered into collaborative relationships with certain
computer system integrators and others that can integrate
PHARMASYST-Registered Trademark- with the products and services they provide.
The Company has not yet recognized any sales as a result of these relationships
and cannot predict if or when such relationships will prove successful. The
Company must complete further development work on PHARM2-TM-, which is an
advanced version of the PHARMASYST-Registered Trademark- product, and must
successfully conduct training of its partners to make such relationships
effective. No assurance can be given that this will occur.
Through the GTD, the Company develops and manufactures weapons management
systems and other defense related products. See "The Government Technology
Division," above.
The Company experienced a net loss of $7.2 million in the nine months ended
July 31, 1997, compared with $7.9 million in the nine months ended July 31,
1996, and net losses of $9.0 million in the year ended October 31, 1996,
compared with $1.4 million in the year ended October 31, 1995. These losses
resulted primarily from reduction of defense related revenues, write-offs and
amortization of software development expenditures incurred in prior periods and
expenses related to the marketing and sales of commercial products. The Company
anticipates incurring additional losses in the fourth quarter of fiscal 1997 and
the first half of fiscal 1998 and could continue to incur losses in subsequent
periods. The Company's ability to achieve profitable operations is dependent
upon, among other things, successful marketing of its manufacturing execution
system products, and successful competition in the markets in which the Company
participates. Failure of the PHARMASYST-Registered Trademark- product to achieve
market acceptance would have a material effect on the Company's business,
results of operations and financial condition.
COMMERCIAL OPERATIONS. During 1996 the Company focused on the development
of PHARM2-TM-, an advanced version of the PHARMASYST-Registered Trademark-
product introduced in 1995. As of November 30, 1997, the Company had received 25
contracts or signed licensed agreements from manufacturers or their integrators
for installation of systems at 38 sites, including Abbott Hospital Products,
Berlex, Novo Nordisk, Pfizer International Products Group, Pharmacia & Upjohn,
SmithKline Beecham, 3M, Taisei, and Wyeth. In the earlier part of the year, the
Company added Roche, Astra, and an additional contract from Pharmacia & Upjohn.
Although the Company has made eight deliveries of early releases of
PHARM2-TM-, 10 other deliveries of PHARM2-TM- continue to be overdue. Deliveries
have been delayed primarily because of the Company's failure to accurately
estimate the time necessary to complete software enhancements to PHARM2-TM-
required to meet individual customer requirements, including customer
requirements revised by customers after initial bids were submitted or
agreements signed. In order to maintain customer relations, the Company accepted
responsibility for changes without requesting additional funding or extension of
delivery dates. Although cancellation for late deliveries may occur, the Company
does not currently anticipate the loss of material orders as a result thereof,
but such failure to make necessary deliveries could adversely affect the
Company's reputation. In order for the PHARM2-TM- business to grow, it will be
necessary for the Company to increase its delivery rate and, since the end of
the second quarter of 1997 the
34
<PAGE>
Company has increased its development staff by approximately 40% to overcome
this shortcoming. Although required deliveries are planned no assurances can be
given that they will take place in a timely manner. One effect of further
delayed deliveries would be to negatively impact the Company's cash flow, which
could limit the Company's ability to grow. The timing of revenues from MES can
be affected by factors outside the Company's control, including long sales
cycles and delays in customer authorization procedures.
The Company sells PHARM2-TM- through direct salespersons operating from its
headquarters in New Jersey; St. Louis, MO; Camberley, England; Brussels,
Belgium; Copenhagen, Denmark; and Tokyo, Japan. The Tokyo office was opened in
January 1997 in response to opportunities in the Pacific Rim. In addition to
direct selling, the Company has developed relationships with implementers and
integrators already active in this market to increase the number of
opportunities available to it to demonstrate and offer its products. The Company
requires additional sales persons to grow and has, as of yet, not been able to
find suitable candidates at compensation levels consistent with the Company's
limits. Failure to add to the staff could negatively impact revenues.
During the 1997 first quarter, the Company engaged Drumbeat Dimensions, Inc.
an internationally recognized consulting organization, to assist it in the
further development and refinement of procedures and documentation for the
Company in order to be fully compliant with the principles embodies in GAMP and
the Company believes it is currently in full compliance with such GAMP
principles. GAMP is the output of an industry group defining the methodology for
creation of software products for the pharmaceutical industry. Although no
assurances can be given, the Company believes that this provides added value to
the Company's ability to sell in this market and this should further
differentiate the Company from its competition. The Company has also
strengthened its quality assurance organization through the employment of
personnel familiar with pharmaceutical manufacturing practice.
In February 1997, the Company announced the validation of the Dispensing
module of PHARMASYST-Registered Trademark- at the Canadian manufacturing
facility of a major pharmaceutical company, one of the Company's principal
clients. The Company believes that the value of validation will be realized in
increased acceptance of the Company's products by other pharmaceutical
companies. Although the Company generates certain revenue upon delivery of
PHARM2-TM- to its clients, it is necessary for a pharmaceutical company to
validate its equipment and processes in order to satisfy FDA regulations and
PHARM2-TM- is a critical portion of the manufacturing activity. The Company
announced its first validated site in October 1996 for a major pharmaceutical
company manufacturing medical devices. The Company hopes to add four to six more
validated sites by the end of January 1998, although any such accomplishment is
dependent on customer cooperation.
During the nine month period ended July 31, 1997, the Company strengthened
its technical resources through the addition of development staff in both
Camberley, England, and in its New Jersey headquarters, and in its opinion must
continue to do so to meet its delivery commitments and to accommodate expected
growth. The Company considers its technical staff to be a primary resource and
crucial to its continuance in this business area. Loss of any portion of its
technical resources would be injurious and loss of a significant portion of its
technical staff could cause serious and immediate damage to the Company's
business. The Company believes it has good relations with its technical staff.
DEFENSE OPERATIONS. During the 1997 nine month period the Company
concentrated on the development tasks related to the Interference Blanker Unit
(IBU) awarded to the Company in mid-1996, the development tasks related to the
Maintenance Data Recorder also awarded to the Company in mid-1996, and the
development tasks related to the SLAM ER missile contract awarded in October
1996. This activity involved primarily technical staff and was responsible for a
major part of the income generated by the Government Technology Division in this
period. In the month of August, the Company completed the environmental
qualification of its Maintenance Data Recorder which the Company believes will
increase the sales opportunities for this product. Development effort on the IBU
has proceeded on schedule. The
35
<PAGE>
development work on the SLAM-ER missile is currently behind schedule although
the Company hopes to achieve recovery to schedule within the next months.
In addition, the Company continued its development of additional software
for the Stores Management System used aboard the Tornado aircraft. The Tornado
program extends beyond the year 2000 and could offer the Company significant
additional business. The Company recently provided cost and pricing information
for additional production for the Tornado Stores Management System and has
recently been advised that the customer anticipates placing an $11.4 million
order before the end of 1997. The award of this contract is dependent on, among
other factors, the defense budget of the German government. Efforts to secure
the released funds for this contract have been unsuccessful in the past due to
budget allocations for other priorities and there currently can be no assurance
of the award of such contract.
The Company continues to seek additional sources of business in the weapons
control area concentrating on those opportunities where the Company's technical
skills are relevant.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 1997 COMPARED TO
THE NINE MONTHS ENDED JULY 31, 1996
Total revenues decreased by $0.6 million or 5.7%, from $10.5 million in the
nine months ended July 31, 1996 to $9.9 million in the same period in 1997.
Revenues from defense operations decreased by $1.6 million or 16.3%, to $8.2
million for the nine months ended July 31, 1997 compared with revenues of $9.8
million in the same period in 1996. Commercial revenues increased by $0.4
million or 36.4% from $1.1 million in the nine months ended July 31, 1996 to
$1.5 million in the same period in 1997.
The decline in defense revenues was due in part to lower order writing
caused by delays in government funding, administrative delays in issuing
contracts and reduced contract values due to competitive pressures.
The increase in commercial revenues primarily resulted from deliveries of
early releases of standard versions of PHARM2-TM- as well as the completion of
certain portions of enhancements on the percentage completion method. The
PHARM2-TM- development effort is no longer being capitalized since initial
deliveries have taken place and all further enhancements to the functionality of
the basic product are being expensed, which negatively impacts earnings.
The Company incurred a net loss of $7.2 million in the nine months ended
July 31, 1997 compared with a loss of $7.9 million in the comparable period in
1996. The loss in 1997 was due to reduced order bookings in the Government
Technology Division resulting in lower revenues without a corresponding decrease
in overhead or selling, general, and administrative costs. In addition, the
development contracts which the Company has accepted in anticipation of future
production were bid aggressively and have a high cost relative to realized
revenue. These contracts will not be complete until 1998 and the effect of this
aggressive bidding will continue to affect revenues. The effect on earnings is a
function of what additional revenues the Company can develop from other
contracts yet to be booked. There was not sufficient revenue developed by the
MTD to offset the continuing marketing and sales costs as well as the additional
administrative costs necessary to support the development process. The loss in
the nine months ending July 31, 1997 was also due to interest expense of $1.1
million and amortization of capitalized software of $1.1 million, compared to
$0.3 million and $0.8 million respectively for the 1996 period. Interest in
succeeding periods will increase further due to interest on the $5.5 million of
Convertible Debentures since only two months of interest charges were incurred
in the third quarter of 1997.
The Company expects to incur additional operating losses in the 1997 fourth
quarter, and the first half of fiscal 1998, and could be expected to incur
further losses in succeeding quarters, particularly if currently anticipated
orders do not materialize in the amounts required on a timely basis, or if the
Company does not complete its current orders on schedule. While the Company is
actively making proposals to its customers for new business, the Company has no
ability to control government funding or budgeting
36
<PAGE>
processes; and is subject to unpredictable timing of capital authorizations
required by its customers to purchase its PHARM2-TM- products. The Company
intends to add to its sales capability so as to increase the number of selling
opportunities in an effort to reduce the effect of funding and contract
placement delays.
Cost of sales increased by $0.6 million from $7.7 million or 73.1% of
revenues in the nine months ended July 31, 1996 compared to $8.3 million or
83.8% of revenues in the nine months ended July 31, 1997. The cost of sales in
the 1997 period increased relative to revenues due primarily to increases in
direct and contract labor and the increase in overhead salaries. In the nine
months ended July 31, 1997 the direct labor cost was $4.4 or 44.4% of revenues
compared with a direct and contract labor cost of $3.0 million or 28.6% of
revenues in the nine months ended July, 1996. In the nine months ended July 31,
1997 the overhead salaries were $2.5 million or 25% of revenues compared with
$1.6 million or 15.2% of revenues in the comparable period in 1996. Although the
cost of direct and contract labor and overhead salaries were greater in the
period ending July 31, 1997 compared with the same period in 1996, the increase
in capitalized software in 1997 was $3.5 million compared to $2.3 million in the
comparable period in 1996 thus reducing the effect of the increase in labor and
overhead. Since the design of PHARM2-TM- was essentially completed in the period
ending April 30, 1997, capitalization in the three months ending July 31, 1997,
and in future periods, will be substantially reduced thus having an adverse
effect on the future cost of sales. Such an adverse effect can only be overcome
by an increase in revenues through deliveries of PHARM2-TM- and associated
customization income. The cost of sales was reduced by the difference in
purchased material due primarily to the reduced sales of the GTD. In the nine
months ending July 31, 1997 purchases amounted to $1.5 million compared with
$2.0 million in the nine months ending July 31, 1996.
Selling, general and administrative expenses increased by $0.1 million, from
$7.1 million or 67.6% of revenues in the nine months ending July 31, 1996 to
$7.2 million or 72.7% of revenues in the nine months ended July 31, 1997. The
increase was due, in part, to an increase of $0.3 million in amortization costs
of capitalized software for the MTD. The cost of amortization in the nine months
ended July 31, 1996 was $0.8 million and in the nine months ended July 31, 1997
the cost of amortization was $7.7 million. Professional fees in the nine months
ending July 31, 1996 were $0.8 million, reflecting in part the cost of preparing
a registration statement for the sale of securities which was later withdrawn.
Professional fees in the nine months ending July 31, 1997 were $0.3 million.
Selling salaries in the nine month period ending July 31, 1997 were $1.0 million
compared with $0.6 million in the comparable period in 1996. Costs of
consulting, advertising, general and administrative salaries, group life
insurance, and personnel hiring were all higher in the nine months ended July
31, 1997 than in the comparable period in 1996. Miscellaneous general and
administrative costs were greater in the nine months ended July 31, 1996 than in
the comparable period in 1997 by $0.5 million.
Research and development expenses declined from $0.8 million in the nine
months ended July 31, 1996 to $0.5 million in the nine months ended July 31,
1997 due to a reduction of engineering investment in new product design for the
GTD.
LIQUIDITY
During the nine months ended July 31, 1997, the Company had a net reduction
of cash of $3.7 million. The use of cash for operations was due primarily to the
Company's expenditure of approximately $2.4 million net of amortization for the
development of its PHARMASYST-Registered Trademark- products and the Company's
net loss of $7.2 million for the nine months. Cash used in investing activities
during the third quarter of $0.5 million was due primarily to the purchase of
property, plant and equipment. Net cash provided from financing activities was
attributable to the exercise of options and warrants for the purchase of the
Company's Common Stock as well the net proceeds from the issuance of the
Company's $5.5 million Convertible Debentures. The combined use of cash from all
activities during the quarter was $3.7 million. At July 31, 1997 the Company's
cash and billed receivables were $6.8 million.
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<PAGE>
The Company has a $1 million line of credit facility with a local bank which
expires in February 1998. Interest is 1% above the bank's prime lending rate and
the credit line is collateralized by accounts receivable. There currently are no
amounts outstanding under the credit line.
On May 1, 1997, the Company entered into an agreement whereby it became a
minority owner of uPACS LLC, a limited liability company (the "LLC"). Under the
terms of the agreement, the Company made a capital contribution to the LLC of
its rights to its uPACS-TM- technology which is a system for archiving
ultrasound images with networking, communication and off-line measurement
capabilities. In exchange for such capital contribution, the Company received a
9% interest in the LLC. An outside investor made a capital contribution of $2
million and agreed to make a further capital contribution of $1 million on or
before December 1, 1997, in return for a 91% interest in the LLC. The Company
believes that the funds available under the LLC will be sufficient to fund
operations in connection with uPACS-TM- for approximately 18 months. In
connection with the formation of the LLC, the Company entered into a Services
and License Agreement whereby the Company has agreed to complete the development
of the uPACS-TM-technology and undertake to market, sell and distribute systems
using the uPACS-TM- technology. The LLC will pay the Company its expenses in
connection with such services and the Company will pay to the LLC royalties in
connection with the sale of systems using the uPACS-TM- technology. At such time
as the LLC has distributed to the outside investor an aggregate amount equal to
$4.5 million of its net cash flow, the Company would become a 63% owner of the
LLC and the outside investor will own a 37% interest in the LLC. There can be no
assurance that uPACS-TM- will be successful or that the LLC will operate
profitably or that the funds under the LLC will be sufficient for the further
development and marketing of uPACS-TM-. The Company cannot predict if or when
uPACS-TM- sales will commence in its updated versions. There is intense
competition in this market and the Company has not established its market
position. The Company anticipates difficulty in achieving such sales until
further product development is complete and market tested.
On May 30, 1997, the Company sold 55 units ("Units") at $100,000 per Unit,
for an aggregate of $5,500,000, to two accredited purchasers ("Purchasers") in a
private offering (the "Offering"). Each Unit consisted of (i) a convertible
debenture ("Convertible Debenture") in the principal amount of $100,000,
convertible into shares of the Company's Class A Stock, and (ii) a warrant
("Warrant") to acquire 1,800 shares of Class A Stock. The number of shares of
Class A Stock issuable upon conversion of the Convertible Debentures is
variable. The number of shares will be calculated at the time of conversion and
will be the lesser of (i) the product obtained by multiplying (x) the lesser of
the average of the closing bid prices for the Class A Stock for the (A) five or
(B) thirty consecutive trading days ending on the trading day immediately
preceding the date of determination by (y) a conversion percentage equal to 95%
with respect to any conversions occurring prior to February 24, 1998 and 92%
with respect to any conversions occurring on or after February 24, 1998 and (ii)
$13.50 with respect to any conversions occurring prior to May 30, 1998 or $14.00
with respect to any conversions occurring on or after May 30, 1998. The
Convertible Debentures are not convertible prior to December 16, 1997. From
December 16, 1997 until February 23, 1998, one-half of the Convertible
Debentures may be converted and after February 23, 1998, the Convertible
Debentures are fully convertible. The Warrants may be exercised at any time
through May 30, 2002 at an exercise price of $12.26 per share. The Company
received net proceeds of approximately $4,950,000 from the sale of the Units
after deduction of fees and expenses related to the Offering.
During fiscal 1996, the Company used $9.5 million of cash in its operations.
The use of cash was due primarily to an increase of $1.5 million in accounts
receivable, the Company's expenditure of approximately $3.8 million for the
development of its PHARMASYST-Registered Trademark- products, and the Company's
net loss for the year. During fiscal 1996, the Company raised $10.0 million from
the sale of a 9.01% convertible debenture maturing in 2003 and $806,000 from the
exercise of outstanding options. During fiscal 1996, the Company's cash and
equivalents increased approximately $.3 million from $7.2 million at October 31,
1995 to $7.5 million at October 31, 1996, primarily due to $10.0 million of cash
generated by financing activities,
38
<PAGE>
partially offset by $9.5 million of cash used in operations and $1.1 million of
additions to property, plant and equipment.
The Company's net loss of $9.0 million for the year ended October 31, 1996
included noncash expenses consisting of a write-off of capitalized software
development costs aggregating approximately $2.4 million and additional
write-offs of $.3 million relating to other costs and capitalized items, as well
as depreciation and amortization expense of $1.7 million for the period,
including $1.3 million in amortization of capitalized software development
costs.
LIQUIDITY AND CAPITAL RESOURCES FOLLOWING THE SALE. The Company believes
that cash generated by operations and existing capital resources in combination
with the net proceeds from the Sale, its credit facility, the funds available
from the LLC, the net proceeds from the sale of the Convertible Debentures
issued in May 1997 and anticipated collections on its outstanding receivables
will be sufficient to fund its operations through the third fiscal quarter of
1998.
In July, 1997 the Company entered into an engagement with Cowen to act as
the Company's financial advisor. The Company has closed the initial installment
of a private placement of convertible preferred stock which, if fully
consummated will result in receipt of net proceeds of approximately $17 million,
an amount the Company believes will provide it with sufficient resources for
both current operations and expansion of the MTD for at least the next 12
months. See "The Proposed Issuance", below. The Company is working with Cowen to
develop additional capital for use in 1998. The Company is also relying on
receiving anticipated orders for its products. In addition, the Company is
relying on the continued successful enhancement of its MTD's leading product,
PHARM2-TM-, during the fourth quarter of calendar 1997 to stimulate new orders
and permit the delivery of existing orders. However, neither the completion of
PHARM2-TM- nor the resulting generation of cash from orders can be assured
either in time or amount or that such amounts will be sufficient for the
Company's needs. If the Company should not receive such additional capital
funding for fiscal 1998, or should the Company not receive the anticipated
orders in time and in the amounts planned during fiscal 1998 the Company would
need to reduce its operating costs. The effect of these reductions could have an
adverse affect on the Company's ability to market, develop, and implement its
products with the result that the Company's losses could continue or increase.
RESULTS OF OPERATIONS FOR FISCAL 1996 COMPARED TO FISCAL 1995
The Company incurred a net loss of $9.0 million in 1996 compared to a net
loss of $1.4 million in 1995. Losses in 1996 comprised a write off of various
capitalized expenses in the sum of $2.4 million representing development of the
Company's prenatal abnormality detection software, PRENVAL, and early
development costs for uPACS-TM- and other operating losses of $7.0 million. The
major portion of the operating loss reflects the Company's investment in the
development of markets and infrastructure for MTD products. Included in the loss
was approximately $.6 million of expenses incurred in the preparation of a
registration statement which was withdrawn.
Revenues for the twelve months ended October 31,1996, were $14.9 million
compared with $18.3 million in 1995, a decrease of 18.6%. In addition to minimal
revenues from its MTD, the decrease is attributable to a decline in defense
spending resulting in fewer opportunities to bid with the consequent reduction
in contract awards. Anticipated orders for the Company's Bus Interface Unit did
not materialize and other orders for build to print contracts were $2.2 million
in 1996 compared with $4.8 million in 1995. New business in the form of
engineering contracts for Maintenance Data Recorders and Interference Blanking
Units received from McDonnell Douglas in the middle of the year resulted in
revenues during the third and fourth quarters only.
Engineering contracts for both software and hardware development of defense
related products accounted for approximately 26% of revenues. Production of
proprietary weapons control products for international customers accounted for
approximately 24% of revenues and production of proprietary and build to-print
defense related products for national customers accounted for approximately 40%
of
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revenues. Medical Technology products accounted for approximately 8% of
revenues, with the balance of revenues derived from miscellaneous sources.
Revenues from the MTD products declined from $2.2 million in 1995 to $1.3
million in 1996. In 1995, $1.8 million in revenue was recognized upon completion
of the Company's PRENVAL software sold and licensed to Johnson & Johnson Ortho
Clinical Diagnostic Systems, with approximately $.4 million in revenue from the
Company's PHARMASYST-Registered Trademark- products. The Company began to
recognize revenue only upon delivery of PHARMASYST-Registered Trademark-
products at the end of the fiscal 1996 second quarter and consequently these
products produced only minimal revenue in the third and fourth quarters.
Cost of sales as a percent of revenues was 73.7% in 1996 compared with 64.5%
in 1995. The increase is due primarily to overhead expenses for the development
of PHARMASYST-Registered Trademark-. These additional expenses, in the absence
of appreciable revenues, increased cost of sales as a percent of revenues.
Increases in staffing levels for the MTD included project management staff and
the indirect costs of the larger development and testing groups.
Direct labor increased from $3.3 million in 1995 to $4.9 in 1996 due
primarily to increases in the development and testing staff dedicated to the
PHARMASYST-Registered Trademark- project.
Research and development costs increased to $1.0 million from $.9 million in
1995. These charges which represent investments in defense related products are
separate from the $3.8 million in capitalized costs for the development of
PHARMASYST-Registered Trademark- products in 1996. Capitalized costs in 1995 of
$2.3 million consisted primarily of development costs for
PHARMASYST-Registered Trademark- and uPACS-TM-, both MTD products. Efforts to
accelerate the market development of PHARMASYST-Registered Trademark- and uPACS
were recorded as selling, general and administrative expenses rather than
research and development costs.
Selling, general and administrative costs for 1996 increased to $8.5 million
compared with $6.3 million in 1995. Included in the 1996 expenses are the costs
of financing totaling $.6 million incurred in the preparation of a registration
statement in anticipation of a prospective public offering. The offering was
withdrawn in July 1996 because of market conditions. The Company did not have
comparable costs in 1995. The largest single increase in selling, general and
administrative expenses for 1996 was in personnel costs rising from $1.8 million
in 1995 to $2.8 million in 1996, an increase of 55.6%. This increase includes
additional sales persons. Also, additional costs in 1996, attributable largely
to the MTD, for personnel hiring, travel, advertising, and consulting amounted
to an increase of approximately $.5 million compared to 1995.
The amortization of capitalized expenses relating primarily to the
development of PHARMASYST-Registered Trademark- and uPACS increased to $1.3
million in 1996 from $.6 million in 1995.
Interest expense in 1996 was $.7 million representing primarily capitalized
lease costs incurred under a sale and lease back transaction involving sale of
the Company's facility in Trenton, New Jersey in October 1994 and less than
three months interest costs applicable to the $10.0 million convertible
debenture issued in August, 1996. Interest expenses in 1995 of $.6 million
represented the capitalized lease costs and the mortgage loan outstanding during
1995.
Cost increases in personnel and related costs which were incurred in 1996
were incurred over only a part of the year and may be expected to increase in
1997 as they become applicable to the full year.
RESULTS OF OPERATIONS FOR FISCAL 1995 COMPARED TO FISCAL 1994
Total revenues declined by $975,000, or 5.1%, from $19.3 million in fiscal
1994 to $18.3 million in fiscal 1995. Revenues from defense-related operations
declined by $3.1 million, or 16.6%, from $18.7 million to $15.6 million.
Revenues from commercial operations were $2.2 million in 1995. There were no
commercial revenues in 1994.
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The decline in defense revenues reflects reduced defense budgets in the U.S.
and Western Europe and was partially offset by a $2.3 million increase in
contract manufacturing revenues related to the commencement of a manufacturing
contract. Defense revenues accounted for 85.2% and 97.0% of total revenues
during 1995 and 1994, respectively.
Revenues from commercial operations consisted of royalties generated from
sales of PRENATA and $500,000 of initial sales of
PHARMASYST-Registered Trademark-. During 1995, the Company licensed certain
medical screening technology to Johnson & Johnson Clinical Diagnostic Systems
for use in its PRENATA medical screening kit and entered into a corresponding
five year royalty agreement. Using the percentage-of-completion method, the
Company recognized revenues of $1.8 million in 1995, representing the aggregate
minimum royalty payments due under the agreement. Commercial product revenues
accounted for 12.3% of total revenues during 1995.
Cost of sales declined by approximately $1.2 million, or 9.1%, from $13.0
million in 1994 to $11.8 million in 1995. The decline was attributable to the
decline in total revenues. Gross margin increased from 32.6% to 35.5%. This
increase is attributable to approximately $2.2 million of sales of relatively
high margin PRENATA and PHARMASYST-Registered Trademark- products during 1995.
Selling, general and administrative expenses increased by approximately $.7
million, or 13.0%, from $5.1 million in 1994 to $5.8 million in 1995 and
increased as a percentage of revenues from 26.6% to 31.7%. This increase
consisted primarily of (i) $.4 million in salaries relating to the addition of
new sales personnel, (ii) $.1 million in advertising of commercial products and
(iii) $.3 million in travel expenses relating to the addition of new sales
people and increased participation in trade shows. The increase was partially
offset by a $.2 million decrease in employee group insurance expenses relating
to the adoption of a new plan.
Research and development expenses declined by $24,000, or 2.7%, from
$887,000 in 1994 to $863,000 in 1995 and remained relatively constant as a
percentage of revenues. Capitalization of software development costs increased
by approximately $1.3 million, or 81.3%, from $1.6 million in 1994 to $2.9
million in 1995. This increase consisted primarily of $570,000, $460,000 and
$410,000 in increased capitalization of development costs relating to
PHARMASYST-Registered Trademark- , uPACS and a weapons control system,
respectively, partially offset by lower development costs related to PRENVAL.
Interest expense increased by $345,000, or 165.1% from $.2 million in 1994
to $.5 million in 1995 and increased as a percentage of revenues from 1.1% to
3.0%. This increase was primarily due to the 1994 mortgage interest being
replaced in 1995 by capital lease amortization pursuant to the October 1994 sale
and leaseback of the Company's principal facility, resulting in higher levels of
borrowings.
The Company's revenues and operating results are subject to significant
quarterly fluctuations. Factors that could cause such fluctuations include the
time of revenue recognition; changes in customer capital and resource
commitment; changes in product mix; the introduction of new products or product
improvements by the Company or its competitors; FDA regulation requirements and
changes in operating expenses. The timing of revenues from defense-related
programs can be significantly affected by government procurement processes and
disruptions due to political and other events over which the Company has no
control The timing of revenues from manufacturing execution systems can be
affected by factors outside the Company's control, including long sales cycles
and delays in customer authorization procedures.
BUSINESS
The Company operates with a Medical Technology Division ("MTD") and a
Government Technology Division ("GTD"). See "The Proposed Sale of the Government
Technology Division--The Government Technology Division," above, for a
description of the GTD. The MTD, which will constitute the Company's sole
operations following the Sale, designs, develops, manufactures and markets
comprehensive software solutions for the pharmaceutical and medical device
manufacturing industries. The Company's products
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are used in safety critical applications requiring consistent, highly reliable
outcomes where an out-of-specification event could have a catastrophic result.
The Company developed a core competency in safety critical applications from its
historical focus on designing electronic systems used primarily in weapons
management systems for military aircraft. The Company has applied this expertise
to develop PHARMASYST-Registered Trademark-, a computerized MES used to
automate, monitor, control and document highly regulated manufacturing
processes. The following describes the MTD.
OVERVIEW
PHARMASYST-Registered Trademark- operates on a PC-based system in an open
client / server environment and can be readily integrated with industry standard
server database engines. PHARMASYST-Registered Trademark- is designed and
marketed as a standard application, not a custom solution or toolkit, for
implementation into a customer's existing manufacturing facility.
PHARMASYST-Registered Trademark- acts as an electronic monitor ensuring that the
production process complies with a predefined set of specifications in order to
produce a consistent product. The Company believes that
PHARMASYST-Registered Trademark- is a premier commercially available PC-based
standardized MES solution capable of the necessary functionality and supporting
documentation suitable for regulated manufacturing in the pharmaceutical and
medical device industries. The Company is engaged in a continuing program to
maintain compliance with an industry generated standard for Good Automated
Manufacturing Practice (GAMP) as a means of differentiating itself from present
and future competition.
The production of pharmaceuticals is subject to the FDA's current Good
Manufacturing Practices (cGMP), which mandate compliance with technical
requirements involving manufacturing production processes. During its
inspections, the FDA frequently verifies whether a manufacturer is in compliance
with cGMPs. PHARMASYST-Registered Trademark-, through the Company's program of
meeting GAMP requirements, is intended to support the manufacturer's
verification of a compliant production process in a manner which the Company
believes is acceptable to the FDA.
PHARMASYST-Registered Trademark- offers four manufacturing applications:
dispensing, electronic batch recording, inventory control, and document
management, collectively encompassing much or all of a typical pharmaceutical
production process. During 1996 the Company focused on the development of
PHARM2-TM-, an advanced version of the PHARMASYST-Registered Trademark- product
introduced in 1995. As of November 30, 1997, the Company had received 25
contracts or signed license agreements from manufacturers or their integrators
for installation of systems at 38 sites, including Abbott Hospital Products,
Berlex, Novo Nordisk, Pfizer International Products Group, Pharmacia & Upjohn,
SmithKline Beecham, 3M, Taisei, and Wyeth. In the earlier part of the year, the
Company added Astra, Roche, and an additional contract from Pharmacia & Upjohn.
The Company has entered into collaborative relationships with certain
computer system integrators and others that can integrate PHARMASYST with the
products and services they provide. The Company has established a relationship
with STG-Coopers and Lybrand Consulting AG, Walsh Automation (a Canadian systems
integrator), WTI Systems Ltd. (an English systems integrator), Toyo Engineering
Co. (a Japanese developer of turnkey manufacturing facilities), Bailey Controls
Company (a provider of distributed control systems), Intellution, Inc. (a
supplier of manufacturing systems for the pharmaceutical industry), the Taisei
Corporation (a construction and engineering company in Japan), Peat Marwick
KPMG, QAD, (a manufacturer of manufacturing resource planning software),
Euriware ( a French systems integrator) and Wonderware (a provider of
manufacturing software).
MANUFACTURING EXECUTION SYSTEMS
Manufacturing execution systems are designed to create uniformity in a
production sequence by defining the elements of each production step. MES
essentially institute a checklist to be followed, defining the raw material
inputs, equipment operating instructions, and procedures to be followed in order
to maintain consistency in an end product. Historically, manufacturers have
implemented MES using paper
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forms that follow a batch through the production sequence, requiring signatures
to verify that procedures were followed according to defined procedures. Paper
based systems are generally inadequate in enforcing strict manufacturing
procedures, rendering such systems susceptible to human errors, leading to an
increased possibility of corrupted batches. The production of certain products
effecting health and safety, such as pharmaceuticals and some consumer products,
require greater production process control to decrease the possibility of a
corrupted end product. To obtain greater control and increase efficiency,
manufacturers have incorporated custom computer solutions into their MES. These
solutions are expensive, time consuming to implement, address only limited
procedures and generally do not possess the flexibility for expansion or the
addition of new technologies.
The Company believes there is a compelling and immediate need for the
pharmaceutical and medical device industries to implement MES that facilitate
the demonstration of compliance with FDA cGMP regulations and that these
industries are actively seeking suppliers and products to aid in compliance. The
products themselves must be developed and proven under rigid controls and
procedures in compliance with currently accepted industry standards for
validation. In addition, the Company believes pharmaceutical and medical device
manufacturers are subject to pressures to reduce manufacturing costs in
anticipation of the expiration of U.S. patents and the emergence of competing
generic drugs and pricing pressures imposed by large retail organizations and
Healthcare providers who seek bulk purchases at favorable prices.
THE COMPANY'S MES SOLUTION
PHARMASYST-Registered Trademark- enables the customer to specify the
individual steps of the production process. PHARMASYST-Registered Trademark-
interfaces with Manufacturing Resource Planning (MRP) and Supervisory Control
and Data Acquisition (SCADA) systems, information databases and stand-alone
production machinery such as scales, blenders and ovens, directing the execution
of the production process and continuously monitoring the compliance of each
step with the manufacturer's defined specifications. Should
PHARMASYST-Registered Trademark- recognize an out-of-specification event, it can
adapt to that by selecting a previously defined and approved alternative
procedure in order to allow the process to continue in a compliant manner. If a
remedial alternative is not available, PHARMASYST-Registered Trademark- will not
authorize commencement of the next production step and can issue a problem
notification to supervisory or quality control personnel. In addition,
PHARMASYST-Registered Trademark- chronologically tracks and electronically
records each input, procedure and output, which provides a powerful tool for the
customer to demonstrate ongoing cGMP compliance. The following are basic
features of the PHARMASYST-Registered Trademark- MES system:
- Executes workflow instructions, including recipes and equipment
operating instructions;
- Confirms proper execution of procedures;
- Monitors material flow throughout the entire manufacturing process;
- Verifies testing of intermediate and final products and monitors
adherence to quality standards;
- Authorizes progression to the next production step if all events
were completed to specification; and
- Provides comprehensive real time documentation for each event.
PHARMASYST-Registered Trademark- provides a standard set of MES
applications, not custom systems or system design services. The Company is able
to provide customers with a fixed price quotation and estimated delivery
schedule based upon an extensive evaluation of user requirements. The Company
believes such specificity provides a significant advantage over custom MES
solutions that have been characterized by long development and installation
schedules and unpredictable costs.
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The Company commenced sales of PHARMASYST-Registered Trademark- in fiscal
1995 and is installing applications at facilities operated by Abbott
Laboratories Hospital Products Division, Bayer Inc., Instrument Laboratories,
Novo Nordisk, Pfizer Inc. International Pharmaceuticals Group, SmithKline
Beecham, and Taisei. As of November 30, 1997, the Company had received 25
contracts or signed license agreements from manufacturers or their integrators
for installation of systems at 38 sites, including Abbott Laboratories Hospital
Products, Astra, Berlex, Novo Nordisk, Pfizer International Products Group,
Minnesota Mining & Manufacturing, Roche, Taisei, SmithKline Beecham, and
Pharmacia & Upjohn. PHARMASYST-Registered Trademark- normally requires only
limited customization for incorporation into existing systems. Based upon orders
to date, the Company estimates that a typical PHARMASYST-Registered Trademark-
site installation costs between $150,000 and $300,000 and requires six to nine
months to install, depending in part on the time necessary for the customer to
solidify its requirements.
The Company has integrated the PHARMASYST-Registered Trademark- applications
into a single MES product, referred to as PHARM2-TM-. PHARM2-TM- also interfaces
with more database engines and operating systems than earlier
PHARMASYST-Registered Trademark- applications, providing increased flexibility
and limiting the customization required for an installation. The Company is
continuing to enhance the functionality of PHARM2-TM-.
OTHER PRODUCTS
ULTRASOUND IMAGING PRODUCTS. In 1994, the Company introduced uPACS-TM-, a
system for archiving ultrasound images. That system digitizes, records and
stores ultrasound images on CD-ROMs as an alternative to existing film and video
storage systems. In April 1996, the Company determined that uPACS-TM- was not a
commercially viable product, despite anticipated 510(k) premarket clearances
that were subsequently granted in June 1996. The Company is developing a new
system for archiving ultrasound images with networking, communication, and
off-line measurement capabilities. The Company is marketing this new system
under the uPACS-TM- name and has received orders for approximately $300,000 of
this new system. See the discussion of the uPACS LLC under "Liquidity" above.
MEDICAL SCREENING SOFTWARE. The Company has created three software programs
to aid in the prenatal detection of risk for certain birth defects. The first
two programs are designed to accelerate the computation of risk detection for
neural tube defects (PRENVAL I) and Down's syndrome (PRENVAL IA) in pregnant
women. A portion of the third program was sold and the remainder licensed to the
Johnson & Johnson Clinical Diagnostic Division ("Johnson & Johnson"), located in
Amersham, England. Johnson & Johnson offers this software as PRENATA, a
trademark of Johnson & Johnson, in connection with the sale of its products used
in the detection of fetal abnormalities throughout the world, except for the
United States. The Company's agreement with Johnson & Johnson provides for
guaranteed minimum royalties for a period of five years beginning October 1994.
The aggregate minimum royalties of $1.8 million collectable for 1995 through
1999 were earned in fiscal year 1995. The Company has terminated further
self-funded development efforts of these products because the Company believes
that the market and further revenue potential of the products does not currently
justify the cost of further development.
RESEARCH AND DEVELOPMENT
The Company's commercial product development efforts are currently directed
at the continuing development of PHARM2-TM- and a new image archiving system to
be marketed under the uPACS-TM- name. The Company believes that commercial
success in the MES and other markets will depend on its ability to provide
product improvements or version upgrades. Consequently, the Company intends to
continue to devote significant resources to developing product upgrades.
The Company has developed concepts for certain "regulatory implementation"
software intended to verify in real-time that a computer involved in critical
applications is functioning as intended and that certain critical tasks are
being performed within specified parameters. It has also developed certain
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concepts to provide software authors and programmers an environment for
developing safety-critical software.
During fiscal 1994, 1995 and 1996, the Company capitalized $1.5 million,
$2.3 million and $3.8 million of software development costs related to the MTD,
and expensed approximately $.9 million, $.9 million, and $1.0 million, in
research and development expenditures, respectively, related to the MTD. The
MTD's research and development staff consists of approximately 53 engineers and
designers.
COMPETITION
The MES software market is intensely competitive and subject to rapid
change. The principal competitive factors in this market include product
functionality and quality, ease and speed of implementation and use, total cost,
process manufacturing expertise, customer service and satisfaction, supported
hardware and software platforms, the underlying technology and architecture of
the product, vendor reputation and the ability and experience to document the
software design life cycle to accepted industry validation standards. The
Company believes that it competes effectively with respect to these factors,
although it may be at a disadvantage against companies with greater financial,
marketing, and technical resources.
The Company's competitors for MES software include Consilium, Incode, SAP
AG, Intellution, Inc. and ProPack GmbH. While the Company believes that
PHARMASYST-Registered Trademark- is the premier commercially available,
comprehensive standardized PC-based MES solution capable of the necessary
functionality and supporting documentation suitable for regulated manufacturing
found in the pharmaceutical and medical device manufacturing industries, many of
these competitors offer products that provide specific MES applications, or
toolkits that can be used for internal system development. Consilium offers
FlowStream, an MES developed for the highly regulated pharmaceutical and bulk
chemical manufacturing industries. In addition, the Company competes with system
integrators and internal corporate MIS departments. The Company believes that
internal MIS departments, which are responsible for developing and operating a
manufacturer's management information systems and who are instrumental in the
approval process for PHARMASYST-Registered Trademark-, provide a significant
source of competition.
Competition among providers of software for manufacturers is likely to
increase substantially for many reasons. The Company also expects that
competition will increase as a result of software industry consolidations. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
There can be no assurance that the Company will compete successfully with
new or existing competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, results of operations and
financial condition.
BACKLOG
Commercial software backlog related to PHARMASYST-Registered Trademark-
products as of July 31, 1997, was approximately $4.5 million, compared with $3.9
million as of July 31, 1996. At fiscal 1996 year end, $4.1 million, or nearly
36% of the Company's backlog, was related to PHARMASYST-Registered Trademark-
product orders with the remainder associated with the defense business.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, trade secret law, and contractual arrangements.
However, existing copyright laws offer only limited practical protection for
software. Furthermore, the laws of some foreign countries do not protect the
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Company's proprietary rights to the same extent as do the laws of the United
States. Under certain circumstances, customers of the Company may be entitled to
limited access of the PHARMASYST-Registered Trademark- source code. Customer
access to source code may increase the possibility of misappropriation or other
misuse of the Company's software. Accordingly, it may be possible for
unauthorized third parties to copy certain portions of the Company's software or
to obtain and use information that the Company regards as proprietary. There can
be no assurance that the Company's means of protecting its proprietary software
will be adequate or that competitors will not independently develop technologies
similar to the Company's.
The Company has obtained a patent for a portable memory device that may be
integrated into future PHARMASYST-Registered Trademark- products, a patent for
technology relating to its PRENVAL software, three patents covering elements of
its regulatory implementation software technology, and a patent for a device
relating to the fusing of rockets. In addition, the Company has filed
applications for a patent covering certain aspects of the safety critical
technology in PHARMASYST-Registered Trademark- and for several patents covering
elements of its imaging technology.
While the Company has received certain patent protection, there can be no
assurances that any additional patents will be issued, that the scope of any
patent protection will be adequate, or that any current or future issued patents
will be held valid if challenged.
The Company believes that its products and technology do not infringe any
existing proprietary rights of others, although there can be no assurance that
third parties will not assert infringement claims in the future.
REGULATIONS
The Company's PHARMASYST-Registered Trademark- software products do not
require FDA clearance or approval at this time although the Company anticipates
that such approval may be required in the future. However, those products are
intended to facilitate compliance by pharmaceutical manufacturers with the FDA's
cGMP regulations and are designed to be integrated into a manufacturer's
production systems. A pharmaceutical manufacturer's systems, including any
PHARMASYST-Registered Trademark- applications used, must be capable of
sufficiently documenting the production of each batch of product to be in
compliance with cGMP. Further, the manufacturer must be able to demonstrate to
the FDA that its systems have that capability under a variety of circumstances.
The Company is engaged in a continuing program to maintain compliance with Good
Automated Manufacturing Practice (an industry generated standard) to enable
fulfillment of its obligations.
Other products the Company has developed are considered, and the archiving
software for ultrasound images that the Company intends to develop will be
considered, "medical devices" under FDA regulations. Before such products may be
marketed in the U.S., they must receive FDA clearance of a premarket
notification application ("510(k) clearance") or FDA clearance of a premarket
approval application ("PMA"). In June 1996 the Company received 510(k) clearance
to market several versions of uPACS-TM-. Obtaining such clearance can take
substantial time and can require substantial expenditures. Many other countries
regulate the manufacture, marketing and use of medical devices in ways similar
to the U.S. There can be no assurance that the Company will be able to obtain
required clearances for any products it develops on a timely or cost-effective
basis, if at all.
EMPLOYEES
The Company currently employs a total work force of 207 persons, including
94 engineers and designers, plus additional contract labor. Of the total work
force, 96 persons, including 53 engineers and designers, work primarily for the
MTD. None of the Company's employees are covered by collective bargaining
agreements. The Company has never experienced any labor disruptions or work
stoppages and considers its employee relations to be good.
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PROPERTIES
The Company's principal facility in the United States is in Trenton, New
Jersey. The Company
occupies 82,000 square feet in Trenton for its corporate headquarters and
engineering, manufacturing and support activities, of which approximately 40,000
square feet (including 10,000 square feet of common space) is proposed to be
sub-leased to the Purchaser, with the remaining 42,000 square feet to be
occupied by the MTD. The lease for such space expires in October 2009. The
Company leases approximately 3,000 square feet of space in Camberley, England,
for use as administrative offices and software development facilities. The lease
for the office space in the Camberley facility expires in March 2003. The
Company also leases small office facilities in Copenhagen, Brussels and Tokyo.
The Company's headquarters and manufacturing facility in Trenton, New Jersey
was subject to a sale and leaseback transaction completed in October 1994. The
Company's fifteen year lease on the facility includes a repurchase option first
exercisable at $4.3 million during fiscal 1996, declining to $3.5 million during
the last five years of the lease.
Management believes that the Company's facilities are adequate for its
operations and are maintained in good condition.
LEGAL PROCEEDINGS
No material legal proceedings are pending by or against the Company and, to
the knowledge of Base Ten, none are contemplated against the Company by
governmental authorities.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Class A Stock is listed on Nasdaq under the trading symbol BASEA, and
the Class B Stock is traded in the Nasdaq Over the Counter Market and quoted on
its Supplemental List under the trading symbol BASEB.
The following table sets forth the high and low sale prices of the Class A
Stock and Class B Stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
CLASS B COMMON STOCK
CLASS A COMMON STOCK
BID PRICE BID PRICE
------------------------ ----------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
---------- ------------ ---------- ----------
FISCAL 1996:
First quarter..... $ 133/4 $ 101/8 $ 125/8 $ 101/2
Second quarter.... 111/8 87/8 111/4 91/2
Third quarter..... 131/2 915/16 143/4 113/8
Fourth quarter.... 131/4 10 14 131/2
FISCAL 1997:
First quarter..... $ 121/2 $ 10 $ 141/4 $ 121/4
Second quarter.... 113/8 93/4 143/4 123/4
Third quarter..... 107/8 95/8 141/4 111/2
Fourth quarter
(through October
27, 1997)....... 16 915/16 131/4 101/2
</TABLE>
As of November 14, 1997, there were approximately 663 record holders of
Class A Stock and 145 record holders of Class B Stock.
The Company has not paid cash dividends on its Common Stock since 1985. The
present policy of the Board of Directors is to retain any future earnings to
provide for the Company's growth.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PURCHASE AGREEMENT
PROVIDING FOR THE SALE
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THE PROPOSED ISSUANCE
(PROPOSAL 2)
BACKGROUND
In order to assure that what the Company believes will be adequate financial
resources are available for continued marketing and development efforts by the
MTD, the Board of Directors authorized, and the Company has consummated, the
first installment of the sale of up to $19 million of convertible preferred
stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants").
A total of $9.375 million of Preferred Stock and Warrants were sold and issued
as of December 5, 1997, to eight institutional investors, consisting of Stark
International, Shepherd Investments International, Ltd., Societe Generale, JMG
Capital Partners, L.P., Triton Capital Investment, L.P., RGC International
Investors, LDC, Elara Ltd., and Keyway Investments. The Company is obligated to
sell and issue, and the existing holders of the Preferred Stock are required to
purchase, an additional $9.675 million of Preferred Stock and Warrants, if and
when this proposal is approved by the shareholders. The $9.675 million of
Preferred Stock and Warrants not yet sold are referred to as the "Issuance."
TERMS OF THE ISSUANCE
Holders of Preferred Stock have the following rights, privileges and
preferences:
TERM; DIVIDENDS AND ILLIQUIDITY PAYMENTS. The Preferred Stock has a term of
three years and pays a cumulative dividend of 8.0% per annum during any quarter
in which the closing bid price for the Class A Stock is less than $8.00 for any
10 consecutive trading days. An equivalent payment is payable to any holder of
Preferred Stock which is subject during any quarter to a standstill period (as
described below) following a Base Ten underwritten public offering or which is
non-convertible because of the limitations described below. Such dividends and
payments are payable only prior to conversion, and payable in cash or additional
Preferred Stock at Base Ten's option; however, if Base Ten elects to pay the
dividend in Preferred Stock, the amount of such payment will be 125% of the cash
amount due.
LIQUIDATION PREFERENCE. The Preferred Stock has a liquidation preference as
to its principal amount and any accrued and unpaid dividends.
CONVERSION RIGHTS. The Preferred Stock is convertible at any time or from
time to time into Class A Stock, at a conversion price equal to the LESSER of
(i) $16.25 per share, or (ii) the Weighted Average Price of the Class A Stock
prior to the conversion date. Weighted Average Price is defined as the volume
weighted average price of Class A Stock on Nasdaq (as reported by Bloomberg
Financial Markets) over any two trading days in the 20 trading day period ending
on the day prior to the date the holder gives notice of conversion (excluding
the lowest closing bid price in that period). The holder has the right to select
such two days. In any event, no more than 3,040,000 shares of Class A Stock
shall be issued upon conversion of all of the Preferred Stock. Any Preferred
Stock remaining outstanding because of this limitation may be redeemed at the
holder's option for a subordinated 8% promissory note maturing when the
Preferred would have matured.
COMPANY REDEMPTION RIGHT. Base Ten has the right, at any time, to redeem
all or any part of the outstanding Preferred Stock or subordinated notes at 130%
of their original purchase price.
MANDATORY REDEMPTION ON MATURITY. Any shares of Preferred Stock or
subordinated notes still outstanding three years after issuance must be redeemed
in either cash or at Base Ten's option, in Class A Stock. If Base Ten elects to
make the redemption in Class A Stock, the amount of such payment will be 125% of
the original purchase price.
48
<PAGE>
VOTING RIGHTS. The holders of the Preferred Stock have the same voting
rights as the holders of Class A Stock, calculated as if all outstanding shares
of Preferred Stock had been converted into shares of Class A Stock on the record
date for determination of shareholders entitled to vote on the matter presented.
WARRANTS. For each $1 million of Preferred Stock purchased, a purchaser
will receive five-year warrants to purchase 40,000 shares of Class A Stock
exercisable at $16.25 per share.
RIGHT OF FIRST REFUSAL. So long as shares of the Preferred Stock remain
outstanding, each holder has the right (with certain exceptions) to purchase, on
five days notice, up to that portion of any future equity financing by Base Ten
which would be sufficient to enable the holder to maintain its percentage
interest in Base Ten equity on a fully diluted basis.
REGISTRATION. Base Ten is required to file a registration statement
("Registration Statement") with the Securities and Exchange Commission ("SEC")
registering for resale the Class A Stock underlying the Preferred Stock,
including any Preferred Stock which may be issued as a dividend, and the
Warrants, which must be effective no later than March 2, 1998. In the event the
Registration Statement is not declared effective by the SEC by such date, Base
Ten will be required to pay the holders of the Preferred an amount equal to
1 1/2% of the original purchase price for each month until the Registration
Statement has been declared effective. The holders have agreed, if requested by
a managing underwriter, to a 90-day standstill period following any underwritten
Base Ten public offering, but not in excess of two such standstills in any
18-month period. In the event a standstill period is effective, the maturity
date of the Preferred Stock would be extended by the duration of the standstill
period.
REASONS FOR THE PROPOSAL
The Company is seeking shareholder approval of the Issuance pursuant to the
designation criteria for continued inclusion of the Class A Stock on NASDAQ.
Specifically, the NASDAQ rules require an issuer that has securities listed on
NASDAQ to seek shareholder approval of any issuance of securities that will
result in issuance of shares representing 20% or more of the issuer's
outstanding voting common stock, at a price per share below the market price of
the issuer's voting common stock. The terms of the Preferred Stock provide that
it is convertible at a price equal to the Weighted Average Price. Because
Weighted Average Price (as defined) may be below the market price of the Class A
Stock on the closing date of the Issuance, under the NASDAQ rules the Issuance
requires shareholder approval.
RISK FACTORS
While the Board of Directors recommends approval of the Issuance and is of
the opinion that the proposal regarding the Issuance is fair to, and in the best
interest of, the Company and its shareholders, the Company's shareholders should
consider the following possible effects in evaluating the Issuance.
EFFECT OF ACTUAL OR POTENTIAL FUTURE CONVERSIONS BELOW MARKET PRICE. If
consummated, the Issuance will substantially increase the number of shares of
Preferred Stock which are convertible at any time, or from time to time, into
shares of Class A Stock at a conversion price per share which may be
substantially below the current market price of the Class A Stock. In addition,
because Weighted Average Price for purposes of conversion of the Preferred Stock
is measured by reference to closing bid price on two trading days selected by
the holder in the 20-day trading period preceding conversion, the actual
conversion price may be substantially lower than the average market price of the
Class A Stock over the 20-day trading period, or the average market price on the
date of conversion. For example, if the average closing bid price of the Class A
Stock over a 20-day trading period is $12.75 per share, reflecting fluctuating
bid prices during the 20-day trading period ranging from $11.00 per share to
$13.00 per share, with 17 of the daily closing bid prices equal to or greater
than $12.75 per share, but three daily closing bid prices at $11.00 per share,
the holders of the Preferred Stock would have the right to convert their shares
into Class A Stock at
49
<PAGE>
an effective conversion price of $11.00 per share, or only 86% of the 20-day
trading average. Moreover, the potential issuance of Class A Stock upon
conversion of the Preferred Stock at conversion prices which may be
significantly lower than current market prices may have a depressive effect on
the market price of, and reduce trading activity in the Class A Stock.
DILUTION. If consummated, and if all of the Preferred Stock were converted
into the maximum number of shares of Class A Stock, the Issuance would increase
the number of shares of outstanding Class A Stock by approximately 40% and
significantly dilute the ownership interests and proportionate voting power of
the existing holders of Class A Stock.
USE OF PROCEEDS
The proceeds of the Issuance may be utilized for working capital and other
general corporate purposes.
INTERESTS OF CERTAIN PERSONS IN THE ISSUANCE; CONFLICTS OF INTEREST
The terms of a consulting agreement between the Company and its former Chief
Executive Officer and current Chairman, Mr. Myles M. Kranzler, provide for
certain fees, in consideration of certain consulting and non-competition
covenants and commitments, to be due and payable to Mr. Kranzler upon
consummation of certain financings such as the Issuance. See "The Proposed Sale
of the Government Technology Division--Certain Arrangements Regarding Certain
Directors and Management of Base Ten Following the Sale." Another director, Mr.
Alex Adelson, will receive a financial advisory fee of approximately $190,000
plus warrants to purchase approximately 95,000 shares of Class A Stock,
exercisable at $12.50 per share (the market price of the Class A Stock on the
date of the first sale of the Preferred Stock), if the sale of all $19 million
of Preferred Stock is consummated.
REQUIRED VOTE
Assuming a quorum is present, the affirmative vote of a majority of the
votes cast by holders of Class A Stock, together with Class B Stock, at the
Meeting, either in person or by proxy, is required for the approval of the
Issuance. Abstentions will be counted as present in determining whether a quorum
exists, but will have the same effect as a vote against the Issuance.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE
50
<PAGE>
THE PROPOSED OPTION PLAN AMENDMENTS
(PROPOSAL 3)
GENERAL
The Company's management considered employee morale and reaction to a
possible sale of the GTD, and reached an initial determination during August and
September 1997 that in order to retain valued employees of both the GTD and the
MTD during the sale process and to encourage certain of them to agree to be
employed by a buyer of the GTD, it would be in the best interests of the Company
and its shareholders to extend the exercise period of certain employees' options
for a two year period following any termination of employment, even if
voluntary. In connection therewith, the Company has determined that amendments
(the "Amendments") to the Base Ten Stock Option Plan (the "Base Ten Plan"), the
1990 Incentive Stock Option Plan (the "1990 Plan"), the 1992 Stock Option Plan
(the "1992 Plan") and the 1995 Incentive Stock Option Plan (the "1995 Plan," and
along with the Base Ten Plan, 1990 Plan and 1992 Plan, each sometimes
hereinafter referred to as a "Plan" and, collectively, the "Incentive Stock
Option Plans" or the "Plans") which would extend the period within which option
holders whose employment terminated could exercise such options from 90 days to
two years would be required, approval of which is being sought at the Meeting.
Such amendments would confer certain benefits upon the option holders. No other
changes in the terms and provisions of the Plans are contemplated or are being
sought at the Meeting. The Base Ten Board is unanimous in its recommendation to
the holders of Base Ten Common Stock that the Amendments be approved. The
following description of the Plans and the proposed amendments are qualified in
its entirety by reference to the terms of the Plans.
DESCRIPTION OF THE PLANS
Each of the Plans is administered by the Base Ten Board. Under each of the
Plans, the Base Ten Board has the authority to determine the employees to whom
options will be granted, the number of shares covered by each option, the price
per share specified in each option, the time or times at which options will be
granted and the terms and provisions of the instruments by which options will be
evidenced. The aggregate number of shares of Class A Common Stock originally
available for issuance under each of the Plans, subject to certain adjustments
as set forth in each of the Plans, is 80,000 under the Base Ten Plan, 484,000
under the 1990 Plan, 700,000 under the 1992 Plan and 750,000 under the 1995
Plan. Each of the Plans permits the granting of ISOs (or in the case of the Base
Ten Plan, non-qualified stock options) to employees at an exercise price not
less than the fair market value of the Class A Stock or in the case of the 1990
Plan, the Class A Stock or Class B Stock, on the date of grant (or 110% of the
fair market value in the case of ISOs granted to employees holding more than 10%
of the voting stock of the Company). Under the Plans, the aggregate fair market
value of the shares for which a recipient's ISO becomes exercisable for the
first time during any calendar year may not exceed $100,000. The term of each
ISO cannot exceed ten years from the date of grant (or five years for options
granted to employees holding 10% or more of the voting stock of the Company).
Options become exercisable in such installments and at such times as the Base
Ten Board may determine. Options may not be assigned or transferred except by
will or by operation of the laws of descent and distribution. Unless terminated
sooner, the 1990 Plan will terminate on January 12, 2002, the 1992 Plan will
terminate on April 27, 2002, the Base Ten Plan will terminate on February 27,
2005 and 1995 Plan will terminate on September 6, 2005. All employees of the
Company, including officers and directors who are also employees, are eligible
to receive options under the Plans. The Company currently has approximately 200
employees. The maximum number of shares of Class A Stock subject to options
which may be granted to an employee who is also a director is 50,000 shares or
250,000 in the aggregate for all such management directors under the 1990 Plan,
and 100,000 and 350,000 under each of the 1992 Plan and 1995 Plan; there is no
maximum number of shares subject to options which may be granted to directors,
individually or collectively, under the Base Ten Plan.
51
<PAGE>
ADMINISTRATION OF THE PLANS
Option holders seeking to exercise their option are to deliver to the
Company a written exercise notice along with payment of the exercise price.
Payment of the exercise price shall be in cash or shares of the Company's Class
A or Class B Stock valued at fair market value at the time of exercise. The Base
Ten Board may permit the voluntary surrender of all or a portion of any option
granted under a Plan to be conditioned upon the granting to the optionee of a
new option for the same or different number of shares of Common Stock as the
option surrendered, or may require such voluntary surrender as a condition to a
grant of a new option to such optionee. Such new option is exercisable at the
price, during the period, and in accordance with any other terms or conditions
specified by the Base Ten Board at the time the new option is granted, all
determined in accordance with the provisions of each of the Plans without regard
to the price, period of exercise, or any other terms or conditions of the option
surrendered.
AMENDMENT OF THE PLANS
The Base Ten Board may make such changes in and additions to any of the
Plans as it may deem proper and in the best interest of the Company; provided,
however, that no such change or addition shall, without the consent of the
optionee, impair any option theretofore granted under any of the Plans and
provided further that, without the approval of the shareholders of the Company,
(1) the total number of shares which may be purchased under each of the Plans
shall not be increased except as provided in the Plans; (2) the option price
shall not be reduced below the limits set forth in each of the Plans; (3) the
option period with respect to any option shall not be extended beyond the
maximum periods permitted by the Plans; (4) the class of employees eligible to
receive the options shall not be varied; and (5) no such change or addition
shall be made as shall cause any option issued or issuable under each of the
Plans to fail to qualify as an incentive stock option.
Pursuant to each of the Plans, the Company has the right at any time to
reacquire and cancel, without the consent of the optionee, any outstanding
option in consideration of the payment to the optionee of an amount equal to the
difference between the option price and the fair market value (as of the date of
reacquisition) of the shares subject to the option. The shares subject to a
reacquired and canceled option for which such payment has been made shall not
again be available for the grant of ISOs under any of the Plans.
PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the federal income tax consequences to
the Company and the optionee of the issuance and exercise of ISOs.
Neither the grant nor the exercise of an ISO will have immediate tax
consequence to an optionee or the Company. If an optionee exercises an ISO and
does not dispose of the acquired stock within two years after the date of the
grant of the option or within one year after the purchase of the stock by the
optionee, the Company will not be entitled to a tax deduction, the optionee will
realize no ordinary income and any gain or loss that is realized on a subsequent
sale or taxable exchange of the stock will be treated as a long-term capital
gain or loss. The exercise of an ISO gives rise to alternative minimum taxable
income that may subject the optionee to the alternative minimum tax. If an
optionee exercises an ISO and disposes of the acquired stock within two years
after the date of the grant of the option or within one year after the date of
the purchase of the stock by the optionee, the optionee will recognize ordinary
income equal to the lesser of (i) the excess of the fair market value of the
shares on the date of exercise over the option price or (ii) the excess of the
amount realized on the disposition over the option price. The Company will be
entitled to a corresponding income tax deduction equal to the amount of ordinary
income so recognized by the optionee. Further, if the amount realized on the
disposition exceeds the fair market value of the stock on the date of exercise,
the excess will be treated as a long or short term capital gain, depending on
the holding period of the stock.
52
<PAGE>
BENEFITS TO CERTAIN PERSONS OF THE PROPOSED AMENDMENTS
The following table illustrates certain of the benefits of the proposed
amendments to non-officer employees of the Company. The proposed amendments will
not be applied by the Base Ten Board to options previously granted to officers
of the Company.
BENEFITS OF THE AMENDED PLANS
<TABLE>
<CAPTION>
BASE TEN PLAN 1990 PLAN 1992 PLAN 1995 PLAN
------------------------ ---------------------------- ------------------------ ----------
NUMBER NUMBER NUMBER
DOLLAR OF DOLLAR OF DOLLAR OF DOLLAR
NAME VALUE(1) UNITS(2) VALUE(1) UNITS(2) VALUE(1) UNITS(2) VALUE(1)
- ------------------------------- ----------- ----------- ------------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Executive Group................ N/A N/A N/A N/A N/A N/A N/A
Non-Executive Director Group... N/A N/A N/A N/A N/A N/A N/A
Non-Executive Officer Employee
Group........................ $ 25,500 101,600 N/A N/A $ 25,750 102,600 $ 215,275
<CAPTION>
NUMBER
OF
NAME UNITS(2)
- ------------------------------- -----------
<S> <C>
Executive Group................ N/A
Non-Executive Director Group... N/A
Non-Executive Officer Employee
Group........................ 857,600
</TABLE>
- ------------------------
(1) Dollar value is shown on a per-share basis, calculated using the
Black-Scholes option pricing model adopted for use in valuing stock options.
(2) The number of outstanding options granted under the Plans which would be
affected by the Amendments.
ACCOUNTING TREATMENT
Approval and adoption of the proposed option plan amendments will result in
a new measurement date for the options with respect to which the exercise period
is being extended, and the Company will thereupon recognize a charge to earnings
(but with no effect on shareholders' equity) of not greater than $900,000 in the
fiscal quarter in which the amendments are approved and become effective
(currently anticipated to be the fiscal quarter ended January 31, 1998).
REQUIRED VOTE
Approval of Proposal 3 will require the affirmative vote of a majority of
the votes cast on Proposal 3 by the holders of Class A Common Stock and Class B
Common Stock represented in person or by proxy voting as a single class, with
each share of Class A Common Stock being entitled to one-tenth vote and each
share of Class B Common Stock being entitled to one vote.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR APPROVAL OF THE PROPOSED
OPTION PLAN AMENDMENTS
ATTENDANCE OF AUDITORS AT THE MEETING.
Representatives of Deloitte & Touche LLP, the Company's auditors, are
expected to be present at the Meeting and will have the opportunity to make a
statement if they choose to do so and will be available to respond to
appropriate questions of shareholders.
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), shareholders of Base Ten may present proper
proposals for inclusion in the proxy statement of Base Ten related to, and for
consideration at, the next annual meeting of its shareholders by submitting
their
53
<PAGE>
proposals to Base Ten in a timely manner. Any proposal of a shareholder which
meets the requirements of Rule 14a-8 of the Exchange Act and intended to be
presented at the Company's 1998 Annual Meeting of the Shareholders, must have
been received by the Company for inclusion in the proxy statement and form of
proxy for that meeting no later than October 10, 1997. No such proposals have
been presented to the Company.
APPRAISAL RIGHTS
Under applicable New Jersey law, the Company's shareholders are entitled to
statutory appraisal rights with respect to, among other matters, a sale of "all
or substantially all of the assets" of the Company, unless the Class A Stock is
listed on a "national securities exchange." The Company's management is of the
view that the sale of the GTD does not constitute a sale of "all or
substantially all of the assets" of the Company under applicable New Jersey law.
In addition, the inclusion of the Class A Stock on NASDAQ may constitute listing
on a "national securities exchange". Management is nonetheless submitting the
Sale for shareholder approval because of the nature of the transaction and to
eliminate any issues as to proper corporate authorization. Therefore, the
Company's management is of the view that the Company's shareholders are not
entitled to statutory appraisal rights in connection with the Proposals covered
by this Proxy Statement, including the Sale, and presently intends to oppose any
effort by a shareholder to seek appraisal of their shares with respect to the
Sale.
However, if it were determined that the Company's shareholders have
appraisal rights under the New Jersey Business Corporation Act (the "Business
Corporation Act"), holders of Common Stock would have to comply with Chapter 11
of the Business Corporation Act as described below.
Under Chapter 11, in order to claim dissenters rights a holder of Common
Stock must file with Base Ten, to the attention of Edward J. Klinsport, Vice
President and Secretary, either by mail or by delivery to One Electronics Drive,
Trenton, New Jersey 08669, before the taking of the vote on the Sale at the
Meeting, a written notice of dissent from the Sale proposal, stating such
holder's intention to demand payment for such holder's shares if the Sale is
effected. A negative vote or proxy will not be deemed to constitute a written
dissent which complies with the Business Corporation Act; however, the failure
to vote against approval of the Sale will not constitute a waiver of a
shareholder's appraisal rights.
If the Sale is approved, and if dissenters' rights were determined to be
available, each holder of Common Stock who filed written notice of dissent,
except any who voted for the Sale, may require Base Ten to purchase his shares
of Common Stock at their fair value on the day prior to the date of the
shareholder's meeting approving the Sale, by making written demand on Base Ten
for the payment of such fair value within twenty days after the mailing of
written notice to such shareholder of the effective date of the Sale (which
notice would be required to be sent to each such shareholder by Base Ten by
certified mail within ten days after the Effective Date). A dissenting
shareholder may not withdraw a demand for payment of the fair value of such
holder's share without the written consent of Base Ten.
No later than twenty days after a holder of Common Stock demands payment for
such holder's shares, such holder must submit the certificates representing such
holder's shares to Base Ten for notation thereon that such demand has been made,
whereupon such certificates will be returned to such holder. If Base Ten and any
such holder of Common Stock are unable to agree as to the fair value of such
holder's shares, Chapter 11 of the Business Corporation Act provides for a
judicial determination of such fair value to be made. In all cases, fair value
shall exclude any appreciation or depreciation resulting from the Sale.
Any holder of Common Stock who files a written notice of dissent and makes a
written demand for payment will cease to have any of the rights of a holder of
Common Stock except the right to be paid the fair value of such holder's shares
and the other rights of a dissenting shareholder under Chapter 11 of the
Business Corporation Act.
54
<PAGE>
The foregoing summary does not purport to be a complete statement of the
provisions of Chapter 11 of the Business Corporation Act and is qualified in its
entirety by reference to the text of the statute, a copy of certain provisions
of which is annexed to this Proxy Statement as Exhibit B.
THE COMPANY'S MANAGEMENT IS OF THE VIEW THAT APPRAISAL RIGHTS UNDER CHAPTER
11 OF THE BUSINESS CORPORATION ACT ARE NOT AVAILABLE TO SHAREHOLDERS WITH
RESPECT TO THE SALE.
<TABLE>
<S> <C> <C>
By Order of the Board of Directors
[SIGNATURE]
Edward J. Klinsport
CHIEF FINANCIAL OFFICER,
EXECUTIVE VICE PRESIDENT AND SECRETARY
</TABLE>
Dated: December 15, 1997
55
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets--October 31, 1996 (as Restated) and October 31, 1995 (as Restated)............. F-3
Consolidated Statements of Operations--Years ended October 31, 1996, 1995 and 1994 (as Restated)........... F-4
Consolidated Statements of Shareholders' Equity--Years ended October 31, 1996, 1995 and 1994 (as
Restated)................................................................................................ F-5
Consolidated Statements of Cash Flows--Years ended October 31, 1996, 1995 and 1994 (as Restated)........... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Consolidated Balance Sheets--July 31, 1997 (unaudited) and October 31, 1996 (as Restated) (audited)........ F-19
Consolidated Statements of Operations--Nine months and Three months ended July 31, 1997 and 1996
(unaudited).............................................................................................. F-20
Consolidated Statements of Shareholders' Equity--Nine months ended July 31, 1997 (unaudited)............... F-21
Consolidated Statements of Cash Flows--Nine months ended July 31, 1997 and 1996 (unaudited)................ F-22
Notes to Consolidated Financial Statements (unaudited)..................................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Base Ten Systems, Inc.
Trenton, New Jersey 08619
We have audited the consolidated balance sheets of Base Ten Systems, Inc.
and subsidiaries as of October 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Base Ten
Systems, Inc. and subsidiaries as of October 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1996 in conformity with generally accepted accounting
principles.
AS DISCUSSED IN NOTE M, THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS
HAVE BEEN RESTATED.
Parsippany, New Jersey
December 23, 1996 (May 16, 1997 as to Note M)
F-2
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1996 1995
------------- -------------
<S> <C> <C>
(AS RESTATED, SEE NOTE M)
CURRENT ASSETS:
Cash................................................................................ $ 7,465,000 $ 7,221,000
Accounts receivable (including unbilled receivables of $4,162,000 in 1996 and
$3,271,000 in 1995)............................................................... 7,515,000 6,034,000
Inventories......................................................................... 2,935,000 3,151,000
Current portion of employee loan receivable......................................... 128,000 108,000
Other current assets................................................................ 386,000 536,000
------------- -------------
TOTAL CURRENT ASSETS............................................................ 18,429,000 17,050,000
PROPERTY, PLANT AND EQUIPMENT......................................................... 5,071,000 4,480,000
EMPLOYEE LOAN RECEIVABLE.............................................................. 148,000 298,000
OTHER ASSETS.......................................................................... 6,700,000 6,177,000
------------- -------------
$ 30,348,000 $ 28,005,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 1,472,000 $ 1,246,000
Accrued expenses.................................................................... 2,994,000 1,454,000
Income taxes payable................................................................ -- 1,038,000
Current portion of capital lease obligation......................................... 47,000 42,000
------------- -------------
TOTAL CURRENT LIABILITIES....................................................... 4,513,000 3,780,000
------------- -------------
LONG-TERM LIABILITIES:
Deferred income taxes............................................................... -- 83,000
Deferred compensation............................................................... 19,000 90,000
Other long-term liabilities......................................................... 247,000 266,000
Capital lease obligation............................................................ 3,478,000 3,525,000
Long-term debt...................................................................... 10,000,000 --
------------- -------------
TOTAL LONG-TERM LIABILITIES..................................................... 13,744,000 3,964,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, authorized and unissued
1,000,000 shares.................................................................. -- --
Class A Common Stock, $1.00 par value, 22,000,000 shares authorized; issued and
outstanding 7,358,964 shares in 1996 and 7,216,195 shares
in 1995........................................................................... 7,359,000 7,216,000
Class B Common Stock, $1.00 par value, 2,000,000 shares authorized; issued and
outstanding 445,387 shares in 1996 and 458,474 shares in 1995 (convertible into
Class A Common Stock on a one for one basis)...................................... 445,000 458,000
Additional paid-in capital.......................................................... 25,086,000 24,410,000
Deficit............................................................................. (20,640,000) (11,681,000)
------------- -------------
12,250,000 20,403,000
Equity adjustment from foreign currency translation................................... (159,000) (142,000)
------------- -------------
12,091,000 20,261,000
------------- -------------
$ 30,348,000 $ 28,005,000
------------- -------------
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
<S> <C> <C> <C>
-------------------------------------------
<CAPTION>
1996 1995 1994
------------- ------------- -------------
(AS RESTATED, SEE NOTE M)
<S> <C> <C> <C>
REVENUE
Sales............................................................. $ 14,591,000 $ 17,841,000 $ 18,698,000
Other............................................................. 300,000 466,000 584,000
------------- ------------- -------------
14,891,000 18,307,000 19,282,000
------------- ------------- -------------
COSTS AND EXPENSE:
Cost of sales..................................................... 10,973,000 11,813,000 12,996,000
Amortization of software development costs........................ 1,278,000 630,000 --
Research and development.......................................... 998,000 863,000 887,000
Selling, general and administrative............................... 8,509,000 6,298,000 5,131,000
Write-off of software development costs........................... 2,429,000 -- --
Interest.......................................................... 710,000 554,000 209,000
------------- ------------- -------------
24,897,000 20,158,000 19,223,000
------------- ------------- -------------
EARNINGS/(LOSS) BEFORE INCOME TAXES................................. (10,006,000) (1,851,000) 59,000
INCOME TAXES/(BENEFIT).............................................. (1,047,000) (474,000) 24,000
------------- ------------- -------------
NET EARNINGS (LOSS)................................................. $ (8,959,000) $ (1,377,000) $ 35,000
------------- ------------- -------------
------------- ------------- -------------
NET EARNINGS (LOSS) PER COMMON SHARE................................ $ (1.16) $ (.20) $ .03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......................... 7,743,000 6,926,000 7,569,000
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
CLASS A CLASS B ADDITIONAL FROM FOREIGN
-------------------- -------------------- PAID-IN CURRENCY TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TRANSLATION STOCK
--------- --------- --------- --------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE:
October 31, 1993............... 4,646,670 $4,647,000 558,111 $ 558,000 $13,253,000 $(10,339,000) $ (162,000) --
Conversions of Class B Common
to Class A Common............ 81,635 82,000 (81,635) (82,000) -- -- -- --
Exercise of Options............ 87,561 88,000 -- -- 185,000 -- -- (14,000)
Exercise of Rights............. 305 -- -- -- -- -- -- --
Exercise of Warrants........... 204,022 204,000 -- -- 936,000 -- -- --
Foreign currency translation... -- -- -- -- -- -- 40,000 --
Retirement of treasury stock... (13,631) (14,000) -- -- -- -- -- 14,000
Net Earnings/(Loss)............ -- -- -- -- -- 35,000 -- --
--------- --------- --------- --------- ---------- ----------- ------------ -----------
--------- --------- --------- --------- ---------- ----------- ------------ -----------
BALANCE:
October 31, 1994............... 5,006,562 5,007,000 476,476 476,000 14,374,000 (10,304,000) (122,000) --
Conversions of Class B Common
to Class A Common............ 20,896 21,000 (20,896) (21,000) -- -- -- --
Exercise of Options............ 123,131 123,000 5,000 5,000 400,000 -- -- (14,000)
Exercise of Rights............. 828,542 828,000 -- -- 3,444,000 -- -- --
Exercise of Warrants........... 1,248,701 1,249,000 -- -- 5,690,000 -- -- --
Capital Contribution (as
restated, see Note M)........ -- -- -- -- 502,000 -- -- --
Foreign currency translation... -- -- -- -- -- -- (20,000) --
Retirement of treasury stock... (11,637) (12,000) (2,106) (2,000) -- -- -- 14,000
Net Earnings/(Loss) (as
restated, see Note M)........ -- -- -- -- -- (1,377,000) -- --
--------- --------- --------- --------- ---------- ----------- ------------ -----------
--------- --------- --------- --------- ---------- ----------- ------------ -----------
BALANCE:
October 31, 1995 (as restated,
see Note M).................. 7,216,195 $7,216,000 458,474 $ 458,000 $24,410,000 $(11,681,000) $ (142,000) --
Conversions of Class B Common
to Class A Common............ 5,418 5,000 (5,418) (5,000) -- -- -- --
Exercise of Options............ 137,351 138,000 676,000 -- -- (8,000)
Foreign currency translation... -- -- -- -- -- -- (17,000) --
Retirement of treasury stock... -- -- (7,669) (8,000) -- -- -- 8,000
Net Earnings/(Loss)............ -- -- -- -- -- (8,959,000) -- --
--------- --------- --------- --------- ---------- ----------- ------------ -----------
--------- --------- --------- --------- ---------- ----------- ------------ -----------
BALANCE:
October 31, 1996 (as restated,
see Note M).................. 7,358,964 $7,359,000 445,387 $ 445,000 $25,086,000 $(20,640,000) $ (159,000) --
--------- --------- --------- --------- ---------- ----------- ------------ -----------
--------- --------- --------- --------- ---------- ----------- ------------ -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
------------- ------------- -------------
<CAPTION>
(AS RESTATED, SEE NOTE M)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss)............................................... $ (8,959,000) $ (1,377,000) $ 35,000
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH (USED IN)/PROVIDED
FROM OPERATING ACTIVITIES:
Depreciation and amortization....................................... 1,743,000 1,106,000 586,000
Write off of Software Development Costs............................. 2,429,000 -- --
Contribution to Capital............................................. -- 502,000 --
Deferred gain on sale of building................................... (19,000) (17,000) (282,000)
Deferred income taxes............................................... (83,000) (149,000) (290,000)
Accounts receivable................................................. (1,481,000) (966,000) 228,000
Inventories......................................................... 216,000 (740,000) (269,000)
Other current assets................................................ 150,000 (237,000) 303,000
Accounts payable and accrued expenses............................... 1,766,000 162,000 (398,000)
Deferred compensation............................................... (71,000) (58,000) (23,000)
Other assets........................................................ (4,126,000) (3,846,000) (2,171,000)
Income taxes payable................................................ (1,038,000) (325,000) 314,000
------------- ------------- -------------
NET CASH (USED IN) OPERATIONS....................................... (9,473,000) (5,945,000) (1,967,000)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.......................... (1,058,000) (350,000) (306,000)
Proceeds from sale of land and building............................. -- -- 3,600,000
------------- ------------- -------------
NET CASH (USED IN)/PROVIDED FROM INVESTING ACTIVITIES............... (1,058,000) (350,000) 3,294,000
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of amounts borrowed....................................... (42,000) (34,000) (4,711,000)
Proceeds from the issuance of common stock.......................... 10,000,000 -- --
Issuance of Long Term Debt.......................................... 806,000 11,725,000 1,399,000
------------- ------------- -------------
NET CASH PROVIDED FROM/(USED IN) FINANCING ACTIVITIES............... 10,764,000 11,691,000 (3,312,000)
------------- ------------- -------------
Effect of Exchange Rate Changes on Cash............................. 11,000 (43,000) 50,000
------------- ------------- -------------
NET INCREASE/(DECREASE) IN CASH..................................... 244,000 5,353,000 (1,935,000)
CASH, beginning of year............................................. 7,221,000 1,868,000 3,803,000
------------- ------------- -------------
CASH, end of year................................................... $ 7,465,000 $ 7,221,000 $ 1,868,000
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............................. $ 485,000 $ 527,000 $ 173,000
------------- ------------- -------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Retirement of Treasury Stock........................................ $ 8,000 $ 14,000 $ 14,000
------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
A. DESCRIPTION OF BUSINESS
Base Ten Systems, Inc. and subsidiaries ("Base Ten" or the "Company")
designs and manufactures proprietary weapons control systems employing
microprocessors and advanced software for use in military aircraft and builds
custom designed electronic assemblies as a subcontractor to prime government
contractors. In addition, the Company develops batch processing control, medical
screening and image archiving software and designs and builds proprietary
electronic systems for use in secure communications.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION--The Company's consolidated financial statements
have been prepared on an historical cost basis.
2. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of Base Ten. All significant intercompany accounts,
transactions and profits have been eliminated.
3. REVENUE RECOGNITION--For Medical Software Products, the Company
evaluates each product and order on an individual basis to determine the proper
revenue recognition method. Contracts to deliver software which require
significant customization or modification for an extended period of time are
accounted for under the percentage of completion method. For the products or
orders which are more standardized in nature, revenue is recognized on delivery.
For products in the Government Technology Division earnings on long-term
contracts are recognized on the percentage-of-completion or unit-of-delivery
basis. CHANGES IN ESTIMATES ARE ACCOUNTED FOR USING THE CUMULATIVE CATCH UP
METHOD AND ARE IMMATERIAL IN EACH PERIOD PRESENTED.
On contracts where the percentage-of-completion method is used, costs and
estimated earnings in excess of progress billings are presented as unbilled
receivables. Unbilled costs of unit-of-delivery contracts are included in
inventory. Payments received in excess of costs incurred on long-term contracts
are recorded as customers' advance payments, which are included as a reduction
of inventory on the balance sheet.
4. INVENTORIES--Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Inventoried costs on contracts include direct material, labor and applicable
overhead. In accordance with industry practice, inventoried costs include
amounts relating to contracts with a long production cycle, some of which are
not expected to be realized within one year.
5. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are carried
at cost and depreciated over estimated useful lives, principally on the
straight-line method. The estimated useful lives used for the determination of
depreciation and amortization are:
<TABLE>
<S> <C>
Leased asset--building........................................ 15 years
3 to 10
Machinery and equipment....................................... years
3 to 20
Furniture and fixtures........................................ years
</TABLE>
6. OTHER ASSETS--Included in other non-current assets are software
development costs capitalized in accordance with Statement of Financial
Accounting Standard No. 86, "Accounting for Costs for Computer Software to be
Sold, Leased or Otherwise Marketed" issued by the Financial Accounting Standards
Board.
F-7
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company is required to capitalize certain software development and
production costs once technological feasibility has been achieved. The cost of
purchased software is capitalized when related to a product which has achieved
technological feasibility or that has an alternative future use. For the year
ended October 31, 1996, the Company capitalized $3.8 million of software
development costs. Software development costs incurred prior to achieving
technological feasibility are charged to research and development expense as
incurred. The Company performs quarterly reviews of the recoverability of its
capitalized software costs and other long lived assets based on anticipated
revenues and cash flows from sales of these products. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset to the
estimated future cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of the impairment by comparing the
carrying amount of the asset to its fair value. The estimation of fair value is
generally measured by discounting expected future cash flows at the rate the
Company utilizes to evaluate potential investments. The Company estimates fair
value based on the best information available making whatever estimates,
judgments and projections are considered necessary. Commencing upon initial
product release, these costs are amortized based on the straight-line method
over the estimated life of four years.
In the second quarter of fiscal 1996 the Company conducted its regular
quarterly review of the recoverability of its capitalized software costs and
determined that neither PRENVAL nor uPACS would achieve sufficient revenues in
future periods to justify retention of the related capitalized costs.
Accordingly, the Company wrote off the $2.4 million balance of such capitalized
costs. With respect to PRENVAL, it became apparent to the Company in late
February 1996, after a discussion with the licensee, that market acceptance of
the product was less than anticipated. Thereafter, in May 1996, the Company
determined that the licensee had no current plans to market the product in the
U.S. as was originally anticipated by the Company and that, as a result, sales
would not exceed the amount necessary to generate royalties in excess of the
minimum provided under the license. Effective as of the end of the second
quarter of fiscal 1996, management resolved to suspend further development of
PRENVAL. However, the Company will provide marketing support for the remainder
of the license term. With respect to uPACS, the Company had implemented sales
efforts in late 1995 and displayed the product at certain trade shows in Europe.
In December 1995, sales were anticipated for early 1996. However, by early April
1996 it became clear that the anticipated sales would not materialize. The
Company concluded that the product, as it then existed, would not generate
sufficient sales to recover the capitalized costs, and that only a new product
with networking, communications and off-line measurement capabilities would be
capable of producing acceptable sales volume.
7. CASH AND CASH EQUIVALENTS--The Company considers all investments with a
maturity of three months or less at date of acquisition to be cash equivalents.
8. RECENTLY ISSUED ACCOUNTING STANDARD--In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," which requires adoption of
the disclosure provisions no later than fiscal years beginning after December
15, 1995 and adoption of the recognition and measurement provisions for
nonemployee transactions no later than after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation
F-8
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income and, if presented, earnings per share
as if the Company had applied the new method of accounting for all grants after
November 1, 1995.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has not yet determined if it will elect to change to the fair value method, nor
has it determined the effect the new standard will have on net income and
earnings per share should it elect to make such a change. Adoption of the new
standard will have no effect on the Company's cash flows.
9. NET EARNINGS/(LOSS) PER SHARE--Earnings per share for fiscal years ended
October 31, 1996, 1995 and 1994 were calculated using the number of weighted
average common shares outstanding.
Stock options, warrants and rights would have an anti-dilutive effect on
earnings per share for the years ended October 31, 1996 and 1995 and therefore
were not included in the calculation of weighted average shares and were not
material in 1994.
10. USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair market value of certain
financial instruments, including cash, accounts receivable, accounts payable,
and other accrued liabilities, approximate the amount recorded in the balance
sheet because of the relatively current maturities of these financial
instruments. The fair market value of long term debt at October 31, 1996 and
1995 approximates the amounts recorded in the balance sheet based on information
available to the Company with respect to interest rates and terms for similar
financial instruments.
12. CHANGE IN PRESENTATION--Certain balance sheet items for fiscal 1995
have been reclassified to conform to the 1996 presentation.
13. FOREIGN CURRENCY TRANSLATION--The accounts of the consolidated foreign
subsidiaries are translated into United States dollars in accordance with
Financial Accounting Standards Board (FASB) Statement No. 52. Transaction gains
and losses are immaterial.
F-9
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
C. INVENTORIES
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 1,232,000 $ 1,557,000
Work in progress.................................................. 1,383,000 1,515,000
Finished goods.................................................... 369,000 95,000
------------ ------------
2,984,000 3,167,000
Less advance payments............................................. 49,000 16,000
------------ ------------
$ 2,935,000 $ 3,151,000
------------ ------------
</TABLE>
D. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Leasehold improvement.......................................... $ 85,000 $ 21,000
Machinery and equipment........................................ 9,668,000 8,853,000
Furniture and fixtures......................................... 705,000 617,000
Leased asset--land and building................................ 3,600,000 3,600,000
------------- -------------
14,058,000 13,091,000
Less accumulated depreciation.................................. 8,987,000 8,611,000
------------- -------------
$ 5,071,000 $ 4,480,000
------------- -------------
</TABLE>
Maintenance and repairs charged to costs and expenses amounted to $258,000,
$240,000 and $239,000 in fiscal 1996, 1995 and 1994, respectively.
E. OTHER ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Patents (net of amortization)..................................... $ 362,000 $ 297,000
Capitalized costs................................................. 4,255,000 3,773,000
Unamortized bond issue costs...................................... 579,000 --
Deposit-long term capital lease................................... 550,000 550,000
Long-term receivable.............................................. 770,000 1,150,000
Other............................................................. 184,000 407,000
------------ ------------
$ 6,700,000 $ 6,177,000
------------ ------------
</TABLE>
F. INCOME TAXES
INCOME TAXES--Effective November 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which requires a change from the deferred method's income statement
approach of accounting for income taxes to an asset and liability approach of
accounting for income taxes. Under the asset and liability approach, deferred
tax assets and liabilities are
F-10
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
F. INCOME TAXES (CONTINUED)
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. This change had no effect on the Company's statement
of operations.
The provision (benefit) for income taxes includes the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------
1996 1995 1994
------------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal............................................. $ (882,000) $ (325,000) $ 259,000
State............................................... (165,000) -- 55,000
Foreign............................................. -- -- --
------------- ----------- ----------
Total Current................................... (1,047,000) (325,000) 314,000
------------- ----------- ----------
------------- ----------- ----------
Deferred:
Federal............................................. -- (124,000) (239,000)
State............................................... -- (25,000) (51,000)
Foreign............................................. -- -- --
------------- ----------- ----------
Total Deferred.................................. (149,000) (290,000)
------------- ----------- ----------
------------- ----------- ----------
$ (1,047,000) $ (474,000) $ 24,000
------------- ----------- ----------
</TABLE>
A reconciliation of the Company's effective rate to the U.S. statutory rate
is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PRE-TAX EARNINGS
YEAR ENDED OCTOBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal tax (benefit)/provisions at applicable statutory rates...................... (34.0)% (34.0)% 34.0%
Increases (decreases) in income taxes resulting from:
State tax benefit, net of Federal tax effect...................................... (6.0) (4.0) 7.0
Net changes in current and deferred valuation allowances.......................... 31.5 6.9 --
Other, net........................................................................ (2.9) 5.5 --
--------- --------- ---
(11.4)% (25.6)% 41.0%
--------- --------- ---
--------- --------- ---
</TABLE>
F-11
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
F. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and liabilities as follows:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1996 1995
------------- -------------
<S> <C> <C>
CURRENT
Vacation...................................................... $ 212,000 $ 46,000
Deferred compensation......................................... 2,000 34,000
Other......................................................... -- 3,000
------------- -------------
Total current assets............................................ 214,000 83,000
------------- -------------
------------- -------------
NONCURRENT
Deferred gain on sale leaseback............................... $ 99,000 $ 101,000
Depreciation.................................................. (382,000) (315,000)
Net operating loss carryforwards.............................. 3,666,000 681,000
Research and development and investment tax credits
carryforwards............................................... 578,000 528,000
------------- -------------
Total noncurrent assets....................................... $ 3,961,000 $ 995,000
Valuation allowance........................................... (4,175,000) (1,078,000)
------------- -------------
Net deferred tax assets....................................... -- --
------------- -------------
------------- -------------
</TABLE>
The research and development and investment tax credits and the net
operating loss carryforward are available to offset future taxable earnings of
the Company. SFAS No. 109 requires that a valuation allowance be created and
offset against the deferred tax assets if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred asset will not be realized. The valuation allowance will be adjusted
when the credits are realized or when, in the opinion of management, sufficient
additional positive evidence exists regarding the likelihood of their
realization. The reductions, if any, will be reflected as a component of income
tax expense.
The total current amounts presented above are included in other current
assets on the balance sheet.
The components of earnings/(loss) before income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------
1996 1995 1994
-------------- ------------- ---------
<S> <C> <C> <C>
Domestic................................................................ $ (9,040,000) $ (1,845,000) $ 79,000
Foreign................................................................. (966,000) (6,000) (20,000)
-------------- ------------- ---------
$ (10,006,000) $ (1,851,000) $ 59,000
-------------- ------------- ---------
</TABLE>
F-12
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
G. GEOGRAPHIC AND SEGMENT INFORMATION
The following tabulation details the Company's operations in different
geographic areas for the years ended October 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1994:
Revenues from unaffiliated sources.................... $ 19,268,000 $ 14,000 $ -- $ 19,282,000
------------- ------------ ------------- -------------
Operating profit/loss................................. $ 288,000 $ (20,000) $ -- $ 268,000
------------- ------------ ------------- -------------
Identifiable assets at October 31,1994................ $ 17,664,000 $ 398,000 $ (453,000) $ 17,609,000
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
YEAR ENDED OCTOBER 31, 1995:
Revenues from unaffiliated sources.................... $ 17,925,000 $ 382,000 $ -- $ 18,307,000
------------- ------------ ------------- -------------
Operating Loss........................................ $ (1,291,000) $ (6,000) $ -- $ (1,297,000)
------------- ------------ ------------- -------------
Identifiable assets at October 31, 1995............... $ 28,063,000 $ 960,000 $ (1,018,000) $ 28,005,000
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
YEAR ENDED OCTOBER 31, 1996:
Revenues from unaffiliated sources.................... $ 14,840,000 $ 51,000 $ -- $ 14,891,000
------------- ------------ ------------- -------------
Operating loss........................................ $ (8,330,000) $ (966,000) $ -- $ (9,296,000)
------------- ------------ ------------- -------------
Identifiable assets at October 31, 1996............... $ 32,690,000 $ 1,039,000 $ (3,381,000) $ 30,348,000
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
The Company's business is composed of two industry segments: government
technology and medical technology. A summary of information relating to these
divisions is presented below for the year ended October 31, 1996. Prior to 1995,
the Medical Technology Division was considered insignificant and therefore not
presented.
<TABLE>
<CAPTION>
GOVERNMENT MEDICAL
TECHNOLOGY TECHNOLOGY
SEGMENT SEGMENT OTHER CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1995:
Revenues............................................. $ 15,597,000 $ 2,244,000 $ 466,000 $ 18,307,000
------------- ------------- ------------- -------------
Operating profit (loss):............................. $ 765,000 $ (2,528,000) $ 466,000 $ (1,297,000)
------------- ------------- ------------- -------------
Identifiable assets at October 31, 1995:............. $ 11,433,000 $ 7,003,000 $ 9,569,000 $ 28,005,000
------------- ------------- ------------- -------------
Depreciation and amortization:....................... $ 257,000 $ 685,000 $ 164,000 $ 1,106,000
------------- ------------- ------------- -------------
Capital expenditures:................................ $ 118,000 $ 218,000 $ 14,000 $ 350,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
YEAR ENDED OCTOBER 31, 1996:
Revenues............................................. $ 13,329,000 $ 1,262,000 $ 300,000 $ 14,891,000
------------- ------------- ------------- -------------
Operating profit (loss):............................. $ (909,000) $ (8,687,000) $ 300,000 $ (9,296,000)
------------- ------------- ------------- -------------
Identifiable assets at October 31, 1996:............. $ 12,370,000 $ 7,589,000 $ 10,389,000 $ 30,348,000
------------- ------------- ------------- -------------
Depreciation and amortization:....................... $ 376,000 $ 1,278,000 $ 89,000 $ 1,743,000
------------- ------------- ------------- -------------
Capital expenditures:................................ $ 356,000 $ 658,000 $ 44,000 $ 1,058,000
------------- ------------- ------------- -------------
</TABLE>
F-13
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
G. GEOGRAPHIC AND SEGMENT INFORMATION (CONTINUED)
Operating profit (loss) includes all revenues and expenses of the reportable
segment, except for interest income, dividend income, other income and exchange
losses. These items are shown as part of the "other."
Identifiable assets are assets used in the operation of each segment. Other
identifiable assets consist primarily of cash and assets that are corporate
owned.
Total Government Technology sales in the amounts of $4,522,000, $4,633,000
and $4,289,000 in fiscal 1996, 1995 and 1994, respectively, were made to a
single European customer. All sales were export sales and are included in the
United States sales to unaffiliated customers. In 1996, three domestic customers
accounted for sales of $1,946,000, $1,589,000 and $1,127,000, respectively. As
provided in several contracts, customers advance funds to the Company for the
purpose of purchasing inventory. The related advances have been offset against
these inventories.
H. COMMITMENTS
CHANGE IN CONTROL. The Company has agreements with three of its executive
officers providing severance payments if the executive's employment is
terminated within three years after a change in control of the Company (i) by
the Company for reasons other than death, disability or cause or (ii) by the
executive for good reason. The amount of the severance payment is 2.99 times
total average compensation and cost of employee benefits for each of the five
years prior to the change in control, subject to a maximum equal to the amount
deductible by the Company under the Internal Revenue Code.
EMPLOYMENT AGREEMENTS. The Company has employment agreements with four key
employees. Three of the agreements provide for one year of compensation in the
aggregate of $600,000 plus normal benefits and any amounts due under incentive
compensation plans in the event the employee is terminated without cause. The
fourth agreement provides for a lump sum payment in the amount of $150,000 in
the event of retirement.
CONSULTING AGREEMENTS. The Company has consulting agreements providing two
of its directors cash compensation in the total amount of $205,000 plus expenses
in fiscal 1997, assuming the agreements are renewed under similar terms and
conditions, for technical marketing and investor relations services. In
addition, these directors have a financial and option advisory agreement
providing for success fees on any acquisition or equity offering introduced by
them during the term of the agreement.
LEASES. The Company entered into a sale and leaseback arrangement on
October 28, 1994. Under the arrangement, the Company sold its main building in
Trenton, New Jersey and agreed to lease it back for a period of 15 years under
terms that qualify the arrangement as a capital lease. The buyer/lessor of the
building was a partnership. Two of the partners are officers and directors of
the Company. In addition, a non-interest bearing security deposit of $550,000
was paid at closing and included in other non-current assets on the balance
sheet. Interest is calculated under the effective interest method and
depreciation is taken using the straight line method over the term of the lease.
F-14
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
H. COMMITMENTS (CONTINUED)
The Company's future minimum lease payments related to the sale-leaseback
arrangement in effect at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 560,000
1998........................................................................... 560,000
1999........................................................................... 560,000
2000........................................................................... 615,000
2001........................................................................... 615,000
2002 and thereafter............................................................ 5,354,000
-------------
8,264,000
Less interest portion.......................................................... (4,739,000)
-------------
Present value of net minimum payments.......................................... $ 3,525,000
-------------
-------------
</TABLE>
I. LONG-TERM DEBT
The Company executed an agreement to sell $10.0 million 9.01% Convertible
Subordinate Debentures due August 31, 2003. Under the terms of the debentures,
the holder can convert the debentures into the Company's Class A Common Stock,
at $12.50 per share, 125% of the closing price on August 9, 1996. The Company
has the right to call the debentures after February 28, 1998, if the Company's
stock price trades at certain levels between 150%--175% of the closing price or
$15-$17.50 per share. In addition, the Company's financing costs relating to
this debenture amounted to approximately $.6 million. These costs are being
amortized over the life of the loan. In August 1996, the Company received the
proceeds from the above agreement.
J. DEFERRED COMPENSATION PLANS
The Company has a non-qualified deferred compensation plan that provides for
compensation payments to a key individual. Distributions are generally made five
years after amounts are earned.
K. STOCK OPTION PLANS, WARRANTS AND RIGHTS
The Company's 1990 Incentive Stock Option Plan reserves 484,000 shares of
either Class A or Class B Common Stock for purchase upon the exercise of options
that may not be granted at less than the fair market value as of the date of
grant and that are exercisable over a period not to exceed ten years. There are
no options available for grant under this plan.
The Company's 1992 Stock Option Plan reserves 700,000 shares of Class A
Common Stock for purchase upon the exercise of options that may not be granted
at less than fair market value as of the date of grant and are exercisable over
a period not to exceed ten years. There are no options available for grant under
this plan.
The Company's discretionary compensation plan reserves 400,000 shares of
Class A Common Stock for issuance upon the exercise of options. Approximately
34,000 options remain available for grant under
F-15
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
K. STOCK OPTION PLANS, WARRANTS AND RIGHTS (CONTINUED)
this plan. Options may not be granted at less than fair market value as of the
date of grant and are exercisable over a period not to exceed ten years.
The Company's 1995 Incentive Stock Option Plan, approved by the shareholders
at the 1996 Annual Meeting of Shareholders, reserves 750,000 shares of Class A
Common Stock for issuance upon the exercise of options. Approximately 189,000
options remain available for grant under this plan. Options may not be granted
at less than fair market value as of the date of grant and are exercisable over
a period not to exceed ten years.
Information with respect to the aforementioned stock option plans is
summarized as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Outstanding at October 31, 1993
($3.00 to $11.59 per share).................................................. 589,331 9,946 599,277
Granted ($7.93 per share)...................................................... 400,170 -- 400,170
Exercised ($3.00 to $8.625 per share).......................................... (87,561) -- (87,561)
Canceled ($8.00--$8.625 per share)............................................. (31,450) -- (31,450)
Expired ($10.00 to $11.59)..................................................... (2,182) -- (2,182)
---------- ----------- ----------
Outstanding at October 31, 1994
($3.00 to $8.875 per share).................................................. 868,308 9,946 878,254
Granted ($6.625 to $11.25 per share)........................................... 46,000 -- 46,000
Exercised ($3.00 to $8.625 per share).......................................... (104,431) (5,000) (109,431)
Canceled ($8.625 per share).................................................... (26,483) -- (26,483)
---------- ----------- ----------
Outstanding at October 31, 1995
($3.00 to $11.25 per share).................................................. 783,394 4,946 788,340
Granted ($10.20 to $11.125 per share).......................................... 560,700 -- 560,700
Exercised ($3.00 to $8.625 per share).......................................... (78,851) -- (78,851)
Canceled (per share)........................................................... (3,850) -- (3,850)
---------- ----------- ----------
Outstanding at October 31, 1996
($3.00 to $11.125 per share)................................................. 1,261,393 4,946 1,266,339
---------- ----------- ----------
---------- ----------- ----------
Exercisable at October 31, 1996................................................ 686,407 4,946 691,353
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The Company has issued 895,000 warrants and 522,000 options to consultants
and three non-management directors at prices ranging from $3.00 to $11.75,
expiring from 1997 to 2004. None of these warrants or options have expired to
date. Included in the above are 250,000 warrants issued to consultants for
services related to the promotion and selling of the Company's stock at an
exercise price which was less than the fair market value of the stock at the
date of the grant. The remaining options and warrants were issued at fair market
value at the date of grant. One consultant and one director have exercised
warrants or options for a total of 34,000 shares during fiscal 1996 at prices
ranging from $4.00 to $7.25 per share.
The Board of Directors have issued options to various employees to purchase
a total of 229,000 shares of Class A Common Stock. The options have exercise
prices ranging from $7.25 to $10.50 per share (fair market value at the date of
grant), expiring from 2000 to 2006. Employees have exercised options for a total
of 24,500 shares during fiscal 1996 at $8.50.
F-16
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
L. EMPLOYEE BENEFIT PLAN
In 1986, the Company adopted a benefit plan under section 401(k) of the
Internal Revenue Code. In November 1995, the plan was amended to allow for a 1%
base annual salary Company matching contribution for each eligible employee. The
plan allows all eligible employees to defer up to 17% of their pre-tax income
through contributions to the plan.
M. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for the years
ended October 31, 1996 and 1995. Subsequent to the issuance of the Company's
1996 consolidated financial statements, the Company's management determined that
certain temporary salary reductions for certain officers of the Company during
fiscal 1995, and loans made to such officers to be repaid by future bonuses,
should have been recorded as an increase to compensation expense with a
corresponding increase to additional paid-in-capital in the Company's 1995
consolidated financial statements. As a result, the Company's1996 and 1995
consolidated financial statements have been restated from the amounts previously
reported to record these loans as a charge to operations and as an increase to
additional paid-in-capital in fiscal 1995. The impact of these adjustments was
to increase the previously reported 1995 net loss by $502,000 and net loss per
common share by $.07. The restatement had no effect on the Company's cash
position.
A summary of the significant effects of the restatement is as follows
(dollar amounts in thousands, except per share data);
<TABLE>
<CAPTION>
AS
PREVIOUSLY AS
REPORTED RESTATED
---------- ---------
<S> <C> <C>
YEAR ENDED OCTOBER 31, 1995:
Selling, general and administrative expense............................. $ 5,796 6,298
Total operating expenses................................................ 19,656 20,158
Loss before income tax benefit.......................................... (1,349) (1,851)
Net loss................................................................ (875) (1,377)
Net loss per common share............................................... (.13) (.20)
---------- ---------
---------- ---------
AT OCTOBER 31, 1995:
Additional paid-in capital.............................................. $ 23,908 24,410
Accumulated deficit..................................................... (11,179) (11,681)
---------- ---------
---------- ---------
AT OCTOBER 31, 1996:
Additional paid-in capital.............................................. $ 24,584 25,086
Accumulated deficit..................................................... (21,138) (20,640)
</TABLE>
F-17
<PAGE>
[This page intentionally left blank]
F-18
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
AS OF OCTOBER 31,
JULY 31, 1997 1996
-------------- ---------------
<S> <C> <C>
(UNAUDITED) (AUDITED)
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash.......................................................................... $ 3,771,000 $ 7,465,000
Accounts receivable (including unbilled receivables of $4,122,000 in 1997 and
$3,902,000 in 1996)......................................................... 7,181,000 7,515,000
Inventories................................................................... 3,868,000 2,935,000
Current portion of employee loan receivable................................... 128,000 128,000
Other current assets.......................................................... 601,000 386,000
-------------- ---------------
TOTAL CURRENT ASSETS........................................................ 15,549,000 18,429,000
PROPERTY, PLANT AND EQUIPMENT................................................... 5,209,000 5,071,000
EMPLOYEE LOAN RECEIVABLE........................................................ 47,000 148,000
OTHER ASSETS.................................................................... 8,717,000 6,700,000
-------------- ---------------
$ 29,522,000 $ 30,348,000
-------------- ---------------
-------------- ---------------
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 1,045,000 $ 1,472,000
Accrued expenses.............................................................. 3,693,000 2,994,000
Current portion of capital lease obligation................................... 54,000 47,000
-------------- ---------------
TOTAL CURRENT LIABILITIES................................................... 4,792,000 4,513,000
LONG-TERM LIABILITIES:
Other long-term liabilities................................................... 272,000 266,000
Capital lease obligation...................................................... 3,441,000 3,478,000
Long-term debt................................................................ 15,500,000 10,000,000
-------------- ---------------
TOTAL LONG-TERM LIABILITIES................................................. 19,213,000 13,744,000
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized and unissued--1,000,000 shares... -- --
Class A Common Stock, $1.00 par value, 22,000,000 shares authorized; issued
and outstanding 7,497,360 shares in 1997 and 7,358,964 shares in 1996....... 7,497,000 7,359,000
Class B Common Stock, $1.00 par value, 2,000,000 shares authorized; issued and
outstanding 445,121 shares in 1997 and 445,387 shares in 1996............... 445,000 445,000
Additional paid-in capital.................................................... 25,603,000 25,086,000
Deficit....................................................................... (27,885,000) (20,640,000)
-------------- ---------------
5,660,000 12,250,000
Equity adjustment from foreign currency translation........................... (143,000) (159,000)
-------------- ---------------
5,517,000 12,091,000
-------------- ---------------
$ 29,522,000 $ 30,348,000
-------------- ---------------
-------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements
F-19
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31 JULY 31
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- ------------- ------------- -------------
REVENUES
Sales.............................................. $ 9,808,000 $ 10,352,000 $ 3,618,000 $ 2,973,000
Other.............................................. 133,000 150,000 20,000 59,000
9,941,000 10,502,000 3,638,000 3,032,000
COSTS AND EXPENSES:
Cost of sales...................................... 8,322,000 7,683,000 3,430,000 2,489,000
Research and development........................... 490,000 811,000 158,000 249,000
Selling, general and administrative................ 6,114,000 6,316,000 2,018,000 2,421,000
Write-off of software development costs............ -- 2,429,000 -- --
Amortization of software medical cost.............. 1,121,000 807,000 440,000 246,000
Interest........................................... 1,139,000 392,000 409,000 132,000
------------- ------------- ------------- -------------
17,186,000 18,438,000 6,455,000 5,537,000
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES............................. (7,245,000) (7,936,000) (2,817,000) (2,505,000)
INCOME TAXES......................................... -- -- -- --
------------- ------------- ------------- -------------
NET LOSS............................................. $ (7,245,000) $ (7,936,000) $ (2,817,000) $ (2,505,000)
NET LOSS PER COMMON SHARE............................ $ (.92) $ (1.04) $ (.35) $ (.33)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 7,852,453 7,660,300 7,928,516 7,565,040
</TABLE>
See Notes to Consolidated Financial Statements
F-20
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK EQUITY
------------------------------------------------ ADJUSTMENT
FROM
CLASS A CLASS B ADDITIONAL FOREIGN
------------------------- --------------------- PAID-IN CURRENCY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TRANSLATION
----------- ------------ --------- ---------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
October 31,
1996............ 7,358,964 $ 7,359,000 445,387 $ 445,000 $ 25,086,000 $ (20,640,000) $ (159,000)
Conversions of
Class B Common
to Class A
Common.......... 266 (266)
Exercise of
options......... 132,043 132,000 517,000
Issuance of Common
Stock........... 6,087 6,000
Foreign currency
translation..... 16,000
Net loss.......... (7,245,000)
----------- ------------ --------- ---------- ------------- -------------- -----------
Balance -
July 31, 1997..... 7,497,360 $ 7,497,000 445,121 $ 445,000 $ 25,603,000 $ (27,885,000) $ (143,000)
----------- ------------ --------- ---------- ------------- -------------- -----------
----------- ------------ --------- ---------- ------------- -------------- -----------
</TABLE>
See Notes to Consolidated Statements
F-21
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.......................................................................... $ (7,245,000) $ (7,936,000)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization..................................................... 1,474,000 1,224,000
Write-off of software development costs........................................... -- 2,429,000
Accounts receivable............................................................... 352,000 270,000
Inventories....................................................................... (934,000) 80,000
Other current assets.............................................................. (110,000) 67,000
Accounts payable.................................................................. (400,000) (210,000)
Accrued expenses.................................................................. 295,000 836,000
Customers' advance payments....................................................... 390,000 158,000
Deferred compensation............................................................. -- (66,000)
Other Assets...................................................................... (3,147,000) (2,622,000)
Other long-term liabilities....................................................... 6,000 (14,000)
Income taxes payable.............................................................. -- (3,000)
------------- -------------
NET CASH USED IN OPERATIONS......................................................... (9,319,000) (5,787,000)
------------- -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment-net.................................... (487,000) (697,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES............................................... (487,000) (697,000)
------------- -------------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Repayment of amounts borrowed..................................................... (31,000) (32,000)
Proceeds from Issuance of Convertible Debenture................................... 5,500,000 --
Proceeds from issuance of common stock............................................ 655,000 569,000
------------- -------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES....................................... 6,124,000 537,000
Effect of exchange rate change on cash............................................ (12,000) (14,000)
------------- -------------
NET DECREASE IN CASH................................................................ (3,694,000) (5,961,000)
CASH, beginning of period........................................................... 7,465,000 7,221,000
------------- -------------
CASH, end of period................................................................. $ 3,771,000 $ 1,260,000
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Cash paid during the period for interest.......................................... $ 1,089,000 $ 390,000
------------- -------------
SUPPLEMENTAL SCHEDULE OF NON-CASHINVESTING AND FINANCING ACTIVITIES:
Retirement of treasury stock...................................................... $ -- $ 7,000
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
F-22
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
A. DESCRIPTION OF BUSINESS
Base Ten Systems, Inc. ("Base Ten" or the "Company") is engaged in the
design and manufacture of electronic systems employing safety critical software
for defense markets and the development of commercial applications focused on
manufacturing execution systems, medical screening and image processing
software.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1. In management's opinion, all adjustments, of a normal recurring nature,
necessary for a fair presentation of the financial statements are reflected in
the accompanying statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated interim financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1996. The results of operations for the three months and nine months
ended July 31, 1997 are not necessarily indicative of the operating results for
the full year.
2. BASIS OF PRESENTATION--The Company's consolidated financial statements
have been prepared on a historical cost basis.
3. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts of Base Ten. All significant intercompany accounts,
transactions and profits have been eliminated.
4. REVENUE RECOGNITION--For Medical Software Products, the Company
evaluates each product and order on an individual basis to determine the proper
revenue recognition method. Contracts to deliver software which require
significant customization or modification for an extended period of time are
accounted for under the percentage of completion method. For the products or
orders which are more standardized in nature, revenue is recognized on delivery.
For products in the Government Technology Division revenues on long-term
contracts are recognized on the percentage-of-completion or unit-of-delivery
basis. Changes in estimates are accounted for using the cumulative catch-up
method and are immaterial in each period presented.
On contracts where the percentage-of-completion method is used, costs and
estimated revenues in excess of progress billings are presented as unbilled
receivables. Unbilled costs of unit-of-delivery contracts are included in
inventory. Payments received in excess of costs incurred on long-term contracts
are recorded as customers' advance payments, which are included as a reduction
of inventory on the balance sheet.
5. INVENTORIES--Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Inventoried costs on contracts include direct material, labor and applicable
overhead. In accordance with industry practice, inventoried costs include
amounts relating to contracts with a long production cycle, some of which are
not expected to be realized within one year
F-23
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are carried
at cost and depreciated over estimated useful lives, principally on the
straight-line method. The estimated useful lives used for the determination of
depreciation and amortization are:
<TABLE>
<S> <C>
Leased asset--building........................................ 15 years
3 to 10
Machinery and equipment....................................... years
3 to 20
Furniture and fixtures........................................ years
</TABLE>
7. WRITE-OFF OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS--A portion of the
Company's software development costs since 1991 have been capitalized and
included in other non-current assets in accordance with the Statement of
Financial Accounting Standard No. 86, "Accounting for Costs for Computer
Software to be Sold, Leased or Otherwise Marketed" (SFAS 86), requiring the
amortization of these costs over the estimated economic life of the product. See
"Other Assets" below. The Company performs quarterly reviews of the
recoverability of its capitalized software costs based on anticipated revenues
and cash flows from sales of these products. In the second quarter of fiscal
1996 the Company conducted its regular quarterly review of the recoverability of
its capitalized software development costs and determined that neither its
PRENVAL nor its uPACS products would achieve sufficient revenues in future
periods to justify retention of the related capitalized costs as productive
assets. To confirm its determination, the Company reviewed the marketing
chronology related to these products. With respect to PRENVAL, it became
apparent to the Company in late February 1996, after a discussion with the
licensee, that enhancements that are not developed or available for the product
were being requested by customers who had a chance to use and test the product
during the first quarter of fiscal 1996, and that, as a result, sales would not
exceed the amount necessary to generate additional royalties in excess of the
minimum required under the license. Thereafter, in May 1996, the Company
determined that the licensee had no current plans to market the product in the
U.S. as was originally anticipated by the Company. With respect to uPACS, the
Company has implemented sales efforts in late 1995 and displayed the product at
certain trade shows in Europe. In December 1995, sales were anticipated for
early 1996. However, by early April 1996 it became clear that the anticipated
sales would not materialize. The Company concluded that the product, as it then
existed, would not generate sufficient sales to recover the capitalized costs,
and that only a new product with networking, communications and off-line
measurement capabilities was marketable. Accordingly the Company wrote off $2.4
million of such capitalized costs in the 1996 second fiscal quarter.
8. OTHER ASSETS--Included in other non-current assets are software
development costs capitalized in accordance with SFAS 86, "Accounting for Costs
for Computer Software to be Sold, Leased or Otherwise Marketed", pursuant to
which the Company is required to capitalize certain software development and
production costs once technological feasibility has been achieved. The cost of
purchased software is capitalized when related to a product which has achieved
technological feasibility or that has an alternative future use. Software
development costs incurred prior to achieving technological feasibility are
charged to research and development expense as incurred. The Company performs
quarterly reviews of the recoverability of its capitalized software costs and
other long lived assets based on anticipated revenues and cash flows from sales
of these products. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the estimated future cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of the
F-24
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
impairment by comparing the carrying amount of the asset to its fair value. The
estimation of fair value is generally measured by discounting expected future
cash flows at the rate the Company utilizes to evaluate potential investments.
The Company estimates fair value based on the best information available making
whatever estimates, judgments and projections are considered necessary.
Commencing upon initial product release, these costs are amortized based on the
straight-line method over the estimated life.
9. CASH AND CASH EQUIVALENTS--The Company considers all investments with a
maturity of three months or less at date of acquisition to be cash equivalents.
10. INCOME TAXES--Effective November 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which requires a change from the deferred method's income statement
approach of accounting for income taxes to an asset and liability approach of
accounting for income taxes. Under the asset and liability approach, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. This change has
not had any effect on the Company's Consolidated Statement of Operations.
11. RECENTLY ISSUED ACCOUNTING STANDARDS--In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which required
adoption of the disclosure provisions no later than fiscal years beginning after
December 15, 1995 and adoption of the recognition and measurement provisions for
nonemployee transactions no later than after December 15, 1995. The new standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees, but requires disclosure in a note to the financial
statements pro forma net income and, if presented, earnings per share as if the
Company had applied the new method of accounting for all grants after November
1, 1995.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has elected to continue to account for employee stock-based transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and will include the required disclosures under SFAS 123 in the
Company's financial statements and notes thereto to be included in the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1997.
The Financial Accounting Standards Board issued Statement of Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). The Company is required to
adopt FAS 128 for both interim and annual periods ending after December 15,
1997. FAS 128 requires the Company to present Basic Earnings Per Share which
excludes dilution and Diluted Earnings Per Share which includes potential
dilution. The Company believes that the adoption of FAS 128 will not have a
material effect on the Company's earning per share calculations.
F-25
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for financial statement
periods beginning after December 15, 1997. This statement establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company believes that the information to be included in deriving
comprehensive income, although not currently presented in a separate financial
statement, is disclosed as a part of these financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for financial statement periods beginning after December 15, 1997.
This statement establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that these enterprises report selected information about
operating segments in interim financial reports issued to shareholders. This
Statement supersedes SFAS No. 14 and amends SFAS No. 94. The Company is
currently evaluating the impact to its current financial statements of the
implementation of SFAS 131.
12. NET EARNINGS/(LOSS) PER SHARE--Earnings per share for periods ended
July 31, 1997 and 1996 were calculated using the number of weighted average
common shares outstanding.
Stock options, warrants and rights would have an anti-dilutive effect on
earnings per share for the periods included.
13. USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair market value of certain
financial instruments, including cash, accounts receivable, accounts payable,
and other accrued liabilities, approximate the amount recorded in the balance
sheet because of the relatively current maturities of these financial
instruments. The fair market value of long term debt at July 31, 1997 and
October 31, 1996 approximates the amounts recorded in the balance sheet based on
information available to the Company with respect to interest rates and terms
for similar financial instruments.
15. FOREIGN CURRENCY TRANSLATION--The accounts of the consolidated foreign
subsidiaries are translated into United States dollars in accordance with
Financial Accounting Standards Board (FASB) Statement No. 52. Transaction gains
and losses are immaterial.
16. CHANGE IN PRESENTATION--Certain balance sheet items for the interim
period in fiscal 1996 have been reclassified to conform to the 1997
presentation.
F-26
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
C. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
------------ ---------------
<S> <C> <C>
Raw materials................................................. $1,287,000 $ 1,232,000
Work in process............................................... 2,321,000 1,383,000
Finished goods................................................ 578,000 369,000
------------ ---------------
4,186,000 2,984,000
Less advance payments......................................... 318,000 49,000
------------ ---------------
$3,868,000 $ 2,935,000
------------ ---------------
------------ ---------------
</TABLE>
As provided in several of the Company's contracts, customers advance funds
to Base Ten for the purpose of purchasing inventory. The related advances have
been offset against inventory.
D. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
JULY 31, 1997 1996
------------- ---------------
<S> <C> <C>
Machinery and equipment...................................... $ 10,105,000 $ 9,668,000
Furniture and fixtures....................................... 723,000 705,000
Leased asset--land and building.............................. 3,600,000 3,600,000
------------- ---------------
Leasehold improvement........................................ 120,000 85,000
------------- ---------------
14,548,000 14,058,000
Less accumulated depreciation and amortization............... 9,339,000 8,987,000
------------- ---------------
$ 5,209,000 $ 5,071,000
------------- ---------------
------------- ---------------
</TABLE>
E. OTHER ASSETS:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
------------ ---------------
<S> <C> <C>
Patents (net of amortization)................................. $ 386,000 $ 362,000
Capitalized costs............................................. 6,313,000 4,255,000
Unamortized bond issue costs.................................. 1,104,000 579,000
Deposit--long-term capital lease.............................. 550,000 550,000
Long-term receivable.......................................... 200,000 770,000
Other......................................................... 164,000 184,000
------------ ---------------
$8,717,000 $ 6,700,000
------------ ---------------
------------ ---------------
</TABLE>
F-27
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
F. LONG-TERM CAPITAL LEASE:
LEASES. The Company entered into a sale and leaseback arrangement on October
28, 1994. Under the arrangement, the Company sold its main building in Trenton,
New Jersey and agreed to lease it back for a period of 15 years under terms that
qualify the arrangement as a capital lease. The buyer/lessor of the building was
a partnership. One of the partners is a current officer and director of the
Company. In addition, a non-interest bearing security deposit of $550,000 was
paid at closing and included in other non-current assets on the balance sheet.
Interest is calculated under the effective interest method and depreciation will
be taken using the straight line method over the term of the lease.
The Company's future minimum lease payments related to the sale-leaseback
arrangement in effect at July 31, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 560,000
1998........................................................................... 560,000
1999........................................................................... 560,000
2000........................................................................... 615,000
2001........................................................................... 615,000
2002 and thereafter............................................................ 5,344,000
-------------
8,254,000
Less: Interest portion......................................................... (4,759,000)
-------------
Present value of net minimum payments.......................................... $ 3,495,000
-------------
-------------
</TABLE>
G. LONG-TERM DEBT:
In August 1996, the Company sold $10.0 million of its 9.01% Convertible
Subordinate Debentures due August 31, 2003. Under the terms of the Debentures,
the holder can convert the Debentures into the Company's Class A Common Stock,
at $12.50 per share, 125% of the closing price on August 9, 1996. The Company
has the right to call the Debentures after February 28, 1998, if the Company's
stock price trades at certain levels between 150%--175% of the closing price, or
$15-$17.50 per share. The Company's financing costs relating to such Debentures
amounted to approximately $.6 million. These costs are being amortized over the
life of the loan.
In May 1997, the Company sold 55 units ("Units") at $100,000 per Unit, for
an aggregate of $5,500,000. Each Unit consists of (i) a convertible debenture
("Convertible Debenture") in the principal amount of $100,000 convertible into
shares of the Company's Class A Common Stock, and (ii) a warrant ("Warrant") to
acquire 1,800 shares of Class A Common Stock. The number of shares of Class A
Common Stock issuable upon conversion of the Convertible Debentures is variable.
The number of shares will be calculated at the time of conversion and will be
the lesser of (i) the product obtained by multiplying (x) the lesser of the
average of the closing bid prices for the Class A Common Stock for the (A) five
or (B) thirty
consecutive trading days ending on the trading day immediately preceding the
date of determination by (y) a conversion percentage equal to 95% with respect
to any conversions occurring prior to February 24, 1998 and 92% with respect to
any conversions occurring on or after February 24, 1998 and (ii) $13.50 with
respect to any conversions occurring prior to May 30, 1998 or $14.00 with
respect to any conversions
F-28
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1997
(UNAUDITED)
G. LONG-TERM DEBT: (CONTINUED)
occurring on or after May 30, 1998. The Convertible Debentures are not
convertible prior to December 16, 1997. From December 16, 1997 until February
23, 1998, one-half of the Convertible Debentures may be converted and after
February 23, 1998, the Convertible Debentures are fully convertible. The
Warrants may be exercised at any time through May 30, 2002 at an exercise price
of $12.26 per share. The Company received net proceeds of approximately
$4,950,000 from the sale of the Units after deduction of fees and expenses
related to the Offering.
H. OTHER ARRANGEMENTS
On May 1, 1997, the Company entered into an agreement whereby it became a
minority owner of uPACS LLC, a limited liability company (the "LLC"). Under the
terms of the agreement, the Company made a capital contribution to the LLC of
its rights to its uPACS technology which is a system for archiving ultrasound
images with networking, communication and off-line measurement capabilities. In
exchange for such capital contribution, the Company received a 9% interest in
the LLC. An outside investor made a capital contribution of $2 million and
agreed to make a further capital contribution of $1 million on or before
December 1, 1997, in return for a 91% interest in the LLC. In connection with
the formation of the LLC, the Company entered into a Services and License
Agreement whereby the Company has agreed to complete the development of the
uPACS technology and undertake to market, sell and distribute systems using the
uPACS technology. The LLC will pay the Company its expenses in connection with
such services and the Company will pay to the LLC royalties in connection with
the sale of systems using the uPACS technology. At such time as the LLC has
distributed to the outside investor an aggregate amount equal to $4.5 million of
its net cash flow, the Company would become a 63% owner of the LLC and the
outside investor will own a 37% interest in the LLC. There can be no assurance
that uPACS will be successful or that the LLC will operate profitably or that
the funds under the LLC will be sufficient for the further development and
marketing of uPACS.
F-29
<PAGE>
EXHIBIT A
TO
PROXY STATEMENT
October 27, 1997
Special Committee of the Board of Directors
Base Ten Systems, Inc.
One Electronics Drive
Trenton, New Jersey 08619
Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Base Ten Systems, Inc. ("Base Ten" or the
"Company") of the consideration to be received for substantially all the assets
and certain liabilities of the Government Technology Division ("GTD") of the
Company pursuant to the proposed transaction (the "Transaction"), as set forth
in the Asset Purchase Agreement dated October 27, 1997 (the "Agreement"), by and
between the Company and Strategic Technologies, Inc. (the "Buyer"), a newly
formed corporation that will be managed by certain members of senior management
of the Company who are currently involved in the operations of GTD. Capitalized
terms not otherwise defined herein shall have the meanings given to such terms
in the Agreement.
As more specifically set forth in the Agreement and subject to certain terms
and conditions thereof, the Buyer will pay to the Company consideration as
follows: (i) $3,900,000 in cash, of which $400,000 is contingent upon receipt of
a certain customer contract within 12 months following Closing (the "Cash
Payment"), (ii) a five year promissory note (the "Purchase Note") bearing
interest at a 7.5% annual rate with a principal amount equal to the estimated
Net Asset Value of GTD at Closing minus $3,100,000, (iii) a warrant (the
"Warrant") to purchase 5% of Buyer at any time during the five year period
following the initial public offering ("IPO") of the Buyer at an exercise price
equal to 5% of two times the sum of (x) the Cash Payment, (y) the Purchase Note
and (z) any additional cash contributed or loaned to the Buyer prior to or
within 30 days following the Closing Date, and (iv) the right (the "Disposition
Right") to receive 15% of the gross proceeds above $7,000,000 for a sale, merger
or liquidation of the Buyer that occurs prior to the Buyer's IPO provided that
the Warrant has been canceled. In addition the Buyer has agreed to enter into a
five year lease for office and manufacturing space with estimated annual rent,
taxes, utilities and maintenance payments totaling $486,000 in years one through
three and $509,570 in years four and five.
In the ordinary course of its services, Cowen & Company ("Cowen") is
regularly engaged in the valuation and pricing of businesses and their
securities and in advising corporate securities issuers on related matters.
In arriving at our opinion, Cowen has, among other things:
(1) reviewed the Agreement;
(2) reviewed the Company's consolidated financial statements for the nine
months ended July 31, 1997 and the fiscal years ended October 31, 1996,
1995 and 1994, certain publicly available filings with the Securities and
Exchange Commission and certain other relevant financial and operating
data of the Company;
A-1
<PAGE>
Special Committee of the Board of Directors
Base Ten Systems, Inc.
October 27, 1997
Page 2
(3) reviewed GTD's financial statements as prepared by management of the
Company for the nine months ended July 31, 1997 and the fiscal years
ended October 31, 1996 and 1995 and certain other relevant financial and
operating data of GTD;
(4) held meetings and discussions with management and senior personnel of
the Company to discuss the business, operations, historical financial
results and future prospects of GTD;
(5) reviewed financial projections furnished to us by the management of the
Company, including among other things, the capital structure, sales, net
income, cash flow, capital requirements and other data of GTD we deemed
relevant;
(6) reviewed the historical prices of the Class A and Class B common stock
of the Company from October 13, 1996 to October 13, 1997 and compared
those trading histories with those of market indices which we deemed
relevant;
(7) reviewed the valuation of GTD in comparison to other similar publicly
traded companies;
(8) compared the financial terms, to the extent publicly available, of the
Transaction to selected business transactions deemed to be comparable in
whole or in part;
(9) conducted a discounted cash flow analysis of GTD based on financial
projections provided to us by management of the Company;
(10) analyzed potential pro forma financial effects of the Transaction
contemplated by the Agreement; and
(11) conducted such other studies, analysis, inquiries and investigations as
we deemed appropriate.
At the request of the Company, Cowen solicited an indication of interest to
acquire substantially all of the assets of GTD from a third party.
In rendering our opinion, we relied upon the Company's management with
respect to the accuracy and completeness of the financial and other information
furnished to us as described above. We assumed that financial forecasts,
projections and estimates reflected the best currently available estimates and
judgments of the Company's management as to the expected future financial
performance of GTD. We have not assumed any responsibility for independent
verification of such information, including financial information, nor have we
made an independent evaluation or appraisal of any of the properties or assets
of GTD. With respect to all legal matters relating to the Company and Buyer, we
have relied on the advice of legal counsel to the Company.
Our opinion is necessarily based on general economic, market financial and
other conditions as they exist on, and can be evaluated as of, the date hereof,
as well as the information currently available to us. It should be understood
that, although subsequent developments may affect our opinion, we do not have
any obligation to update, revise or reaffirm our opinion. Our opinion does not
constitute a recommendation to any stockholder as how to such stockholder should
vote on the proposed Transaction. Our opinion does not imply any conclusion as
to the likely trading range for the common stock of the Company following
consummation of the Transaction or otherwise, which may vary depending on
numerous factors that generally influence the price of securities.
A-2
<PAGE>
Special Committee of the Board of Directors
Base Ten Systems, Inc.
October 27, 1997
Page 3
Our opinion is limited to the fairness, from a financial point of view, of
the terms of the Transaction. We express no opinion with respect to any other
reasons, legal, business or otherwise, that may support the decision of the
Special Committee to approve, or the Company's decision to consummate, the
Transaction.
For purposes of rendering our opinion we have assumed in all respects
material to our analysis, that the representations and warranties of each party
contained in the Agreement are true and correct, that each party will perform
all of the covenants and agreements required to be performed by it under the
Agreement and that all conditions to the consummation of the Transaction will be
satisfied without waiver thereof. We have also assumed that all governmental,
regulatory or other consents and approvals contemplated by the Agreement will be
obtained and that in the course of obtaining any of those consents no
restrictions will be imposed or waivers made that would have an adverse effect
on the contemplated benefits of the Transaction.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Transaction contemplated by the
Agreement and will receive a fee for rendering this opinion which is not
contingent upon consummation of the Transaction. Cowen and its affiliates are
providing financing services for the Company and will receive fees for rendering
such services. In addition, in the ordinary course of its business, Cowen may
trade the securities of the Company for its own account and for the accounts of
its customers, and, accordingly, it may at any time hold a long or short
position in such securities.
On the basis of our review and analysis, as described above, it is our
opinion as investment bankers that, as of the date hereof, the financial terms
of the Transaction are fair, from a financial point of view, to the Company.
Very truly yours,
Cowen & Company
A-3
<PAGE>
EXHIBIT B
TO
PROXY STATEMENT
EXCERPTS FROM CHAPTER 11 OF THE NEW JERSEY
BUSINESS CORPORATION ACT
14A:11-1. RIGHT OF SHAREHOLDERS TO DISSENT
(1) Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions * * *
(b) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation not in the usual or regular
course of business as conducted by such corporation, * * * provided that,
unless the certificate of incorporation otherwise provides, the shareholder
shall not have the right to dissent
(i) with respect to shares of a class or series which, at the record
date fixed to determine the shareholders entitled to vote upon such
transaction, is listed on a national securities exchange or is held of
record by not less than 1,000 holders;
* * *
(3) A shareholder may not dissent as to less than all of the shares owned
beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
* * *
14A:11-2. NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF CERTIFICATES
(1) Whenever a vote is to be taken * * * upon a proposed corporate action
from which a shareholder may dissent under section 14A:11-1, any shareholder
electing to dissent from such action shall file with the corporation before the
taking of the vote of the shareholders on such corporate action, * * * a written
notice of such dissent stating that he intends to demand payment for his shares
if the action is taken.
(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, * * * the surviving or new corporation, shall give
written notice of the effective date of such corporate action, by certified mail
to each shareholder who filed written notice of dissent pursuant to subsection
14A:11-2(1), except any who voted for or consented in writing to the proposed
action.
(3) Within 20 days after the mailing of such notice, any shareholder to whom
the corporation was required to give such notice and who has filed a written
notice of dissent pursuant to this section may make written demand on the
corporation, or, in the case of a merger or consolidation, on the surviving or
new corporation, for the payment of the fair value of his shares.
* * *
(6) Not later than 20 days after demanding payment for his shares pursuant
to this section, the shareholder shall submit the certificate or certificates
representing his shares to the corporation upon which such demand has been made
for notation thereon that such demand has been made, whereupon such certificate
or certificates shall be returned to him. If shares represented by a certificate
on which notation has been made shall be transferred, each new certificate
issued therefor shall bear similar notation, together with the name of the
original dissenting holder of such shares, and a transferee of such
B-1
<PAGE>
shares shall acquire by such transfer no rights in the corporation other than
those which the original dissenting shareholder had after making a demand for
payment of the fair value thereof.
(7) Every notice or other communication required to be given or made by a
corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
14A:11-3. "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF FAIR VALUE
(1) A shareholder who has made demand for the payment of his shares in the
manner prescribed by [subsection] 14A:11-2(3) * * * is hereafter in this Chapter
referred to as a "dissenting shareholder".
(2) Upon making such demand, the dissenting shareholder shall cease to have
any of the rights of a shareholder except the right to be paid the fair value of
his shares and any other rights of a dissenting shareholder under this Chapter.
(3) "Fair value" as used in this Chapter shall be determined
(a) As of the day prior to the day of the meeting of shareholders at
which the proposed action was approved * * *
* * *
In all cases, "fair value" shall exclude any appreciation or depreciation
resulting from the proposed action.
14A:11-4. TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE OF HIS
SHARES
(1) The right of a dissenting shareholder to be paid the fair value of his
shares under this Chapter shall cease if
(a) he has failed to present his certificates for notation as provided
by subsection 14A:11-2(6), unless a court having jurisdiction, for good and
sufficient cause shown, shall otherwise direct;
(b) his demand for payment is withdrawn with the written consent of the
corporation;
(c) the fair value of the shares is not agreed upon as provided in this
Chapter and no action for the determination of fair value by the Superior
Court is commenced within the time provided in this Chapter;
(d) the Superior Court determines that the shareholder is not entitled
to payment for his shares;
(e) the proposed corporate action is abandoned or rescinded; or
(f) a court having jurisdiction permanently enjoins or sets aside the
corporate action.
(2) In any case provided for in subsection 14A:11-4(1), the rights of the
dissenting shareholder as a shareholder shall be reinstated as of the date of
the making of a demand for payment pursuant to [subsection] 14A:11-2(3) * * *
without prejudice to any corporate action which has taken place during the
interim period. In such event, he shall be entitled to any intervening
preemptive rights and the right to payment of any intervening dividend or other
distribution, or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the board, the fair value thereof in cash as of the time of such
expiration or completion.
14A:11-5. RIGHTS OF DISSENTING SHAREHOLDER
(1) A dissenting shareholder may not withdraw his demand for payment of the
fair value of his shares without the written consent of the corporation.
B-2
<PAGE>
(2) The enforcement by a dissenting shareholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection 14A:11-4(2) and except that
this subsection shall not exclude the right of such dissenting shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.
14A:11-6. DETERMINATION OF FAIR VALUE BY AGREEMENT
(1) Not later than 10 days after the expiration of the period within which
shareholders may make written demand to be paid the fair value of their shares,
the corporation upon which such demand has been made pursuant to [subsection]
14A:11-2(3) * * * shall mail to each dissenting shareholder the balance sheet
and the surplus statement of the corporation whose shares he holds, as of the
latest available date which shall not be earlier than 12 months prior to the
making of such offer and a profit and loss statement or statements for not less
than a 12-month period ended on the date of such balance sheet or, if the
corporation was not in existence for such 12-month period, for the portion
thereof during which it was in existence. The corporation may accompany such
mailing with a written offer to pay each dissenting shareholder for his shares
at a specified price deemed by such corporation to be the fair value thereof.
Such offer shall be made at the same price per share to all dissenting
shareholders of the same class, or, if divided into series, of the same series.
(2) If, not later than 30 days after the expiration of the 10-day period
limited by subsection 14A:11-6(1), the fair value of the shares is agreed upon
between any dissenting shareholder and the corporation, payment therefor shall
be made upon surrender of the certificate or certificates representing such
shares.
14A:11-7. PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT OF ACTION
TO DETERMINE FAIR VALUE
(1) If the fair value of the shares is not agreed upon within the 30-day
period limited by subsection 14A:11-6(2), the dissenting shareholder may serve
upon the corporation which such demand has been made pursuant to [subsection]
14A:11-2(3) * * * a written demand that it commence an action in the Superior
Court for the determination of the fair value of the shares. Such demand shall
be served not later than 30 days after the expiration of the 30-day period so
limited and such action shall be commenced by the corporation not later than 30
days after receipt by the corporation of such demand, but nothing herein shall
prevent the corporation from commencing such action at any earlier time.
(2) If a corporation fails to commence the action as provided in subsection
14A:11-7(1), a dissenting shareholder may do so in the name of the corporation,
not later than 60 days after the expiration of the time limited by subsection
14A:11-7(1) in which the corporation may commence such an action.
14A:11-8. ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF COURT; APPOINTMENT OF
APPRAISER
In any action to determine the fair value of shares pursuant to this
Chapter:
(a) The Superior Court shall have jurisdiction and may proceed in the
action in a summary manner or otherwise;
(b) All dissenting shareholders, wherever residing, except those who
have agreed with the corporation upon the price to be paid for their shares,
shall be made parties thereto as an action against their shares quasi in
rem;
(c) the court in its discretion may appoint an appraiser to receive
evidence and report to the court on the question of fair value, who shall
have such power and authority as shall be specified in the order of his
appointment; and
B-3
<PAGE>
(d) The court shall render judgment against the corporation and in favor
of each shareholder who is a party to the action for the amount of the fair
value of his shares.
14A:11-9. JUDGMENT IN ACTION TO DETERMINE FAIR VALUE
(1) A judgment for the payment of the fair value of shares shall be payable
upon surrender to the corporation of the certificate or certificates
representing such shares.
(2) The judgment shall include an allowance for interest at such rate as the
court finds to be equitable, from the date of the dissenting shareholder's
demand for payment under [subsection] 14A:11-2(3) * * * to the day of payment.
If the court finds that the refusal of any dissenting shareholder to accept any
offer of payment, made by the corporation under section 14A:11-6, was arbitrary,
vexatious or otherwise not in good faith, no interest shall be allowed to him.
14A:11-10. COSTS AND EXPENSES OF ACTION
The costs and expenses of bringing an action pursuant to section 14A:11-8
shall be determined by the court and shall be apportioned and assessed as the
court may find equitable upon the parties or any of them. Such expenses shall
include reasonable compensation for and reasonable expenses of the appraiser, if
any, but shall exclude the fees and expenses of counsel for and experts employed
by any party; but if the court finds that the offer of payment made by the
corporation under section 14A:11-6 was not made in good faith, or if no such
offer was made, the court in its discretion may award to any dissenting
shareholder who is a party to the action reasonable fees and expenses of his
counsel and of any experts employed by the dissenting shareholder.
14A:11-11. DISPOSITION OF SHARES ACQUIRED BY CORPORATION
(1) The shares of a dissenting shareholder * * * shall become reacquired by
the corporation which issued them * * * upon the payment of the fair value of
shares.
* * *
B-4
<PAGE>
CLASS A BASE TEN SYSTEMS, INC. CLASS A
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 31, 1997
The undersigned hereby constitutes and appoints MYLES M. KRANZLER and
ALAN J. EISENBERG, and each of them, his or her true and lawful agents and
proxies, with full power of substitution in each, to represent the
undersigned and vote, as directed, all the shares of Class A Stock which the
undersigned may be entitled to vote, at the Special Meeting of Shareholders
of Base Ten Systems, Inc. to be held at the executive offices of the Company,
at One Electronics Drive, Trenton, New Jersey 08619 on Wednesday, December
31, 1997, and at any adjournments or postponements thereof, on all matters
coming before said meeting.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. YOUR SHARES CANNOT
BE VOTED BY THE PERSONS NAMED ABOVE AS PROXIES UNLESS YOU SIGN AND RETURN
THIS CARD.
(continued, and to be signed on reverse side) SEE REVERSE
SIDE
<PAGE>
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF SHAREHOLDERS
BASE TEN SYSTEMS, INC.
CLASS A
DECEMBER 31, 1997
| Please Detach and Mail in the Envelope Provided |
V V
A /X/ Please mark your
votes as in this
example
<TABLE>
<S> <C>
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTES "FOR" EACH OF THE FOLLOWING
FOR AGAINST ABSTAIN
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING 1. Approval and adoption of the Asset / / / / / /
THE ENCLOSED ENVELOPE. YOU MAY REVOKE THIS PROXY AT ANY TIME BY Purchase Agreement providing for
FORWARDING TO THE COMPANY A SUBSEQUENTLY DATED PROXY RECEIVED BY the Sale.
THE COMPANY PRIOR TO THE TAKING OF A VOTE ON THE MATTERS HEREIN.
2. Approval of the issuance of Class A / / / / / /
Stock underlying Convertible
Securities.
3. Approval of the Stock Option Plan / / / / / /
Amendments.
4. OTHER MATTERS: Discretionary authority is hereby granted with
respect to such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER
DIRECTED AND, IF NO INSTRUCTIONS TO THE CONTRARY ARE INDICATED,
WILL BE VOTED FOR APPROVAL OF THE PROPOSALS SET FORTH IN THE
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.
The undersigned hereby acknowledges receipt of the Notice of
Special Meeting of Shareholders and the Proxy Statement
furnished herewith and hereby revokes any proxy or proxies
heretofore given.
____________________________________ DATE: _______________, 1997 ____________________________________ DATE: _______________, 1997
SIGNATURE (TITLE, IF ANY) SIGNATURE (TITLE, IF ANY)
NOTE: Please print and sign your name exactly as it appears hereon. When signing as attorney, agent, executor, administrator,
trustee, guardian or corporate officer, please give full title as such. Each joint owner should sign the Proxy. If a
corporation, please sign full corporate name by president or authorized officer. If a partnership, please sign in
partnership name by authorized person.
</TABLE>
<PAGE>
CLASS B BASE TEN SYSTEMS, INC. CLASS B
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 31, 1997
The undersigned hereby constitutes and appoints MYLES M. KRANZLER and
ALAN J. EISENBERG, and each of them, his or her true and lawful agents and
proxies, with full power of substitution in each, to represent the
undersigned and vote, as directed, all the shares of Class B Stock which the
undersigned may be entitled to vote, at the Special Meeting of Shareholders
of Base Ten Systems, Inc. to be held at the executive offices of the Company,
at One Electronics Drive, Trenton, New Jersey 08619 on Wednesday, December
31, 1997, and at any adjournments or postponements thereof, on all matters
coming before said meeting.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. YOUR SHARES CANNOT
BE VOTED BY THE PERSONS NAMED ABOVE AS PROXIES UNLESS YOU SIGN AND RETURN
THIS CARD.
(continued, and to be signed on reverse side) SEE REVERSE
SIDE
<PAGE>
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF SHAREHOLDERS
BASE TEN SYSTEMS, INC.
CLASS B
DECEMBER 31, 1997
| Please Detach and Mail in the Envelope Provided |
V V
A /X/ Please mark your
votes as in this
example
<TABLE>
<S> <C>
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTES "FOR" EACH OF THE FOLLOWING
FOR AGAINST ABSTAIN
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING 1. Approval and adoption of the Asset / / / / / /
THE ENCLOSED ENVELOPE. YOU MAY REVOKE THIS PROXY AT ANY TIME BY Purchase Agreement providing for
FORWARDING TO THE COMPANY A SUBSEQUENTLY DATED PROXY RECEIVED BY the Sale.
THE COMPANY PRIOR TO THE TAKING OF A VOTE ON THE MATTERS HEREIN.
2. Approval of the issuance of Class B / / / / / /
Stock underlying Convertible
Securities.
3. Approval of the Stock Option Plan / / / / / /
Amendments.
4. OTHER MATTERS: Discretionary authority is hereby granted with
respect to such other matters as may properly come before the
meeting or any adjournment or postponement thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER
DIRECTED AND, IF NO INSTRUCTIONS TO THE CONTRARY ARE INDICATED,
WILL BE VOTED FOR APPROVAL OF THE PROPOSALS SET FORTH IN THE
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.
The undersigned hereby acknowledges receipt of the Notice of
Special Meeting of Shareholders and the Proxy Statement
furnished herewith and hereby revokes any proxy or proxies
heretofore given.
____________________________________ DATE: _______________, 1997 ____________________________________ DATE: _______________, 1997
SIGNATURE (TITLE, IF ANY) SIGNATURE (TITLE, IF ANY)
NOTE: Please print and sign your name exactly as it appears hereon. When signing as attorney, agent, executor, administrator,
trustee, guardian or corporate officer, please give full title as such. Each joint owner should sign the Proxy. If a
corporation, please sign full corporate name by president or authorized officer. If a partnership, please sign in
partnership name by authorized person.
</TABLE>
