SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) December 31, 1997
Base Ten Systems, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 0-7100 22-1804206
- --------------------------------------------------------------------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
One Electronics Drive, Trenton, New Jersey 08619
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(609) 586-7010
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On December 31, 1997, following approval by the shareholders of Base Ten
Systems, Inc. (the "Company", the "Registrant" or "Base Ten") at a special
meeting held on that date, the Company sold all of the assets, subject to
certain liabilities, of the Company's Government Technology Division ("GTD") to
Strategic Technology Systems, Inc. ("Strategic"), a newly formed corporation
that is owned in part and will be managed by certain persons who had been
members of the Company's senior management (the "Sale"). Those persons had been
historically, and at the time of the sale were, significantly involved in GTD's
business and development. The terms of the Sale and certain financial and other
information related thereto is set forth in Registrant's Current Report on Form
8-K dated October 27, 1997, which, together with the Exhibits filed therewith,
is hereby incorporated in its entirety herein; and in Registrant's Proxy
Statement, dated December 15, 1997, for the special meeting of shareholders held
on December 31, 1997, the following portions of which are hereby incorporated by
reference herein -- all matters under the caption "The Proposed Sale of the
Governmental Technology Division" (page 5 et seq.); all matters under the
caption "Information Concerning Base Ten Systems, Inc." (page 32 et seq.); and
"Index to Financial Statements" (page F-1 et seq.).
Item 5. Other Events
a) In order to assure that what the Company believes will be adequate
financial resources are available for its continued marketing and development
efforts, the Company consummated on December 31, 1997, the second (and final)
installment of the sale of an aggregate of $19 million of convertible preferred
stock ("Preferred Stock") and Class A Stock purchase warrants (the "Warrants"),
of which $9.375 million of Preferred Stock and Warrants were sold and issued as
of December 5, 1997, and $9.675 million of Preferred Stock and Warrants were
sold and issued as of December 31, 1997, in each case to several institutional
investors. In order to complete the closing of the financing referred to above,
certain actions were required to be taken by the shareholders of the Company;
those actions were taken at the special meeting of shareholder of the Company
held on December 31, 1997.
The terms of the financing referred to above, including the terms of the
Preferred Stock and the Warrants, are described in detail in Registrant's
Current Report in Form 8-K dated December 9, 1997, which, together with the
Exhibits thereto (other than Exhibit 99.5 - Press Release, dated as of December
9, 1997), is hereby incorporated by reference herein. The matter related to the
financing that was proposed for approval by the Company's shareholders at the
special meeting held on December 31, 1997, is described in detail in the Proxy
Statement, dated December 15, 1997, related thereto. The information in such
Proxy Statement under the caption "The Proposed Issuance" (page 48 et seq.) is
hereby incorporated by reference herein.
b) At the Company's special meeting of shareholders held on December 31,
1997, three matters were presented for approval by the shareholders: (i) the
Sale of the GTD; (ii) the issuance of the Preferred Stock and the Warrants; and
(iii) amendments to the Company's various stock option plans that were deemed
necessary to retain valued employees of both the GTD and the Company during the
Sale process and to encourage certain employees to agree to be employed by a
buyer of the GTD. All three proposals were approved by the shareholders at the
special meeting held on December 31, 1997.
Certain information concerning the third proposal is contained in the
Company's Proxy Statement, dated December 15, 1997, that was disseminated in
connection with the December 31, 1997, special meeting. In that respect, the
information set forth under the caption "The Proposed Option Plan Amendments"
(page 51, et seq.) in the aforementioned Proxy Statement is hereby incorporated
by reference herein.
Item 7. Financial Statements and Exhibits
a) The financial statements of the GTD, which was sold as described in
response to Item 2 of this Current Report on Form 8-K, as well as certain pro
forma financial information, are contained in the Company's Proxy Statement,
dated December 15, 1997, that was disseminated in connection with the special
meeting of shareholders held on December 31, 1997. In that respect, the
following is hereby incorporated by reference herein from the said Proxy
Statement: the information appearing under the caption "The Proposed Sale of the
Government Technology Division - Unaudited Pro Forma Financial Statements of the
Company" (page 27 et seq.); "Information Concerning Base Ten Systems, Inc. -
Selected Financial Data" (;page 32 et seq.); "Information Concerning Base Ten
Systems, Inc. - Management's Discussion and Analysis of Financial Condition and
Results of Operations" (page 34 et seq.); and "Index to Financial Statements"
(page F-1 et seq.).
b) Exhibits:
99.1 Registrant's Current Report on Form 8-K dated October 27, 1997 (SEC
File No. 0-7100).
99.2 Registrant's Current Report on Form 8-K dated December 9, 1997 (SEC
File No. 0-7100).
99.3 Registrant's Proxy Statement, dated December 15, 1997, related to the
special meeting of shareholders held on December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BASE TEN SYSTEMS, INC.
Date: January 9, 1998 By: /s/ Thomas E. Gardner
---------------------
Name: Thomas E. Gardner
Title: President and Chief
Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
BASE TEN SYSTEMS, INC.
Date: January 9, 1998 By: /s/ William F. Hackett
----------------------
Name: William F. Hackett
Title: Chief Financial Officer
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) October 27, 1997
Base Ten Systems, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 0-7100 22-1804206
- --------------------------------------------------------------------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
One Electronics Drive, Trenton, New Jersey 08619
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(609) 586-7010
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report)
<PAGE>
ITEM 2. Acquisition or Disposition of Assets
On October 27, 1997, Base Ten Systems, Inc. (the "Company") entered into an
Asset Purchase Agreement (the "Agreement") with Strategic Technologies, Inc., a
Nevada corporation ("Purchaser"), pursuant to which the Company will sell
substantially all of the assets, subject to certain liabilities, of the
Government Technology Division ("GTD") to the Purchaser (the "Sale"). The
Purchaser will be operated and partially owned by certain members of the
Company's senior management (the "Management Group") who have been over time,
and are currently, significantly involved in the business and development of the
GTD.
The Management Group is led by Mr. Edward Klinsport, Executive Vice
President and Secretary of the Company, 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,
Pursuant to the terms of the Asset Purchase Agreement executed by the
Company and the Purchaser in connection with the proposed Sale, in consideration
of the transfer to the Purchaser of substantially all of the operating assets of
the GTD (the "Assets") and assumption by the Purchaser of certain liabilities
associated with the GTD (the "Assumed Liabilities"), the Company will receive
cash in the amount of $3,500,000 and a promissory note (the "Note") 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 such amount
shall be determined jointly between 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 bear interest at the rate of 7.5% per annum.
Principal payments under the Note will amortize over a three year period
beginning on the second anniversary of the closing of the Sale. Interest on the
Note will be payable quarterly beginning at the end of the first fiscal quarter
following the closing of the Sale. Net assets of the GTD will be the amount
equal to the 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.
The Company will also receive 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 immediately following and giving effect to the Purchaser's initial
underwritten public offering, with respect to which there can be no assurance.
In addition, if, within twelve months of the closing of the Sale, 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.
The Agreement also provides that the Company will sub-lease to Purchaser
for a term of five years an approximately 40,000 square foot portion of the
Company's main building located at One Electronics Drive, Trenton, New Jersey
(the "Leased Space"). The initial rent the Purchaser will pay the Company for
the Leased Space will be at the rate of (i) $7.00 per square foot for office and
manufacturing space, and (ii) $3.00 per square foot for shared common areas, or
a total of $240,000 annually. In addition, the Purchaser will be responsible for
its pro rata share of the building's electric, heating, insurance, tax and
maintenance expenses.
Completion of the Sale will be subject to certain third-party consents and
approval by the Company's shareholders, who will also be asked to approve
separately amendments to certain provisions of the Company's incentive stock
option plans (the "Amendments"). Such Amendments extend the date on which
certain options held by persons who will continue in the employ of the Purchaser
may be exercised. The effect of these Amendments will be a non-cash charge of
$900,000 maximum against the Company's earnings in the first quarter of 1998.
Attached to this Report as Exhibit 99.1 is the form of Asset Purchase
Agreement, executed in connection with the proposed Sale.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(b) Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of July 31, 1997..................................F1
Unaudited Pro Forma Condensed Consolidated Statements
of Income of the Company...................................F3
(c) Exhibits
2.1 Asset Purchase Agreement
99.1 Press Release, dated as of October 27, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BASE TEN SYSTEMS, INC.
Date: November __, 1997 By: /s/Edward J. Klinsport
-----------------------
Name: Edward J. Klinsport
Title: Executive Vice President and
Secretary
<PAGE>
Unaudited Pro Forma Financial Information
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 the Company's periodic reports filed with the
Securities and Exchange Commission. The unaudited pro forms 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.
Base Ten Systems, Inc.
Pro Forma Consolidated Balance Sheet
As of July 31, 1997
<TABLE>
<CAPTION>
Company Pro-forma Company
Historical Sale(1) Adjustments Pro-forma
---------- ------- ----------- ---------
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 --
---
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
======= ======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
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)(3)(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>
- ----------
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 Notes 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.
(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.
<PAGE>
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 the Company's periodic reports filed with the Securities and
Exchange Commission. 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 Forms Condensed Consolidated Income Statement
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
Company Company
Historical Sale(1) Pro-forma
---------- ------- ---------
REVENUES
<S> <C> <C> <C>
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.
<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) Proforma
---------- ------- --------
REVENUES
<S> <C> <C> <C>
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.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) December 9, 1997
Base Ten Systems, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 0-7100 22-1804206
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
One Electronics Drive, Trenton, New Jersey 08619
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(609) 586-7010
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report)
<PAGE>
ITEM 5. Other Events
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
consummated on December 9, 1997, 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 several
institutional investors. 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, following shareholder approval,
which is required by NASDAQ rules. The $9.675 million of Preferred Stock and
Warrants not yet sold are expected to close by early January 1998.
Terms of the Financing
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 at the close of
trading 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.
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, purchasers
received 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 maximum 90-day standstill period following any
underwritten Base Ten public offering, but not in excess of two such standstills
(or more than 90 days) 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.
Use of Proceeds
The proceeds of the sale of the Preferred are expected to be used for
continued development of the Company's PHARMASYST(R) family of products,
increased marketing activities, working capital, and acquisition financing.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
99.1 Securities Purchase Agreement
99.2 Registration Rights Agreement
99.3 Certificate of Amendment of Restated Certificate of Incorporation
Providing for Designation, Preferences and Rights of the
Convertible Preferred Shares, Series A
99.4 Common Stock Purchase Warrant Certificate
99.5 Press Release, dated as of December 9, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BASE TEN SYSTEMS, INC.
Date: December 18, 1997 By: /s/ Thomas E. Gardner
---------------------
Name: Thomas E. Gardner
Title: President and Chief
Executive Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BASE TEN SYSTEMS, INC.
Date: November ____, 1997 By: _____________________________
Name: Edward J. Klinsport
Title: Executive Vice President
and Secretary
<PAGE>
Exhibit 99.1
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT ("Agreement") is entered into as of
December 4, 1997, by and between BASE TEN SYSTEMS, INC., a New Jersey
corporation (the "Company"), with headquarters located at One Electronics Drive,
Trenton, New Jersey 08619 and the purchasers ("Purchasers") set forth on the
execution pages hereof.
RECITALS
A. The Company and Purchasers are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D ("Regulation D"), as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act").
B. Purchasers desire (a) to purchase, upon the terms and conditions stated
in this Agreement, in the aggregate at the First Closing and the Second Closing,
Nineteen Million U.S. Dollars ($19,000,000) face amount of the Company's
Convertible Preferred Shares (the "Preferred Shares"), in the form attached
hereto as Exhibit A, convertible into shares of the Company's Class A Common
Shares, par value $1.00 per share (the "Common Stock") and (b) to receive, in
consideration for such purchase, Stock Purchase Warrants (the "Warrants"), in
the form attached hereto as Exhibit B, to acquire shares of Common Stock. The
shares of Common Stock issuable upon exercise of or otherwise pursuant to the
Warrants are referred to herein as "Warrant Shares". The shares of Common Stock
to be issued to the Purchasers upon conversion of the Preferred Shares are
referred to herein as the "Common Shares". The Preferred Shares may be exchanged
for senior subordinated notes (the "Notes") by the Purchasers under the terms
and conditions specified in the Certificate of Amendment. The Preferred Shares,
the Common Shares, the Warrants, the Warrant Shares and the Notes are
collectively referred to herein as the "Securities".
C. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement in
the form attached hereto as Exhibit C (the "Registration Rights Agreement"),
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act, the rules and regulations promulgated thereunder and
applicable state securities laws.
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and each Purchaser hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED SHARES
1.1 Purchase of Preferred Shares. Subject to the terms and conditions of
this Agreement, the issuance, sale and purchase of Nine Million Three Hundred
Seventy Five Thousand U.S. Dollars ($9,375,000) face amount of the Preferred
Shares shall be consummated in an initial closing (the "First Closing"). On the
date of the First Closing, subject to the satisfaction or waiver of the
conditions set forth in Article VI and Section 7.1, the Company shall issue and
sell to the Purchasers, and the Purchasers severally and not jointly agree to
purchase from the Company, the Preferred Shares specified below the signature
for each such Purchaser on this agreement for an aggregate purchase price of
Nine Million Three Hundred Seventy Five Thousand U.S. Dollars ($9,375,000) (the
"Initial Purchase Price"). Subject to the terms and conditions of this
Agreement, the issuance, sale and purchase of Nine Million Six Hundred Twenty
Five Thousand U.S. Dollars ($9,625,000) face amount of the Preferred Shares
shall be consummated in a second closing (the "Second Closing," the first
Closing and the Second Closing are collectively referred to as the "Closing").
On the date of the Second Closing, subject to the satisfaction or waiver of the
conditions set forth in Section 7.2, the Company shall issue and sell to the
Purchasers, and the Purchasers severally and not jointly agree to purchase from
the Company, the Preferred Shares specified below the signature for each such
Purchaser on this agreement for an aggregate purchase price of Nine Million Six
Hundred Twenty Five Thousand U.S. Dollars (the "Additional Purchase Price," and,
together with the Initial Purchase Price, the "Purchase Price").
1.2 Form of Payment. The Purchasers shall pay the Initial Purchase Price
and the Additional Purchase Price for the Preferred Shares by wire transfer to
the account designated pursuant to the Escrow Agreement by and among the
Company, the Purchasers and the escrow agent ("Escrow Agent") designated therein
in the form attached hereto as Exhibit D ("Escrow Agreement") upon delivery to
the Escrow Agent of the Preferred Shares and, at the First Closing, the
Warrants, all in accordance with the terms of the Escrow Agreement, and upon
satisfaction of the other Closing conditions.
1.3 First Closing Date. Subject to the satisfaction (or waiver) of the
conditions set forth in Article VI and Section 7.1 below, and further subject to
the terms and conditions of the Escrow Agreement, the date and time of First
Closing shall be at 10:00 a.m. California time, on December 4, 1997 (the "First
Closing").
1.4 Second Closing Date. Subject to the satisfaction (or waiver) of the
conditions set forth in Section 7.2 below, and further subject to the terms and
conditions of the Escrow Agreement, the date and time of Second Closing shall be
at 10:00 a.m. California time, on December 30, 1997, or such other date upon
which the conditions set forth in Section 7.2 have been satisfied.
1.5 Warrants. In consideration of the purchase by Purchasers of the
Preferred Shares, the Company shall at the First Closing and at the Second
Closing, as applicable, issue Warrants to the Purchasers to acquire an aggregate
of 40,000 Common Shares for each $1,000,000 face amount of Preferred Shares
purchased.
ARTICLE II
PURCHASERS' REPRESENTATIONS AND
WARRANTIES
Each Purchaser represents and warrants to the Company as of the date hereof
and as of the Closing, severally and solely with respect to itself and its
purchase hereunder and not with respect to any other Purchaser, as set forth in
this Article II. Each Purchaser makes no other representations or warranties,
express or implied, to the Company in connection with the transactions
contemplated hereby and any and all prior representations and warranties, if
any, which may have been made by the Purchaser to the Company in connection with
the transactions contemplated hereby shall be deemed to have been merged in this
Agreement and any such prior representations and warranties, if any, shall not
survive the execution and delivery of this Agreement.
2.1 Investment Purpose. Purchaser is purchasing the Preferred Shares and
the Warrants for Purchaser's own account for investment only and not with a
present view toward or in connection with the public sale or distribution
thereof in violation of the applicable securities laws. Purchaser will not,
directly or indirectly, offer, sell, pledge or otherwise transfer the Securities
or any interest therein except pursuant to transactions that are exempt from the
registration requirements of the Securities Act and/or sales registered under
the Securities Act, the rules and regulations promulgated pursuant thereto and
applicable state securities laws. Purchaser understands that Purchaser must bear
the economic risk of this investment indefinitely, unless the Securities are
registered pursuant to the Securities Act and any applicable state securities
laws or an exemption from such registration is available, and that the Company
has no present intention of registering any such Securities other than as
contemplated by the Registration Rights Agreement. By making the representations
in this Section 2.1, the Purchaser does not agree to hold the Securities for any
minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption from registration under the Securities Act and any
applicable state securities laws.
2.2 Accredited Investor Status. Purchaser is an "accredited investor" as
that term is defined in Rule 501(a) of Regulation D and Purchaser has indicated
on a duly executed Investor Questionnaire and Representation Agreement in the
form attached hereto as Exhibit E in which capacity that it so qualifies as an
"accredited investor."
2.3 Reliance on Exemptions. Purchaser understands that the Preferred
Shares, Notes and Warrants are being offered and sold to Purchaser in reliance
upon specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying upon the truth
and accuracy of, and Purchaser's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of Purchaser set
forth herein in order to determine the availability of such exemptions and the
eligibility of Purchaser to acquire the Preferred Shares, Notes and Warrants.
2.4 Information. Purchaser has been furnished all materials relating to the
business, finances and operations of the Company and materials relating to the
offer and sale of the Securities which have been specifically requested by
Purchaser, including without limitation the Company's Annual Report on Form
10-K/A for the Year ended October 31, 1996; Quarterly Report on Form 10-Q for
the period ended January 31, 1997, as amended by Forms 10-Q/A filed with the
Securities and Exchange Commission ("SEC") on April 3, 1997, May 28, 1997, and
June 11, 1997, respectively; Quarterly Report on Form 10-Q for the period ended
April 30, 1997; Quarterly Report on Form 10-Q for the period ended July 31, 1997
(the "Current Quarterly Report"); Current Reports on Form 8-K filed with the SEC
on June 13, 1997, June 9, 1997 and November 11, 1997; Preliminary Proxy
Statement filed with the SEC on October 29, 1997; and Proxy Statement filed with
the SEC on February 7, 1997 (such documents, collectively, the "SEC Documents").
Purchaser has been afforded the opportunity to ask questions of the Company and
has received what Purchaser believes to be complete and satisfactory answers to
any such inquiries. Neither such inquiries nor any other due diligence
investigation conducted by Purchaser or any of its representatives nor any other
disclosures or documents (including without limitation the SEC Documents) shall
modify, amend or affect Purchaser's right to rely on the Company's
representations and warranties contained in this Agreement or in any Exhibit
hereto or in any certificate issued in connection herewith or therewith.
Purchaser understands that Purchaser's investment in the Securities involves a
high degree of risk, including without limitation the risks and uncertainties
disclosed in the SEC Documents and the Prospectus (as defined below). Subject to
the foregoing, Purchaser acknowledges the disclosures presented under the
caption "Risk Factors" in the Prospectus dated August 22, 1997 included in the
Company's Form S-3 Registration Statement filed with the SEC, and the
incorporation of those disclosures by reference herein.
2.5 Governmental Review. Purchaser understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
2.6 Transfer or Resale. Purchaser understands that (i) except as provided
in the Registration Rights Agreement, the Securities have not been and are not
being registered under the Securities Act or any state securities laws, and may
not be offered, sold, pledged or otherwise transferred unless subsequently
registered thereunder or an exemption from such registration is available (which
exemption the Company expressly agrees may be established as contemplated in
clauses (b) and (c) of Section 5.1 hereof); (ii) any sale of such Securities
made in reliance on Rule 144 under the Securities Act (or a successor rule)
("Rule 144") may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of such Securities without
registration under the Securities Act under circumstances in which the seller
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such Securities
under the Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder (in each case, other than
pursuant to this Agreement or the Registration Rights Agreement).
Notwithstanding the foregoing or anything else contained herein to the contrary,
the Securities may be pledged as collateral in connection with any margin
account or other lending arrangement.
2.7 Legends. Purchaser understands that, subject to Article V hereof, the
certificates for the Preferred Shares and Warrants, the Notes and, until such
time as the Common Shares and Warrant Shares have been registered under the
Securities Act as contemplated by the Registration Rights Agreement or otherwise
may be sold by Purchaser pursuant to Rule 144 (subject to and in accordance with
the procedures specified in Article V hereof), the certificates for the Common
Shares and Warrant Shares, will bear a restrictive legend (the "Legend") in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.
2.8 Authorization: Enforcement. This Agreement and the Registration Rights
Agreement have been duly and validly authorized, executed and delivered on
behalf of Purchaser and are valid and binding agreements of Purchaser
enforceable in accordance with their respective terms, except (i) to the extent
that such validity or enforceability may be subject to or affected by any
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors' rights or
remedies of creditors generally, or by other equitable principles of general
application, and (ii) as rights to indemnity and contribution under the
Registration Rights Agreement may be limited by Federal or state securities
laws.
2.9 Residency. Purchaser is a resident of the jurisdiction set forth under
Purchaser's name on the signature page hereto executed by Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as of the date hereof and
as of each Closing as set forth in this Article III. The Company makes no other
representations or warranties, express or implied, to the Purchasers in
connection with the transactions contemplated hereby and any and all prior
representations and warranties, if any, which may have been made by the Company
to the Purchasers in connection with the transactions contemplated hereby shall
be deemed to have been merged in this Agreement and any such prior
representations and warranties, if any, shall not survive the execution and
delivery of this Agreement.
3.1 Organization and Qualification. Each of the Company and its
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
where the failure so to qualify or be in good standing would have a Material
Adverse Effect. "Material Adverse Effect" means any effect which, individually
or in the aggregate with all other effects, is or could reasonably be expected
to be materially adverse to the business, operations, properties, financial
condition, operating results or prospects of the Company and its subsidiaries,
taken as a whole on a consolidated basis or on the transactions contemplated
hereby or on any of the Securities.
3.2 Authorization: Enforcement. (a) The Company has the requisite corporate
power and authority to enter into and perform this Agreement and the
Registration Rights Agreement, and to issue, sell and perform its obligations
with respect to the Preferred Shares, Warrants and Notes in accordance with the
terms hereof and the terms of the Preferred Shares, Warrants and Notes, to issue
the Common Shares and Warrant Shares upon conversion of the Preferred Shares and
exercise of the Warrants, respectively, in accordance with the terms and
conditions of the Preferred Shares and Warrants, respectively, and subject to
the limitations set forth in Sections 14A:7-14.1 and 14A:7-16 of the New Jersey
Business Corporation Act (the "Corporate Law Restrictions") to issue the Notes
in accordance with the terms and conditions of the Preferred Shares; (b) the
execution, delivery and performance of this Agreement and the Registration
Rights Agreement by the Company and the consummation by it of the transactions
contemplated hereby and thereby (including without limitation the issuance of
the Preferred Shares, the Notes and the Warrants, and the issuance and
reservation for issuance of the Common Shares and the Warrant Shares) have been
duly authorized by all necessary corporate action and, except as set forth on
Schedule 3.2 hereof and except as contemplated by Section 4.8 hereof, no further
consent or authorization of the Company, its board of directors, or its
stockholders or any other person, body or agency, and no filing with any person,
body or agency, is required with respect to any of the transactions contemplated
hereby or thereby (whether under rules of the National Association of Securities
Dealers ("NASD") or otherwise); (c) this Agreement, the Registration Rights
Agreement, certificates for the Preferred Shares, the Warrants and the Notes
have been (or, in the case of the Notes, will be upon issuance) duly executed
and delivered by the Company; and (d) this Agreement, the Registration Rights
Agreement, the Preferred Shares, and the Warrants constitute, and the Notes,
when issued, will constitute, legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms, except (i) to the extent that such validity or enforceability may be
subject to or affected by any bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally the
enforcement of, creditors' rights or remedies of creditors generally, or by
other equitable principles of general application, and (ii) as rights to
indemnity and contribution under the Registration Rights Agreement may be
limited by Federal or state securities laws, and (iii) as to the Notes, to the
Corporate Law Restrictions.
3.3 Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares reserved for issuance pursuant to the
Company's stock option plans, the number of shares reserved for issuance
pursuant to securities (other than the Preferred Shares or the Warrants)
exercisable for, or convertible into or exchangeable for any shares of Common
Stock and the number of shares to be reserved for issuance upon conversion of
the Preferred Shares and exercise of the Warrants is set forth in the Current
Quarterly Report, as the same may be modified or supplemented by Schedule 3.3.
All of such outstanding shares of capital stock have been, or upon issuance will
be, validly issued, fully paid and nonassessable. No shares of capital stock of
the Company (including the Common Shares and the Warrant Shares) are subject to
preemptive rights or any other similar rights of the stockholders of the Company
or of any other person or entity which have not been satisfied or waived, or any
liens or encumbrances. Except as disclosed in Schedule 3.3, as of the date of
this Agreement and as of each Closing Date, (i) there are no outstanding
options, warrants, scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into or
exercisable or exchangeable for, any shares of capital stock of the Company or
any of its subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries, and (ii) issuance of the Securities will not trigger antidilution
or similar rights for any other present or future outstanding or authorized
securities of the Company, and (iii) there are no agreements or arrangements
under which the Company or any of its subsidiaries is obligated to register the
sale of any of its or their securities under the Securities Act (except the
Registration Rights Agreement). The Company has furnished to Purchaser true and
correct copies of the Company's Certificate of Incorporation as in effect on the
date hereof ("Certificate of Incorporation"), and the Company's By-laws as in
effect on the date hereof (the "By-laws"). The Company has set forth on Schedule
3.3 all instruments and agreements (other than the Certificate of Incorporation
and By-laws) governing or concerning securities convertible into or exercisable
or exchangeable for Common Shares of the Company (and the Company shall provide
to Purchaser copies thereof upon the request of Purchaser).
3.4 Issuance of Shares. The Common Shares and Warrant Shares are duly
authorized and (except for the issuance of shares of Common Stock in excess of
twenty percent (20%) of the Common Stock outstanding at the First Closing Date,
which is subject to the completion of the actions to be taken by the Company and
its stockholders after the First Closing pursuant to Section 4.8) reserved for
issuance, and, upon conversion of the Preferred Shares and exercise of the
Warrants in accordance with the terms thereof, as applicable, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances directly or indirectly imposed or suffered by the Company or
any of its subsidiaries, will be entitled to all rights and preferences accorded
to a holder of Common Stock, shall be entitled to be traded on the same markets
and exchanges as the other shares of Common Stock of the Company are traded, and
will not be subject to preemptive rights or other similar rights of stockholders
of the Company or of any other person or entity. The Preferred Shares and
Warrants are duly authorized and validly issued, fully paid and nonassessable,
and free from all liens, claims and encumbrances directly or indirectly imposed
or suffered by the Company or any of its subsidiaries or affiliates and will not
be subject to preemptive rights or other similar rights of stockholders of the
Company or of any other person or entity.
3.5 No Conflicts. Except for the issuance of shares of Common Stock in
excess of twenty percent (20%) of the outstanding Common Stock, which is subject
to the completion of the actions to be taken by the Company and its stockholders
after the First Closing pursuant to Section 4.8, the execution, delivery and
performance of this Agreement, the Preferred Shares, the Warrants, the Notes and
the Registration Rights Agreement by the Company, and the consummation by the
Company of transactions contemplated hereby and thereby (including, without
limitation, the issuance and reservation for issuance, as applicable, of the
Preferred Shares, Common Shares, Warrants, Warrant Shares and, subject to the
Corporate Law Restrictions, Notes) will not (a) result in a violation of the
Certificate of Incorporation or By-laws or (b) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, including without limitation
that certain Securities Purchase Agreement dated as of May 30, 1997 and the
documents related thereto, or (c) result in a violation of any law, rule,
regulation, order, judgment or decree (including U.S. federal and state
securities laws and regulations and the rules and regulations of the NASD or
Nasdaq) applicable to the Company or any of its subsidiaries, or by which any
property or asset of the Company or any of its subsidiaries, is bound or
affected. Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or other organizational documents, and neither the
Company nor any of its subsidiaries is in default (and no event has occurred
which has not been waived which, with notice or lapse of time or both, would put
the Company or any of its subsidiaries in default) under, nor has there occurred
any event giving others (with notice or lapse of time or both) any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party, except for possible violations, defaults or rights as would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its subsidiaries are not being conducted, and shall not be
conducted so long as Purchaser (or any direct or indirect transferee, assignee
or participant of Purchaser or of such transferee, assignee or participant in a
transaction of the type referred to in Section 5.1(b) below ("Purchaser
Transferee")) owns any of the Securities, in violation of any law, ordinance or
regulation of any governmental entity, except for possible violations the
sanctions for which either individually or in the aggregate would not have a
Material Adverse Effect. Except as set forth on Schedule 3.5, or except (A) such
as may be required under the Securities Act in connection with the performance
of the Company's obligations under the Registration Rights Agreement, (B) filing
of a Form D with the SEC, and (C) compliance with the state securities or Blue
Sky laws of applicable jurisdictions, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement, the Preferred Shares, the Warrants, the Notes or the Registration
Rights Agreement or to perform its obligations in accordance with the terms
hereof or thereof. The Company is not in violation of the listing requirements
of Nasdaq, does not know of or anticipate any event which could be grounds for
such delisting and does not reasonably anticipate that the Common Shares will be
delisted by Nasdaq during the foreseeable future.
3.6 SEC Documents. Except as disclosed in Schedule 3.6, since October 31,
1996, the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company has delivered to each Purchaser true and complete
copies of the SEC Documents, except for exhibits, schedules and incorporated
documents. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the statements made in any such SEC Documents which is
required to be updated or amended under applicable law has not been so updated
or amended. The financial statements of the Company included in the SEC
Documents have been prepared in accordance with U.S. generally accepted
accounting principles, consistently applied, and the rules and regulations of
the SEC during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they do not include footnotes or are condensed
or summary statements) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal, immaterial year-end audit adjustments). Except as set
forth in the financial statements or the notes thereto of the Company included
in the SEC Documents, the Company has no liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
consistent with past practice subsequent to the date of such financial
statements and (ii) obligations under contracts and commitments incurred in the
ordinary course of business consistent with past practice and (iii) liabilities
not required under generally accepted accounting principles to be reflected in
such financial statements, in each case of clause (i), (ii) and (iii) next above
which, individually or in the aggregate, are not material to the financial
condition, business, operations, properties, operating results or prospects of
the Company and its subsidiaries or to the transactions contemplated hereby or
to the Securities. To the extent required by the rules of the SEC applicable
thereto, the SEC Documents contain a complete and accurate list of all material
undischarged written or oral contracts, agreements, leases or other instruments
existing as of the respective date of each such SEC Document (or such other date
required by the rules of the SEC) to which the Company or any subsidiary is a
party or by which the Company or any subsidiary is bound or to which any of the
properties or assets of the Company or any subsidiary is subject (each a
"Contract"). Except as set forth in Schedule 3.6, none of the Company, its
subsidiaries or, to the best knowledge of the Company, any of the other parties
thereto, is in breach or violation of any Contract, which breach or violation
could reasonably be expected to have a Material Adverse Effect. No event,
occurrence or condition exists which, with the lapse of time, the giving of
notice, or both, would become a default by the Company or its subsidiaries
thereunder which could reasonably be expected to have a Material Adverse Effect.
The Company has not provided and will not provide to any Purchaser any material
non-public information or any other information which, according to applicable
law, rule or regulation, should have been disclosed publicly by the Company but
which has not been so disclosed as of the date of this Agreement and the date of
the First Closing.
3.7 Absence of Certain Changes. Since October 31, 1996 and to the First
Closing (or, at the Second Closing, since the First Closing to the Second
Closing) there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
results of operations or prospects of the Company, except as disclosed in
Schedule 3.7 or in the SEC Documents. The sale of the assets of the Government
Technology Division of the Company is, as of the date hereof, proceeding in
accordance with the previous public announcements of the Company regarding such
sale.
3.8 Absence of Litigation. Except as disclosed in Schedule 3.8 or in the
SEC Documents, there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, or self-regulatory
organization or body pending or, to the knowledge of the Company or any of its
subsidiaries, threatened against or affecting the Company, any of its
subsidiaries, or any of their respective directors or officers in their
capacities as such, which could reasonably be expected to result in an
unfavorable decision, ruling or finding which would have a Material Adverse
Effect or would adversely affect the transactions contemplated by this Agreement
or any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
There are no facts known to the Company which, if known by a potential claimant
or governmental authority, could reasonably be expected to give rise to a claim
or proceeding which, if asserted or conducted with results unfavorable to the
Company or any of its subsidiaries, could reasonably be expected to have a
Material Adverse Effect.
3.9 Disclosure. No information, statement or representation relating to or
concerning the Company or any of its subsidiaries set forth in this Agreement
contains an untrue statement of a material fact. No information relating to or
concerning the Company or any of its subsidiaries set forth in any of the SEC
Documents contains a statement of material fact that was untrue as of the date
such SEC Document was filed with the SEC. The Company has not herein or in the
SEC Documents omitted to state a material fact necessary in order to make the
statements and representations made herein or therein, in light of the
circumstances under which they were made, not misleading.
3.10 Acknowledgment Regarding Purchaser's Purchase of the Securities. The
Company acknowledges and agrees that Purchaser is not acting as a financial
advisor or fiduciary of the Company or any of its subsidiaries (or in any
similar capacity) with respect to this Agreement or the transactions
contemplated hereby, that this Agreement and the transaction contemplated
hereby, and the relationship between the Purchaser and the Company, are
"arms-length", and that any statement made by Purchaser (except as set forth in
Article II) or any of its representatives or agents, in connection with this
Agreement, and the transactions contemplated hereby is not advice or a
recommendation, is merely incidental to Purchaser's purchase of the Securities
and (except as set forth in Article II) has not been relied upon as such in any
way by the Company, its officers or directors. The Company further represents to
Purchaser that the Company's decision to enter into this Agreement and the
transactions contemplated hereby have been based solely on an independent
evaluation by the Company and its representatives.
3.11 S-3 Registration. The Company is currently eligible to register the
resale of the Common Shares on a registration statement on Form S-3 under the
Securities Act.
3.12 No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as described in Rule 502(c) under
Regulation D, with respect to any of the Securities being offered hereby.
3.13 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would either require registration of
any of the Securities under the Act or prevent the parties hereto from
consummating, or delay or interfere with the consummation of, the transactions
contemplated hereby pursuant to an exemption from the registration under the
Securities Act pursuant to the provisions of Regulation D. The transactions
contemplated hereby are exempt from the registration requirements of the
Securities Act, assuming the accuracy of the relevant representations and
warranties herein contained of the Purchaser and of Cowen & Company ("Cowen")
and Shoreline Pacific Institutional Finance, the Institutional Division of
Financial West Group ("Shoreline") in their letters to the Company dated as of
December 2, 1997 (copies of which are attached as Schedule 3.13 hereto) to the
extent relevant for such determination. To the Company's knowledge, such
representations and warranties of Cowen and Shoreline are accurate. The issuance
of the Securities to the purchasers will not be integrated with any other
issuance of the Company's securities (past, present or future) which require
stockholder approval under the rules of Nasdaq.
3.14 No Brokers. The Company has taken no action, directly or indirectly,
which would give rise to any claim by any person for brokerage commissions,
finder's fees or similar payments by Purchaser relating to this Agreement or the
transactions contemplated hereby, except for dealings with Cowen and Shoreline
the fees of which shall be paid in full by the Company out of escrow at the
First Closing. The Company will indemnify the Purchaser from and against any
fees and expenses (including without limitation reasonable attorneys fees and
expenses) sought or other claims made by Cowen or Shoreline.
3.15 Intellectual Property. Except as disclosed in the SEC Documents, each
of the Company and its subsidiaries owns, is licensed to use, or possesses
adequate and enforceable rights to use all material patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") used or necessary for the conduct of its
business as now being conducted and as described in the Company's Annual Report
on Form 10-K/A for its most recently ended fiscal year. To the Company's best
knowledge, except as disclosed in the SEC Documents, neither the Company nor any
subsidiary of the Company infringes on or is in conflict with any right of any
other person with respect to any Intangibles nor is there any claim of
infringement made by a third party against or involving the Company or any of
its subsidiaries, which infringement, conflict or claim, individually or in the
aggregate, could reasonably be expected to result in an unfavorable decision,
ruling or finding which would have a Material Adverse Effect.
3.16 Key Employees. Each Key Employee (as defined below) is currently
serving the Company in the capacity disclosed in Schedule 3.16. No Key Employee,
to the best of the knowledge of the Company and its subsidiaries, is, or is now
expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best of the knowledge of the
Company and its subsidiaries, any intention to terminate his employment with, or
services to, the Company or any of its subsidiaries. "Key Employee" means Mr. T.
Gardner.
3.17 No "Poison Pill". The Company does not have in effect a shareholders
rights plan or similar plan in the nature of a "poison pill". If the Company
adopts such a plan, none of the Purchaser's Preferred Shares, Warrants, Common
Shares and Warrant Shares will be deemed to trigger such plan.
3.18 Dilution. The Company acknowledges that the number of Common Shares
and Warrant Shares may increase substantially in certain circumstances (subject
to the limitation on issuance of Common Shares set forth in Section (d)(H)(i) of
the Certificate of Amendment), including the circumstances where the trading
price of the Company's Common Stock declines. The Company understands and
acknowledges the potentially dilutive effect to the Common Stock upon the
issuance of the Common Shares and the Warrant Shares upon conversion or exercise
of the Preferred Shares or Warrants. The Company further acknowledges that its
obligation to issue Common Shares and Warrant Shares upon conversion of the
Preferred Shares or exercise of the Warrants in accordance with this Agreement,
the Certificate of Amendment and the Warrants is absolute and unconditional
regardless of the dilutive effect such issuance has on the ownership interests
of other stockholders of the Company.
3.19 Certain Transactions. Except as disclosed in the SEC Documents and
except for arm's length transactions pursuant to which the Company or any of its
direct or indirect subsidiaries makes payments in the ordinary course of
business upon terms no less favorable than the Company or any of its direct or
indirect subsidiaries could obtain from third parties, none of the officers,
directors, or employees of the company is presently a party to any transaction
with the Company or any of its direct or indirect subsidiaries (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
3.20 Permits; Compliance. The Company and each of its direct and indirect
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease, and operate its properties and to
carry on its business as it is now being conducted (collectively, the "Company
Permits"), and there is no action pending or, to the knowledge of the Company,
threatened regarding suspension or cancellation of any of the Company Permits
except for such Company Permits the failure of which to possess, or the
cancellation or suspension of which, would not, individually or in the
aggregate, have a Material Adverse Effect. Neither the Company nor any of its
direct or indirect subsidiaries is in conflict with, or in default or violation
of, any of the Company Permits, except for any such conflicts, defaults or
violations which, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect. Since October 31, 1996, neither the
Company nor any of its direct or indirect Subsidiaries has received any
notification with respect to possible conflicts, defaults or violations of
applicable laws, except for notices relating to possible conflicts, defaults or
violations, which conflicts, defaults or violations could not reasonably be
expected to have a Material Adverse Effect.
3.21 Insurance. The Company and each of its direct and indirect
subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and
its direct and indirect subsidiaries are engaged. Neither the Company nor any
such direct or indirect subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.
ARTICLE IV
COVENANTS
4.1 Best Efforts. The parties shall use their reasonable best efforts to
timely satisfy each of the conditions described in Articles VI and VII of this
Agreement.
4.2 Securities Laws. The Company agrees to timely file a Form D with
respect to the Securities with the SEC as required under Regulation D and to
provide a copy thereof to each Purchaser promptly after such filing. The Company
agrees to file a Form 8-K disclosing this Agreement and the transactions
contemplated hereby with the SEC within five (5) business days following the
date of the First Closing. The Company shall, on or prior to the date of First
Closing or the Second Closing, as applicable, take such action as is necessary
to qualify the Securities for sale to the Purchaser at such Closing in
compliance with applicable securities laws of the states of the United States or
obtain exemption therefrom, and shall provide evidence of any such action so
taken to the Purchaser on or prior to the date of such Closing.
4.3 Reporting Status. So long as the Purchaser or a Purchaser Transferee
beneficially owns any unconverted Preferred Shares or unexercised Warrants, (a)
the Company shall timely file all reports required to be filed with the SEC
pursuant to the Exchange Act, and the Company shall not terminate its status as
an issuer required to file reports under the Exchange Act even if the Exchange
Act or the rules and regulations thereunder would permit such termination, and
(b) the Company will use its best efforts to maintain its ability and
eligibility to register its Common Shares and Warrant Shares on Form S-3.
4.4 Information. The Company agrees to send the following reports to the
Purchaser and Purchaser's Transferee until each Purchaser and Purchaser's
Transferee has converted all of its Preferred Shares and exercised all Warrants:
(a) within three (3) business days after the filing with the SEC, a copy of its
Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, any proxy
statements and any Current Reports on Form 8-K; and (b) within one (1) business
day after release, copies of all press releases issued by the Company or any of
its subsidiaries. The Company further agrees to promptly provide to the
Purchaser and Purchaser's Transferee any information with respect to the
Company, its properties, or its business or Purchaser's investment as the
Purchaser and Purchaser's Transferee may reasonably request; provided, however,
that the Company shall not be required to give the Purchaser any material
nonpublic information. If any information requested by the Purchaser from the
Company contains material nonpublic information, the Company shall inform the
Purchaser in writing that the information requested contains material nonpublic
information and shall in no event provide such information to Purchaser without
the express written consent of the Purchaser after being so informed.
4.5 Listing. The Company shall use its best efforts to continue the
uninterrupted listing and trading of its Common Stock and, upon registration,
the Common Shares and Warrant Shares on the AMEX, the Nasdaq National Market or
the New York Stock Exchange; and comply in all material respects with the
Company's reporting, filing and other obligations under the By-laws and rules of
such exchange or Nasdaq, as applicable. If and so long as the Common Stock and,
following registration, the Common Shares and Warrant Shares are not listed on
one of such exchanges or Nasdaq, as partial compensation for the added liquidity
risk of such delisting the Company shall be obligated to make the following
additional cash payments (the "Delisting Payments"). The Delisting Payments will
be equal to one-half of one percent (1/2%) of the Purchase Price of any
outstanding Preferred Shares for each month (or part thereof, pro-rated)
following the date the Common Stock is delisted (the "Delisting Date")
continuing through the date the Common Stock is listed on one of such exchanges
or Nasdaq (the "New Listing"). The Delisting Payments will be paid to the holder
of the Preferred Shares in cash within five (5) business days following the
earlier of (i) the end of each month following the Delisting Date, or (ii) the
effective date of the New Listing. Nothing herein shall limit the Preferred
Share holder's right to pursue actual damages for the Company's failure to
maintain its listing on such exchange or Nasdaq.
4.6 Prospectus Delivery Requirement. The Purchaser understands that the
Securities Act may require delivery of a prospectus relating to the Common
Shares in connection with any sale thereof pursuant to a registration statement
under the Securities Act covering the resale by the Purchaser of the Common
Shares being sold, and the Purchaser shall comply with the applicable prospectus
delivery requirements of the Securities Act, if any, in connection with any such
sale.
4.7 Share Authorization. The Company covenants and agrees that it shall (i)
use its best efforts to solicit by proxy the authorization (the "Shareholder
Approval") of the issuance of shares of Common Stock in excess of twenty (20)
percent of the outstanding shares of Common Stock by the stockholders of the
Company not later than 60 days following the date of the First Closing, and (ii)
use its best efforts to obtain the Shareholder Approval not later than 120 days
following the date of the First Closing.
4.8 Pre-emptive Right to Participate in Future Private Equity Financings.
(a) The Company shall not, prior to the later of (i) the Second Closing or
(ii) the date of effectiveness of a registration statement with respect to the
resale of the Common Shares and Warrant Shares (such earlier date, the "Release
Date"), issue Class A Common Shares or securities which are convertible into or
exercisable for Class A Common Shares or any other classes of common shares of
the Company (a "Private Equity Financing"), except for Permitted Issuances (as
defined below). If at any time after the Release Date and prior to conversion or
redemption of all of the Preferred Shares, the Company proposes a Private Equity
Financing, other than a Permitted Issuance, the Company shall give each
Purchaser the opportunity to purchase its pro rata share (as calculated below)
of such Private Equity Financing on the same terms as offered to other persons,
on the terms described below. For purposes of this Section 4.9(a), "Permitted
Issuance" means any issuance (i) pursuant to any currently outstanding
convertible debentures, warrants or options (including shares issued in lieu of
cash interest payments), (ii) pursuant to options either already granted or
which may be granted to employees or consultants pursuant to the Company's
existing employee stock option plans or any successor plan approved by the
Company's board of directors, (iii) pursuant to the conversion of the Preferred
Shares or exercise of the Warrants, (iv) pursuant to any stock dividend upon, or
upon any subdivision or combination of shares of the Class A Common Shares, (v)
pursuant to a firm commitment underwritten public offering, (vi) in connection
with an acquisition or merger of another company by or with the Company or (vii)
in connection with any future equity financing whereby Class A Common Shares, or
warrants or options to purchase Class A Common Shares, are issued to a Strategic
Investor (as defined in Section 4.9(d) hereof).
(b) Each Purchaser shall have the right to purchase its pro rata share of
such Private Equity Financing based on the ratio which (x) the Class A Common
Shares issuable on conversion or exercise of Preferred Shares or Warrants
purchased by such Purchaser on the Closing Date to (y) all of the then issued
and outstanding Class A Common Shares of the Company plus the Class A Common
Shares then issuable upon conversion or exercise of any preferred stock, any
warrants and any convertible debentures, options and other warrants then
outstanding, before giving effect to the proposed Private Equity Financing.
(c) The Company shall deliver to each Purchaser, at least five (5) business
days prior to the closing of such Private Equity Financing, written notice
describing the terms and conditions of the proposed Private Equity Financing,
and providing each Purchaser the opportunity to purchase its pro rata share (as
calculated above) of the Private Equity Financing. Any portion of the Private
Equity Financing required to be so offered and so offered which is not purchased
(or irrevocably committed to be purchased) by a Purchaser within five (5)
business days following the receipt by the Purchasers of such offer may be sold
by the Company at any time thereafter on the same terms set forth in the offer,
provided, however, that if the Company does not consummate such Private Equity
Financing within twenty (20) business days after receipt by the Purchasers of
the written notice noted in this Section 4.9(c), the rights of the Purchasers
under this Section 4.9 shall again apply to such Private Equity Financing.
(d) For the purposes of this Section 4.9, "Strategic Investor" shall mean
any person or entity which has or is proposed to have a material business,
technology or commercial relationship with the Company in addition to any equity
financing provided by such person or entity.
(e) So long as any of the Preferred Shares are outstanding the Company
shall not issue any additional shares of Class B Common Stock, other than upon
exercise of existing options to purchase Class B Common Stock.
4.9 Sale of Division. Each Purchaser covenants and agrees that it shall
vote all Preferred Shares or Common Shares which it owns or subsequently
acquires in favor of the proposed sale by the Company, described in the SEC
Documents, of substantially all of the assets of the Government Technology
Division of the Company to Strategic Technology Systems, Inc., a Nevada
corporation.
ARTICLE V
LEGEND REMOVAL, TRANSFER, CERTAIN SALES, ADDITIONAL SHARES
5.1 Removal of Legend. The Legend shall be removed and the Company shall
issue, or shall cause to be issued, a certificate without such Legend to the
holder of any Security upon which it is stamped, and a certificate for a
security shall be originally issued without the Legend, if: (a) the resale of
such Security is registered under the Securities Act; or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions and reasonably
satisfactory to the Company and its counsel (the reasonable cost of which shall
be borne by the Company if neither an effective registration statement under the
Securities Act or Rule 144 is available in connection with such sale) to the
effect that a public sale or transfer of such Security may be made without
registration under the Securities Act pursuant to an exemption from such
registration requirements; or (c) such Security can be sold pursuant to Rule
144, the Holder provides the Company with reasonable assurances that the
Security can be so sold without restriction, and a registered broker dealer
provides to the Company's transfer agent and counsel copies of (i) a "will sell"
letter satisfying the guidelines established by the SEC and its staff from time
to time and (ii) a customary seller's representation letter with respect to such
a sale to be made pursuant to Rule 144 and (iii) a Form 144 in respect of such
Security executed by such holder and filed (or mailed for filing) with the SEC;
or (d) such Security can be sold pursuant to Rule 144(k). Each Purchaser agrees
to sell all registered Securities, including those represented by a
certificate(s) from which the Legend has been removed, or which were originally
issued without the Legend, pursuant to an effective registration statement, in
accordance with the manner of distribution described in such registration
statement and, if required by the Securities Act, to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Securities Act. In the event the Legend is
removed from any Security or any Security is issued without the Legend and the
Security is to be disposed of other than pursuant to the registration statement
or pursuant to Rule 144, then prior to, and as a condition to, such disposition
such Security shall be relegended as provided herein in connection with any
disposition if the subsequent transfer thereof would be restricted under the
Securities Act. Also, in the event the Legend is removed from any Security or
any Security is issued without the Legend and thereafter the effectiveness of a
registration statement covering the resale of such Security is suspended or the
Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance notice to Purchaser
holding such Security, the Company may require that the Legend be placed on any
such Security that cannot then be sold pursuant to an effective registration
statement or Rule 144 or with respect to which the opinion referred to in clause
(b) next above has not been rendered, which Legend shall be removed when such
Security may be sold pursuant to an effective registration statement or Rule 144
or such holder provides the opinion with respect thereto described in clause (b)
next above.
5.2 Transfer Agent Instructions. The Company shall instruct its transfer
agent, in a form satisfactory to the Purchasers, to issue certificates,
registered in the name of the Purchaser or its nominee, for the Common Shares
and the Warrant Shares in such amounts specified from time to time by the
Purchaser upon conversion or exercise of the Preferred Shares and the Warrants,
respectively. Such certificates shall bear the Legend only to the extent
provided by Section 5.1 above. The Company covenants that no instruction other
than such instructions referred to in this Article V, and stop transfer
instructions to give effect to Section 2.6 hereof in the case of the Common
Shares and Warrant Shares prior to registration of the Common Shares and Warrant
Shares under the Securities Act or "black-out" periods as provided in the
Registrations Rights Agreement between the Company and the Purchaser, dated of
such date herewith, will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company. Nothing in this Section shall affect in any way the Purchaser's
obligations and agreement set forth in Section 5.1 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus as required in Section 5.1 in connection with such sale or in
compliance with an exemption from the registration requirements of applicable
securities laws. If (a) the Purchaser provides the Company with an opinion of
counsel, which opinion of counsel shall be in form, substance and scope
customary for opinions of counsel in comparable transactions and reasonably
satisfactory to the Company and its counsel (the reasonable cost of which shall
be borne by the Company if neither an effective registration statement under the
Securities Act nor Rule 144 is available in connection with such sale), to the
effect that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from registration or (b) the Purchaser transfers
Securities to an affiliate which is an accredited investor (within the meaning
of Regulation D under the Securities Act) and which delivers to the Company in
written form the same representations, warranties and covenants made by
Purchaser hereunder or pursuant to Rule 144, the Company shall permit the
transfer, and, in the case of the Common Shares and Warrant Shares, promptly
instruct its transfer agent to issue one or more certificates in such name and
in such denomination as specified by the Purchaser.
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
6.1 The obligation of the Company hereunder to issue and sell the Preferred
Shares and Warrants to the Purchaser at the First Closing and the Second Closing
is subject to the satisfaction, as of the date of each such Closing, of each of
the following conditions, provided that these conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion:
(i) The Purchaser shall have executed the signature page to this Agreement,
the Registration Rights Agreement and the Escrow Agreement and delivered the
same to the Company and Shoreline. The Purchaser shall have completed and
executed the Investor Questionnaire and Representation Agreement and delivered
the same to the Company and Shoreline.
(ii) The Purchaser shall have wired to the account of the Escrow Agent
pursuant to the Escrow Agreement the Initial Purchase Price, in the case of the
First Closing, and the Additional Purchase Price, in the case of the Second
Closing.
(iii) The representations and warranties of the Purchaser shall be true and
correct in all material respects as of the date when made and as of such Closing
as though made at that time (except for representations and warranties that
speak as of a specific date, which representations and warranties shall be true
and correct as of such date), and the Purchaser shall have performed, satisfied
and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Purchaser at or prior to such Closing.
(iv) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
by this Agreement.
ARTICLE VII
CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE
7.1 The obligation of the Purchaser hereunder to purchase the Preferred
Shares and Warrants to be purchased by it on the date of the First Closing is
subject to the satisfaction as of the date of the First Closing, of each of the
following conditions, provided that these conditions are for the Purchaser's
sole benefit and may be waived by the Purchaser at any time in the Purchaser's
sole discretion:
(i) The Company shall have executed the signature page to this Agreement,
the Registration Rights Agreement and the Escrow Agreement and delivered the
same to Purchaser and Shoreline.
(ii) The Company shall have delivered to the Escrow Agent duly issued
Preferred Shares being so purchased by each Purchaser at the First Closing and
certificates for the appropriate number of Warrants in such denominations as are
reasonably requested by Purchaser.
(iii) The Common Shares shall be listed on the Nasdaq National Market and
trading in the Common Shares shall not have been suspended or limited by the
NASD, Nasdaq or the SEC or other regulatory authority, and no such proceeding
seeking suspension shall be pending.
(iv) The representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of the First
Closing as though made at that time (except for representations and warranties
that speak as of a specific date, which representations and warranties shall be
true and correct as of such date), and the Company shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the First Closing. Purchaser shall have
received a certificate, executed by the Chief Executive Officer or Chief
Financial Officer of the Company, dated as of the First Closing to the foregoing
effect.
(v) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(vi) Purchaser shall have received an opinion of (i) Pitney Hardin, special
New Jersey counsel to the Company, and (ii) Battle Fowler, special securities
counsel to the Company, dated as of the First Closing, in the forms attached
hereto as Exhibits F-1 and F-2, respectively.
(vii) The Transfer Agent Instructions set forth in Section 5.2 shall have
been delivered to the Company's transfer agent.
(viii) The Certificate of Amendment shall have been filed with the
Secretary of State of New Jersey.
(ix) The Common Shares required to be authorized and reserved pursuant to
Section (d)H(8) of the Certificate of Amendment shall have been duly authorized
and reserved by the Company.
7.2 The obligation of the Purchaser hereunder to purchase the Preferred
Shares to be purchased by it on the date of the Second Closing is subject to the
satisfaction as of the date of the Second Closing, of each of the following
conditions, provided that these conditions are for the Purchaser's sole benefit
and may be waived by the Purchaser at any time in the Purchaser's sole
discretion:
(i) The First Closing shall have occurred, and no more than 120 days shall
have passed since the date of the First Closing.
(ii) The Shareholder Approval shall have been duly obtained; and a copy of
the minutes of the meeting of the stockholders of the Company, certified by the
Secretary of the Company as being true and correct, reflecting such approval
shall have been provided to each Purchaser.
(iii) The representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of the Second
Closing as though made at that time (except for representations and warranties
that speak as of a specific date, which representations and warranties shall be
true and correct as of such date), and the Company shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Second Closing. Purchaser shall have
received a certificate, executed by the Chief Executive Officer or Chief
Financial Officer of the Company, dated as of the Second Closing to the
foregoing effect.
(iv) The Company shall have delivered to the Escrow Agent duly issued
Preferred Shares being so purchased by each Purchaser at the Second Closing and
certificates for the appropriate number of Warrants in such denominations as are
reasonably requested by Purchaser.
(v) The Common Shares shall be listed on the Nasdaq National Market and
trading in the Common Shares shall not have been then suspended or limited by
the NASD, Nasdaq or the SEC or other regulatory authority, and no such
proceeding seeking suspension shall be pending.
(vi) Purchaser shall have received a bring-down opinion of (i) Pitney
Hardin, special New Jersey counsel to the Company, and (ii) Battle Fowler,
special securities counsel to the Company, dated as of the Second Closing,
addressing the matters referred to in the forms attached hereto as Exhibits F-1
and F-2, respectively.
(vii) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement following the Second Closing.
ARTICLE VIII
GOVERNING LAW; MISCELLANEOUS
8.1 Governing Law: Jurisdiction. This Agreement shall be governed by and
construed in accordance with the corporate law of the Company's jurisdiction of
incorporation (in respect of matters of corporation law) and the laws of the
State of New York (in respect of all other matters) applicable to contracts made
and to be performed in the State of New York. The parties hereto irrevocably
consent to the jurisdiction of the United States federal courts and state courts
located in the Borough of Manhattan in the State of New York in any suit or
proceeding based on or arising under this Agreement or the transactions
contemplated hereby and irrevocably agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and each
Purchaser irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding in such forum. The Company and each
Purchaser further agrees that service of process upon the Company or such
Purchaser, as applicable, mailed by the first class mail in accordance with
Section 8.6 shall be deemed in every respect effective service of process upon
the Company or such Purchaser in any suit or proceeding arising hereunder.
Nothing herein shall affect any Purchaser's or the Company's right to serve
process in any other manner permitted by law. The parties hereto agree that a
final judgment in any such suit or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on such judgment or in any other lawful
manner. The parties hereto irrevocably waive any right to trial by jury under
applicable law.
8.2 Counterparts. This Agreement may be executed in two or more
counterparts, including, without limitation, by facsimile transmission, all of
which counterparts shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party. In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall promptly cause
additional original executed signature pages to be delivered to the other
parties.
8.3 Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
8.4 Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
8.5 Entire Agreement: Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Purchaser makes any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and each Purchaser.
8.6 Notice. Any notice herein required or permitted to be given shall be in
writing and may be personally served or delivered by nationally-recognized
overnight courier or by facsimile machine confirmed telecopy, and shall be
deemed delivered at the time and date of receipt (which shall include telephone
line facsimile transmission). The addresses for such communications shall be:
If to the Company:
Base Ten Systems, Inc.
One Electronics Drive
Trenton, NJ 08619
Telephone: (609) 586-7010
Telecopy: (609) 586-1593
Attention: Mr. Alexander M. Adelson
with a copy to:
Battle Fowler LLP
Park Avenue Tower
75 East 55th Street
New York, NY 10022
Telephone: (212) 856-7000
Telecopy: (212) 856-7822
Attention: David M. Warburg, Esq.
If to JMG Capital Partners, L.P.:
JMG Capital Partners, L.P.
1999 Avenue of the Stars, Suite 1950
Los Angeles, CA 90067
Telephone: (310) 201-2619
Telecopy: (310) 201-2759
Attention: Mr. Jonathan Glaser
If to Triton Capital Investments, Ltd.:
Triton Capital Investments, Ltd.
c/o JMG Capital Partners, L.P.
1999 Avenue of the Stars, Suite 1950
Los Angeles, CA 90067
Telephone: (310) 201-2619
Telecopy: (310) 201-2759
Attention: Mr. Jonathan Glaser
If to RGC International Investors, LDC:
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
RGC General Partner Corp
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Telephone: (610) 617-5900
Telecopy: (610) 617-0570
Attention: Mr. Gary S. Kaminsky
and with a copy to:
Ballard, Spahr, Andrew Ingersoll
1735 Market Street
51st Floor
Philadelphia, PA 19103-7599
Telephone: (215) 864-8123
Telecopy: (215) 864-8999
Attention: Mr. Keith S. Marlowe, Esq.
If to Shepherd Investments International, Ltd.:
Shepherd Investments International, Ltd.
c/o Staro Asset Management
1500 West Market Street, Suite 200
Mequon, WI 53092
Telephone: (414) 241-1810
Telecopy: (414) 241-7704
Attention: Mr. Joe Lucas
and with a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, NY 10022
Telephone: (212) 756-2376
Telecopy: (212) 593-5955
Attention: Mr. Eleazer Klein, Esq.
If to Stark International:
Stark International
c/o Staro Asset Management
1500 West Market Street, Suite 200
Mequon, WI 53092
Telephone: (414) 241-1810
Telecopy: (414) 241-7704
Attention: Mr. Joe Lucas
and with a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, NY 10022
Telephone: (212) 756-2376
Telecopy: (212) 593-5955
Attention: Mr. Eleazer Klein, Esq.
If to Societe Generale:
Societe Generale
1221 Avenue of the Americas
6th Floor
New York, NY 10020
Telephone: (212) 278-5260
Telecopy: (212) 278-5467
Attention: Mr. Guillaume Pollet
with a copy to:
Dorsey & Whitney LLP
250 Park Avenue
New York, NY 10177
Telephone: (212) 415-9263
Telecopy: (212) 888-0018
Attention: Mr. Eric Maki, Esq.
If to Elara Ltd.:
Elara Ltd.
c/o Talisman Capital
PO Box 438
Tropic Isle Building
Wickhains Cay
Road Town, Tortolla
British Virgin Islands
Telephone: (809) 494-2616
Telecopy: (809) 494-2794
Attention: Mr. Geoffrey Tirman
If to Midland Walwyn Capital, Inc.
Keyway Investments:
Keyway Investments Midland Walwyn Capital, Inc.
c/o Midland Walwyn Capital, Inc.
BCE Place-181 Bay Street
Suite 500
Toronto, Ontario M5J2V8
Canada
Telephone: (416) 369-8738
Telecopy: (416) 369-8726
Attention: Mr. Gregory W. Murphy
with a copy to:
Kaufman Malchman Kirby & Squier
919 3rd Avenue
11th Floor
New York, NY 10022
Telephone: (212) 371-6600
Telecopy: (212) 751-2540
Attention: Mr. Rick Stone, Esq.
in each case with a copy to:
Shoreline Pacific Institutional Finance
3 Harbor Drive, Suite 211
Sausalito, CA 94965
Telephone: (415) 332-7800
Telecopy: (415) 332-7808
Attention: General Counsel
and:
Cowen & Co.
1 Financial Square
New York, NY 10005
Telephone: (212) 495-3950
Telecopy: (212) 495-8305
Attention: Mr. Bill Smith
Each party shall provide notice to the other party of any change in address.
8.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and assigns. Neither the
Company nor the Purchaser shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other except,
with respect to the Company, in accordance with Section (d)G of the Certificate
of Amendment. Notwithstanding the foregoing, the Purchaser may subject to and in
compliance with Section 5.2 hereof, assign all or part of its rights and
obligations hereunder to any of its "affiliates," as that term is defined under
the Securities Act, without the consent of the Company so long as such affiliate
is an accredited investor (within the meaning of Regulation D under the
Securities Act) and agrees in writing to be bound by this Agreement.
8.8 Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns
(including transferees permitted in accordance with Section 8.7) and is not for
the benefit of, nor may any provision hereof be enforced by, any other person.
8.9 Survival; Indemnity. The representations and warranties of the Company
and the Purchaser and the agreements and covenants set forth herein shall
survive each Closing hereunder through the date three months following the fifth
anniversary of this Agreement notwithstanding any due diligence investigation
conducted by or on behalf of the Company or any Purchaser as the case may be.
The Company agrees to indemnify and hold harmless each Purchaser and each of
such Purchaser's respective officers, directors, employees, partners, agents and
affiliates for loss or damage or expenses (including reasonable attorneys fees)
arising as a result of or related to any breach or alleged breach by the Company
of any of its respective representations or covenants set forth herein, in the
Certificate of Amendment or in the Registration Rights Agreement, including
advancement of expenses as they are incurred.
8.10 Public Filings: Publicity. As soon as practicable following the First
Closing, the Company shall issue a press release with respect to the
transactions contemplated hereby. The Company and each Purchaser shall have the
right to review before issuance any press releases, SEC or Nasdaq or other
exchange filings, or any other public statements with respect to the
transactions contemplated hereby (which review shall not be unreasonably
delayed); provided, however, that the Company shall be entitled, without the
prior review of the Purchasers, to make any press release or SEC, AMEX, Nasdaq
or other exchange filings with respect to such transactions as is required by
applicable law and regulations (although the Company shall make all reasonable
efforts to consult with the Purchasers in connection with any such press release
prior to its release and shall provide the Purchasers with a copy thereof as
provided in Section 4.4 hereof). Except to the extent required by law or with
the prior written consent of the affected Purchaser, the Company shall not use
the names of the Purchasers in press releases and public communications. Each of
the Purchasers hereby consents to its identification as a Purchaser in any proxy
solicitation seeking the Shareholder Approval.
8.11 Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
8.12 Remedies. No provision of this Agreement providing for any remedy to a
Purchaser or the Company shall limit any remedy which would otherwise be
available to such Purchaser or the Company at law or in equity. Nothing in this
Agreement shall limit any rights a Purchaser may have under any applicable
federal or state securities laws with respect to the investment contemplated
hereby. The Company and each Purchaser acknowledges that a breach by it of its
respective obligations hereunder will cause irreparable harm to each Purchaser,
in the case of the Company, and the Company, in the case of a Purchaser.
Accordingly, the Company and each Purchaser acknowledges that the remedy at law
for a material breach of its respective obligations under this Agreement will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company or a Purchaser, as the case may be, of the provisions of this Agreement,
that a Purchaser or the Company, as the case may be, shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate compliance, without the necessity of showing
economic loss and without any bond or other security being required.
8.13 Acknowledgment By Purchasers Who Are Also Holders Of The Company's
Convertible Term Debentures. Any Purchaser under this Agreement who is also a
holder ("Holder") of Convertible Term Debentures of the Company hereby
acknowledges and agrees, solely with respect to the transactions contemplated by
this Agreement and no other transaction, that any purchases made by Holder under
this Agreement shall be in lieu of and in full and complete satisfaction of any
right of first offer ("First Offer") with respect to the Securities such Holder
may be entitled to under the first paragraph of Section 4(e) of that certain
Securities Purchase Agreement, dated as of May 30, 1997, by and between the
Company and each of The Tail Wind Fund, Ltd. and RGC International Investors,
LDC. The Company hereby represents and warrants to the Purchasers that the
Company has complied with and satisfied in full the First Offer to the extent
not otherwise waived by a Holder with regard to the transactions contemplated by
this Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused
this Agreement to be duly executed as of the date first above written.
BASE TEN SYSTEMS, INC.
By:_______________________
Name:
Title:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS:
JMG CAPITAL PARTNERS, L.P.
By:_______________________
Name: Jonathan Glaser
Title: President, JMG
Capital Management,
Inc. General Partner,
JMG Capital Partners, L.P.
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 246.711
Warrants Purchased at First Closing: 9,868
Preferred Shares Purchased at Second Closing: 253.289
Warrants Purchased at Second Closing: 10,132
TRITON CAPITAL INVESTMENTS, LTD
By:_______________________________
Jonathan Glaser
Vice President, Triton Capital
Investments, Ltd.
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 246.711
Warrants Purchased at First Closing: 9,868
Preferred Shares Purchased at Second Closing: 253.289
Warrants Purchased at Second Closing: 10,132
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
RGC INTERNATIONAL INVESTORS, LDC
BY: Rose Glen Capital Management,
LP/RGC General Partner Corporation
By:________________________________
Gary S. Kaminsky
Managing Director
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 1,973.684
Warrants Purchased at First Closing: 78,947
Preferred Shares Purchased at Second Closing: 2,026.316
Warrants Purchased at Second Closing: 81,053
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
SHEPHERD INVESTMENTS INTERNATIONAL, LTD.
By:________________________________
Name:
Managing Member, Staro Asset
Management, LLC
Investment Manager, Shepherd
Investments International, Ltd.
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 1,726.974
Warrants Purchased at First Closing: 69,079
Preferred Shares Purchased at Second Closing: 1,773.026
Warrants Purchased at Second Closing: 70,921
STARK INTERNATIONAL
By:________________________________
Name:
Managing Member, Staro Asset
Management, LLC
Investment Manager, Stark
International
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 1,726.974
Warrants Purchased at First Closing: 69,079
Preferred Shares Purchased at Second Closing: 1,773.026
Warrants Purchased at Second Closing: 70,921
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
SOCIETE GENERALE
By:____________________________
Name:
Title:
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 2,467.105
Warrants Purchased at First Closing: 98,684
Preferred Shares Purchased at Second Closing: 2,532.895
Warrants Purchased at Second Closing: 101,316
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
ELARA LTD.
By:______________________________
Geoffrey Tirman, Talisman Capital
President, Elara Ltd.
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 493.421
Warrants Purchased at First Closing: 19,737
Preferred Shares Purchased at Second Closing: 506.579
Warrants Purchased at Second Closing: 20,263
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
KEYWAY INVESTMENTS
By:_____________________________
Gregory W. Murphy
Title:
DATE:
Aggregate Subscription Amount
Preferred Shares Purchased at First Closing: 493.421
Warrants Purchased at First Closing: 19,737
Preferred Shares Purchased at Second Closing: 506.579
Warrants Purchased at Second Closing: 20,263
<PAGE>
Exhibit 99.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of December 4, 1997 (the
"Agreement"), is made by and between BASE TEN SYSTEMS, INC., a New Jersey
corporation (the "Company"), and the Investors set forth on the signature pages
hereto (the "Initial Investors").
WITNESSETH:
WHEREAS, in connection with the Securities Purchase Agreement dated
December 4, 1997 between the Initial Investors and the Company (the "Purchase
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of said Purchase Agreement, to issue and sell to the Initial
Investors (the "Offering") Nineteen Million U.S. Dollars face amount of the
Company's Convertible Preferred Shares (the "Preferred Shares"), convertible
into shares of the Company's Class A Common Shares, par value $1.00 per share
(the "Common Stock"), together with Stock Purchase Warrants (the "Warrants") to
purchase additional shares of Common Stock. The shares of common stock of the
Company into which the Preferred Shares are convertible and the Warrants are
exercisable for are collectively referred to herein as the "Common Shares."
WHEREAS, to induce the Initial Investors to execute and deliver the
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Common Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investors hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Purchase Agreement.
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Holders" are stockholders of the Company who, by virtue of agreements
with the Company, are entitled to include their securities in certain
Registration Statements filed by the Company.
(b) "Investors" means the Initial Investors and any transferee or assignee
of the Initial Investors who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(c) "Registrable Securities" means the Common Shares, together with any
shares of Common Stock which may be issued as a dividend or other distribution
and any additional shares of Common Stock which may be issued due to
anti-dilution adjustments with respect to the Preferred Shares or Common Shares,
which are required to be included in a Registration Statement pursuant to
Section 2(a) below.
(d) "Registration Period" means the period between the date of this
Agreement and the earlier of (i) the date on which all of the Registrable
Securities have been sold, or (ii) the date on which the Registrable Securities
(in the opinion of Investors' counsel) may be immediately sold without
registration pursuant to Rule 144(k) under the Securities Act.
(e) "Registration Statement" means a registration statement filed with the
Securities and Exchange Commission (the "SEC") under the Securities Act and any
subsequent Registration Statement filed to register additional Registrable
Securities.
(d) The terms "register", "registered", and "registration" refer to a
registration effected by preparing and filing a Registration Statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of effectiveness of such
Registration Statement by the SEC.
2. Registration.
(a) Mandatory Registration. The Company will file a Registration Statement
on Form S-3 with the SEC registering the Registrable Securities in respect of
the First Closing and the Second Closing for resale within twenty-five (25)
business days of the initial closing of the purchase of the Preferred Shares
(the "Closing Date"). To the extent allowable under the Securities Act
(including Rule 416), the Registration Statement shall include the Common Shares
and such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Preferred Shares and exercise of the Warrants
(i) to prevent dilution resulting from stock splits, stock dividends or similar
transactions, or (ii) by reason of changes in the conversion price of the
Preferred Shares or the exercise price of the Warrants in accordance with the
terms thereof. The number of shares of Common Stock initially included in such
Registration Statement shall be no less than 4,250,000 Common Shares. The
Registration Statement (and each amendment or supplement thereto) shall be
provided to, and subject to the approval of, the Initial Investors and their
counsel, such approval not to be unreasonably withheld or delayed. The Company
shall use its best efforts to cause such Registration Statement to be declared
effective by the SEC no earlier than February 25, 1998 and no later than March
2, 1998 (the "Required Effective Date"). Such best efforts shall include, but
not be limited to, promptly responding to all comments received from the staff
of the SEC. The Initial Investors shall use reasonable efforts to cause their
counsel to provide any comments or approve of any amendment to the Registration
Statement within two business days of receipt. Once declared effective by the
SEC, the Company shall cause such Registration Statement to remain effective
throughout the Registration Period, and any amendment of such Registration
Statement necessary to reflect the Second Closing shall not relieve the Company
of its obligation to cause the Registration Statement to remain effective under
this Agreement.
(b) Late Registration Payments. If the Registration Statement required
pursuant to Section 2(a) above has not been declared effective by the Required
Effective Date the Company will make cash payments to the Investors as partial
compensation for such delay (the "Late Registration Payments"). The Late
Registration Payments will be equal to one and one-half percent (1.5%) of the
purchase price paid for the Preferred Shares for each month following the
Required Effective Date, continuing through the date the Registration Statement
is declared effective by the SEC. The Late Registration Payments will be
prorated on a daily basis for partial months and will be paid to the Initial
Investors in cash within five (5) business days following the earlier of: (i)
the end of each month following the Required Effective Date, or (ii) the
effective date of the Registration Statement. Nothing herein shall limit any
Investor's right to pursue actual damages for the Company's failure to file a
Registration Statement or to have it declared effective by the SEC on or prior
to the Required Effective Date in accordance with the terms of this Agreement.
(c) Piggyback Registrations. If, at any time prior to the expiration of the
Registration Period, the Company decides to register any of its securities for
its own account or for the account of others (excluding registrations relating
to equity securities to be issued solely in connection with an acquisition of
any entity or business or in connection with stock option or other employee
benefit plans), the Company will promptly give the Investors written notice
thereof, and will use its best efforts to include in such registration all or
any part of the Registrable Securities so requested by such Investors (excluding
any Registrable Securities previously included in a Registration Statement).
Each Investor's request for registration must be given to the Company in writing
within ten (10) days after receipt of the notice from the Company. If the
registration for which the Company gives notice is a public offering involving
an underwriting, the Company will so advise the Investors as part of the
above-described written notice. In such event, if the managing underwriter(s) of
the public offering impose a limitation on the number of shares of Common Stock
which may be included in the Registration Statement because, in such
underwriter(s)' judgment, such limitation would be necessary to effect an
orderly public distribution, then the Company will be obligated to include only
such limited portion, if any, of the Registrable Securities with respect to
which such Investors have requested inclusion hereunder. Any exclusion of
Registrable Securities shall be made pro-rata among all Holders of the Company's
securities seeking to include shares of Common Stock (including, for purposes of
this Section 2(c) holders of securities of the Company other than the
Registrable Securities who hold and are attempting to exercise registration
rights) in proportion to the number of shares of Common Stock sought to be
included by such Holders; provided, however, that the Company will not exclude
any Registrable Securities unless the Company has first excluded all outstanding
securities the Holders of which are not entitled by right to inclusion of
securities in such Registration Statement. No right to registration of
Registrable Securities under this Section 2(c) shall be construed to limit in
any way the registration required under Section 2(a) above. The obligations of
the Company under this Section 2(c) will expire upon the earlier of: (i) after
the Company has afforded the opportunity for the Investors to exercise
registration rights under this Section 2(c) for two registrations; provided,
however, that any Investor who shall have had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2(c)
shall be entitled to include in any additional Registration Statement filed by
the Company the Registrable Securities so excluded; or (ii) when all of the
Registrable Securities held by any Investor may be sold by such Investor under
Rule 144(k) under the 1933 Act without being subject to any volume restrictions.
(d) Underwriter's Lock-Up. The underwriters in connection with any firm
commitment public offering of the Company's common stock resulting in proceeds
of at least $10,000,000 to the Company shall have the right to require that the
Investors enter into an agreement restricting the Investors from selling Common
Shares held by such Investors in any public sale for a period not to exceed 90
days following the closing of such underwriting, if they deem this to be
reasonably necessary to effect such underwritten public offering; provided that
all executive officers, directors and persons holding 5% or more of the
Company's common equity securities shall have also agreed to identical (or more
restrictive) restrictions. The Investors shall be subject to no more than two
such restrictions during each 18 month period, and the aggregate number of days
in all such restrictions during any 18 month period shall not exceed 90 days.
(e) Eligibility for Form S-3. The Company represents and warrants that it
meets the requirements for the use of Form S-3 for registration of the sale by
the Initial Investors of the Registrable Securities, and the Company shall file
all reports required to be filed by the Company with the SEC in a timely manner
so as to maintain such eligibility for the use of Form S-3.
3. Additional Obligations of the Company. In connection with the
registration of the Registrable Securities, the Company shall have the following
additional obligations:
(a) The Company shall keep each Registration Statement required by Section
2(a) hereof effective pursuant to Rule 415 under the Securities Act at all times
during the Registration Period as defined in Section 1(d) above.
(b) The Registration Statement (including any amendments or supplements
thereto and prospectuses contained therein) filed by the Company shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading. The Company
shall prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration Statement effective at all times during the Registration
Period, and, during such period, shall comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities of
the Company covered by the Registration Statement until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the sellers thereof as set forth in the Registration
Statement. In the event the number of shares of Common Stock included in a
Registration Statement filed pursuant to this Agreement (excluding piggyback
registrations as provided for in Section 2(c) above) is insufficient to cover
all of the Registrable Securities, the Company shall amend the Registration
Statement and/or file a new Registration Statement so as to cover all of the
Registrable Securities as soon as practicable, but in no event more than twenty
(20) business days after the Company first determines (or reasonably should have
determined) the need therefor. The Company shall use its best efforts to cause
such amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. The Late Registration Payment
provisions of Section 2(b) above shall become applicable with respect to the
effectiveness of such amendment and/or new Registration Statement on the
sixtieth (60th) day following the date the Company first determines (or
reasonably should have determined) the need for the amendment and/or new
Registration Statement.
(c) The Company shall furnish to each Investor whose Registrable Securities
are included in the Registration Statement (i) promptly after the same is
prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto; each
preliminary prospectus and final prospectus and each amendment or supplement
thereto; and, in the case of the Registration Statement required under Section
2(a) above, each letter written by or on behalf of the Company to the SEC and
each item of correspondence from the SEC, in each case relating to such
Registration Statement (other than any portion of any item thereof which
contains information for which the Company has sought confidential treatment);
and (ii) such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto, and such other documents
as such Investor may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by such Investor.
(d) The Company shall use its best efforts to (i) register and qualify the
Registrable Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investors reasonably
request, (ii) prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions. Notwithstanding the
foregoing provision, the Company shall not be required in connection therewith
or as a condition thereto to (i) qualify to do business in any jurisdiction
where it would not otherwise be required to qualify but for this Section 3(d),
(ii) subject itself to general taxation in any such jurisdiction, (iii) file a
general consent to service of process in any such jurisdiction, (iv) provide any
undertakings that cause more than nominal expense or burden to the Company, or
(v) make any change in its charter or bylaws, which in each case the Board of
Directors of the Company determines to be contrary to the best interests of the
Company and its stockholders.
(e) In the event Investors who hold a majority in interest of the
Registrable Securities being offered in an offering select underwriters for such
offering, the Company shall enter into and perform its obligations under an
underwriting agreement in usual and customary form including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering. If the Registration Statement required
pursuant to Section 2(a) is not then effective, the Company shall be responsible
for payment of the reasonable attorney fees and costs incurred by one law firm
selected by such Investors to represent their interests in the underwritten
offering.
(f) The Company shall notify each investor who holds Registrable Securities
being sold pursuant to a Registration Statement of the happening of any event of
which the Company has knowledge as a result of which (i) the prospectus included
in the Registration Statement as then in effect includes an untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (ii) sales cannot be made pursuant to
such Registration Statement in compliance with the securities laws for any other
reason (a "Suspension Event"). The Company shall make such notification as
promptly as practicable after the Company becomes aware of such Suspension
Event, shall promptly use its best efforts to prepare a supplement or amendment
to the Registration Statement to correct such untrue statement or omission, and
shall deliver a number of copies of such supplement or amendment to each
Investor as such Investor may reasonably request. If an Investor reasonably
believes that a Suspension Event is in effect, but has not received notice
thereof from the Company, such Investor may deliver a written request, setting
forth in reasonable detail the basis and source (including any individual) for
such belief, that the Company confirm that no Suspension Event is in effect. The
Company shall respond to any such request with a letter executed by an executive
officer of the Company stating that, in consultation with its counsel, the
Company has determined that a Suspension Event is or is not in effect, on or
before the third business day following receipt of such request. If the Company
fails to respond within such time period, a Suspension Event shall be deemed to
be in effect commencing retroactively as of the day that the Investor delivered
its request to the Company, and shall continue until the Investor is otherwise
notified by the Company. Notwithstanding the foregoing provision, the Company
shall not be required to maintain the effectiveness of the Registration
Statement or to amend or supplement the Registration Statement for a period (a
"Delay Period") beginning on the date of occurrence of the Suspension Event and
expiring upon the earlier to occur of (i) the date on which such material
information is disclosed to the public or ceases to be material, (ii) the date
on which the Company is able to comply with its disclosure obligations and SEC
requirements related thereto, or (iii) thirty (30) days after the occurrence of
the Suspension Event; provided, however, that there shall not be more than two
Delay Periods in any twelve (12) month period. In the event that the total
number of days in any Delay Period(s) within a twelve-month period exceeds
thirty (30) days, the Company shall extend the automatic conversion date of the
Preferred Shares for a number of days equal to the total number of days in such
Delay Period(s). In the event that the number of days in all Delay Period(s)
taken together within a twelve-month period exceeds sixty (60) days, or in the
event that there are more than two Delay Periods in any twelve-month period,
regardless of the duration, the Company shall compensate the Investors for such
delay by making monthly cash payments, prorated on a daily basis, to each such
Investor of one and one-half percent (1.5%) of the purchase price paid for the
Registrable Shares still held by such Investor at such time for each month,
continuing through the date the Delay Period ceases (the "Delay Compensation").
The Delay Compensation will begin to accrue on the sixty-first (61st) day
falling within one or more Suspension Events in any twelve-month period (or on
the first day of any Delay Period in excess of the first two Delay Periods) and
will be payable thirty days from that date and each thirty days thereafter until
the Registration Statement is brought effective.
(g) The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement and,
if such an order is issued, shall use its best efforts to obtain the withdrawal
of such order at the earliest possible time and to notify each Investor who
holds Registrable Securities being sold (or, in the event of an underwritten
offering, the managing underwriters) of the issuance of such order and the
resolution thereof.
(h) The Company shall permit counsel designated by the Investors who hold
Registrable Securities being sold pursuant to such registration to review the
Registration Statement and all amendments and supplements thereto (as well as
all requests for acceleration or effectiveness thereof) a reasonable period of
time prior to their filing with the SEC, and shall not file any document in a
form to which such counsel reasonably objects.
(i) The Company shall make generally available to its security Holders as
soon as practical, but not later than ninety (90) days after the close of the
period covered thereby, an earnings statement (in a form complying with the
provisions of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter following
the effective date of the Registration Statement.
(j) At the request of any Investor who holds Registrable Securities being
sold pursuant to such registration, the Company shall furnish on the date that
Registrable Securities are delivered to an underwriter for sale in connection
with the Registration Statement (i) a letter, dated such date, from the
Company's independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the Investors; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and Investors.
(k) The Company shall make available for inspection by any Investor whose
Registrable Securities are being sold pursuant to such registration, any
underwriter participating in any disposition pursuant to the Registration
Statement, and any attorney, accountant or other agent retained by any such
Investor or underwriter (collectively, the "Inspectors"), all pertinent
financial and other records, pertinent corporate documents and properties of the
Company (collectively, the "Records"), as shall be reasonably necessary to
enable each Inspector to exercise its due diligence responsibility, and cause
the Company's officers, directors and employees to supply all information which
any Inspector may reasonably request for purposes of such due diligence;
provided, however, that each Inspector shall hold in confidence and shall not
make any disclosure (except to an Investor) of any Record or other information
which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (i) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (ii) the release of such Records is ordered pursuant to
a subpoena or other order from a court or government body of competent
jurisdiction, or is reasonably necessary in connection with litigation or other
legal process, or (iii) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(k). Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. Nothing herein shall be deemed to
limit any Investor's ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
(l) The Company shall hold in confidence and shall not make any disclosure
of information concerning an Investor provided to the Company pursuant hereto
unless (i) disclosure of such information is necessary to comply with federal or
state securities laws, (ii) the disclosure of such information is necessary to
avoid or correct a misstatement or omission in any Registration Statement, (iii)
the release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or is reasonably
necessary in connection with litigation or other legal process, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor and
allow such Investor, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.
(m) The Company shall use its best efforts either to (i) cause all the
Registrable Securities covered by the Registration Statement to be listed on
Nasdaq (as defined below), the AMEX or the NYSE and on each additional national
securities exchange on which similar securities issued by the Company are then
listed, if any, if the listing of such Registrable Securities is then permitted
under the rules of such exchange, or (ii) secure designation of all the
Registrable Securities covered by the Registration Statement as a National
Association of Securities Dealers Automated Quotations System ("Nasdaq")
"national market system security" within the meaning of Rule 11Aa2-1 of the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the quotation of the Registrable Securities on the Nasdaq National Market System
or, if, despite the Company's best efforts to satisfy the preceding clause (i)
or (ii), the Company is unsuccessful in satisfying the preceding clause (i) or
(ii), to secure listing on a national securities exchange or Nasdaq
authorization and quotation for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register with the National Association of Securities Dealers, Inc.
("NASD") as such with respect to such Registrable Securities.
(n) The Company shall provide a transfer agent and registrar, which may be
a single entity, for the Registrable Securities not later than the Closing Date.
(o) The Company shall cooperate with the Investors who hold Registrable
Securities being sold and the managing underwriter or underwriters, if any, to
facilitate the timely preparation and delivery of certificates (not bearing any
restrictive legends) representing Registrable Securities to be sold pursuant to
the Registration Statement and enable certificates to be in such denominations
or amounts as the case may be, and registered in such names as the managing
underwriter or underwriters, if any, or the Investors may reasonably request;
and, within five business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
the transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement)
instructions to the transfer agent to issue new stock certificates without a
legend and an opinion of such counsel that the Common Shares have been
registered.
(p) The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investor of the Registrable
Securities pursuant to the Registration Statement.
4. Obligations of the Investors. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Agreement with respect to each Investor that
such Investor shall furnish to the Company such information regarding itself,
the number of Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be reasonably
required by the rules of the SEC to effect the registration of the Registrable
Securities. At least ten (10) business days prior to the first anticipated
filing date of the Registration Statement, the Company shall notify each
Investor of the information the Company requires from each such Investor (the
"Requested Information") if such Investor elects to have any of such Investor's
Registrable Securities included in the Registration Statement. If within five
(5) business days of such notice the Company has not received the Requested
Information from an Investor (a "Non-Responsive Investor"), then the Company may
file the Registration Statement without including Registrable Securities of such
Non-Responsive Investor.
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement.
(d) Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(f) or 3(g),
such Investor will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
(e) No Investor may participate in any underwritten registration hereunder
unless such Investor (i) agrees to sell such Investor's Registrable Securities
on the basis provided in any underwriting arrangements approved by the Investors
entitled hereunder to approve such arrangements, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and other fees and expenses of investment bankers and
any manager or managers of such underwriting and legal expenses of the
underwriter applicable with respect to its Registrable Securities, in each case
to the extent not payable by the Company pursuant to the terms of this
Agreement.
5. Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 and 3,
including, without limitation, all registration, listing and qualifications
fees, printers and accounting fees, the fees and disbursements of counsel for
the Company, and the reasonable fees and disbursements of one counsel selected
by the Initial Investors pursuant to Section 3(e) hereof, shall be borne by the
Company.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act, any underwriter (as defined in the Securities Act) for the
Investors, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims, damages, expenses or
liabilities (joint or several) (collectively "Claims") to which any of them
become subject under the Securities Act, the Exchange Act or otherwise, insofar
as such Claims (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations in the Registration Statement, or any post-effective
amendment thereof, or any prospectus included therein: (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereof or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act or any state
securities law or any rule or regulation (the matters in the foregoing clauses
(i) through (iii) being, collectively, "Violations"). Subject to the
restrictions set forth in Section 6(c) with respect to the number of legal
counsel, the Company shall reimburse the Investors and each such underwriter or
controlling person, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (A) shall not apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (B) with respect to any preliminary prospectus
shall not inure to the benefit of any such person from whom the person asserting
any such Claim purchased the Registrable Securities that are the subject thereof
(or to the benefit of any person controlling such person) if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected in the prospectus, as then amended or supplemented, if a
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; and (C) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Persons and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to indemnify and hold harmless, to the
same extent and in the same manner set forth in Section 6(a), the Company, each
of its directors, each of its officers who signs the Registration Statement,
each person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder or underwriter
within the meaning of the Securities Act or the Exchange Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the Securities Act, the Exchange
Act or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement, and such Investor will promptly reimburse any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent of
such Investor, which consent shall not be unreasonably withheld; provided
further, however, that the Investors shall be liable under this Section 6(b) for
only that amount of a Claim as does not exceed the net proceeds to such Investor
as a result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
(c) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and this indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying parties;
provided, however, that an Indemnified Person or Indemnified Party shall have
the right to retain its own counsel, with the fees and expenses to be paid by
the indemnifying party, if, in the reasonable opinion of counsel retained by the
indemnifying party, the representation by such counsel of the Indemnified Person
or Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and other party represented by such counsel in such
proceeding. The Company shall pay for only one separate legal counsel for the
Investors; such legal counsel shall be selected by the Investors holding a
majority in interest of the Registrable Securities. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. Contribution. To the extent any indemnification provided for herein is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. Reports under the Exchange Act, with a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) File with the SEC in a timely manner and make and keep available all
reports and other documents required of the Company under the Exchange Act so
long as the Company remains subject to such requirements and the filing and
availability of such reports and other documents is required for the applicable
provisions of Rule 144; and
(b) Furnish to each Investor so long as such Investor holds Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 and the Exchange
Act, (ii) a copy of the most recent annual or quarterly report of the Company
and such other reports and documents so filed by the Company, and (iii) such
other information as may be reasonably requested to permit the Investors to sell
such securities pursuant to Rule 144 without registration.
9. Assignment of Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to transferees or assignees of all or
any portion of such securities only if (i) the Investor agrees in writing with
the transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being transferred or assigned, (iii) following such transfer or assignment the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities laws, (iv)
at or before the time the Company received the written notice contemplated by
clause (ii) of this sentence, the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions contained herein, (v) such
transfer shall have been made in accordance with the applicable requirements of
the Purchase Agreement, and (vi) such transferee shall be an "accredited
investor" as that term is defined in Rule 501 of Regulation D promulgated under
the Securities Act.
10. Amendment of Registration Rights. Provisions of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
written consent of the Company and Investors who hold a majority interest of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Investor and the Company.
11. Third Party Beneficiary. The parties acknowledge and agree that
Shoreline Pacific Institutional Finance, the Institutional Division of Financial
West Group ("Shoreline"), shall be deemed a third party beneficiary of the
Company's agreements and representations set forth in this Agreement, entitled
to enforce the terms thereof, and to indemnification for any damages resulting
to Shoreline from any actual or threatened breach thereof by the Company, both
in Shoreline's personal capacity and, should Shoreline so elect, and provided
that Shoreline has obtained the prior written consent of the Investor, on behalf
of the Investor.
12. Miscellaneous.
(a) Conflicting Instructions. A person or entity is deemed to be a holder
of Registrable Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
(b) Notices. Any notices required or permitted to be given under the terms
of this Agreement shall be sent by certified or registered mail (with return
receipt requested) or delivered personally or by courier (including a nationally
recognized overnight delivery service) or by facsimile transmission. Any notice
so given shall be deemed effective three days after being deposited in the U.S.
Mail, or upon receipt if delivered personally or by courier or facsimile
transmission, in each case addressed to a party at the following address or such
other address as each such party furnishes to the other in accordance with this
Section 12(b):
If to the Company:
Base Ten Systems, Inc.
One Electronics Drive
Trenton, NJ 08619
Telephone: (609) 586-7010
Telecopy: (609) 586-1593
Attention: Mr. Alexander M. Adelson
with a copy to:
Battle, Fowler LLP
Park Avenue Tower
75 East 55th Street
New York, NY 10022
Telephone: (212) 856-7000
Telecopy: (212) 856-7822
Attention: David Warburg, Esq.
If to JMG Capital Partners, L.P.
JMG Capital Partners, L.P.
1999 Avenue of the Stars, Suite 1950
Los Angeles, CA 90067
Telephone: (310) 201-2619
Telecopy: (310) 201-2759
Attention: Mr. Jonathan Glaser
If to Triton Capital Investments, Ltd.:
Triton Capital Investments, Ltd.
c/o JMG Capital Partners, L.P.
1999 Avenue of the Stars, Suite 1950
Los Angeles, CA 90067
Telephone: (310) 201-2619
Telecopy: (310) 201-2759
Attention: Mr. Jonathan Glaser
If to RGC International Investors, LDC:
RGC International Investors, LDC
c/o Rose Glen Capital Management, L.P.
RGC General Partner Corp
3 Bala Plaza East, Suite 200
251 St. Asaphs Road
Bala Cynwyd, PA 19004
Telephone: (610) 617-5900
Telecopy: (610) 617-0570
Attention: Mr. Gary S. Kaminsky
and with a copy to:
Ballard, Spahr, Andrew Ingersoll
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
Telephone: (215) 864-8123
Telecopy: (215) 864-8999
Attention: Mr. Keith S. Marlowe, Esq.
If to Shepherd Investments International, Ltd.:
Shepherd Investments International, Ltd.
c/o Staro Asset Management
1500 West Market Street, Suite 200
Mequon, WI 53092
Telephone: (414) 241-1810
Telecopy: (414) 241-7704
Attention: Mr. Joe Lucas
and with a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, NY 10022
Telephone: (212) 756-2376
Telecopy: (212) 593-5955
Attention: Mr. Eleazer Klein, Esq.
If to Stark International:
Stark International
c/o Staro Asset Management
1500 West Market Street, Suite 200
Mequon, WI 53092
Telephone: (414) 241-1810
Telecopy: (414) 241-7704
Attention: Mr. Joe Lucas
and with a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, NY 10022
Telephone: (212) 756-2376
Telecopy: (212) 593-5955
Attention: Mr. Eleazer Klein, Esq.
If to Societe Generale:
Societe Generale
1221 Avenue of the Americas
6th Floor
New York, NY 10020
Telephone: (212) 278-5260
Telecopy: (212) 278-5467
Attention: Mr. Guillaume Pollet
with a copy to:
Dorsey & Whitney LLP
250 Park Avenue
New York, NY 10177
Telephone: (212) 415-9263
Telecopy: (212) 888-0018
Attention: Mr. Eric Maki, Esq.
If to Elara Ltd.:
Elara Ltd.
c/o Talisman Capital
PO Box 438
Tropic Isle Building
Wickhams Cay
Road Town, Tortolla
British Virgin Islands
Telephone: (809) 494-2616
Telecopy: (809) 494-2794
Attention: Geoffrey Tirman
If to Keyway Investments:
Keyway Investments
c/o Midland Walwyn Capital, Inc.
BCE Place-181 Bay Street, Suite 500
Toronto, Ontario M5J2V8
Canada
Telephone: (416) 369-8738
Telecopy: (416) 369-8726
Attention: Mr. Gregory W. Murphy
If to Midland Walwyn Capital, Inc.:
Midland Walwyn Capital, Inc.
with a copy to:
Kauhnan Malchman Kirby & Squier
919 3rd Avenue, 11th Floor
New York, NY 10022
Telephone: (212) 371-6600
Telecopy: (212) 751-2540
Attention: Mr. Rick Stone, Esq.
in each case with a copy to:
Shoreline Pacific Institutional Finance
3 Harbor Drive, Suite 211
Sausalito, CA 94965
Telephone: (415) 332-7800
Telecopy: (415) 332-7808
Attention: General Counsel
and:
Cowen & Co.
1 Financial Square
New York, NY 10005
Telephone: (212) 495-3950
Telecopy: (212) 495-8305
Attention: Mr. Bill Smith
(c) Waiver. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) Governing Law: Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the Company's jurisdiction of
incorporation (in respect of matters of corporation law) and the laws of the
State of New York (in respect of all other matters) applicable to contracts made
and to be performed in the State of New York. The parties hereto irrevocably
consent to the jurisdiction of the United States federal courts and state courts
located in the Borough of Manhattan in the State of New York in any suit or
proceeding based on or arising under this Agreement or the transactions
contemplated hereby and irrevocably agree that all claims in respect of such
suit or proceeding may be determined in such courts. The Company and each
Investor irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding in such forum. The Company and each
Investor further agrees that service of process upon the Company or such
Investor, as applicable, mailed by the first class mail in accordance with
Section 12(b) shall be deemed in every respect effective service of process upon
the Company or such Investor in any suit or proceeding arising hereunder.
Nothing herein shall affect any Investor's right to serve process in any other
manner permitted by law. The parties hereto agree that a final non-appealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.
The parties hereto irrevocably waive any right to trial by jury under applicable
law.
(e) Severability. In the event that any provision of this Agreement is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any provision hereof which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision hereof.
(f) Entire Agreement. This Agreement and the Purchase Agreement (including
all schedules and exhibits thereto) constitute the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein or therein. This Agreement supersedes all prior agreements
and understandings among the parties hereto with respect to the subject matter
hereof.
(g) Successors and Assigns. Subject to the requirements of Section 9
hereof, this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties hereto.
(h) Use of Pronouns. All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(i) Headings. The headings and subheadings in the Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(j) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission, and
facsimile signatures shall be binding on the parties hereto.
(k) Further Acts. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
(1) Remedies. No provision of this Agreement providing for any remedy to
any party shall limit any remedy which would otherwise be available to such
Investor at law or in equity. Nothing in this Agreement shall limit any rights
an Investor may have with any applicable federal or state securities laws with
respect to the investment contemplated hereby. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to an
Investor. Accordingly, the Company and the Investors acknowledge that the remedy
at law for a breach of their respective obligations under this Agreement will be
inadequate and that, in the event of a breach or threatened breach by the
Company or the Investors, respectively, of the provisions of this Agreement,
that an Investors or Company, respectively, shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach and
requiring immediate compliance, without the necessity of showing economic loss
and without any bond or other security being required.
(m) Consents. All consents and other determinations to be made by the
Investors pursuant to this Agreement shall be made by Investors holding a
majority of the Registrable Securities, determined as if all shares of preferred
stock of the Company issued in the Offering and all Warrants then outstanding
had been converted into or exercised for Registrable Securities.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
COMPANY:
BASE TEN SYSTEMS, INC.
By:___________________________
Name:
Title:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS:
JMG CAPITAL PARTNERS, L.P.
By:__________________________
Jonathan Glaser
President, JMG Capital Management, Inc.
General Partner, JMG Capital Partners, LP
DATE:
TRITON CAPITAL INVESTMENTS, LTD
By:_____________________________
Jonathan Glaser
Vice President, Triton Capital Investments, Ltd.
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED
RGC INTERNATIONAL INVESTORS, LDC
BY: Rose Glen Capital Management, LP
RGC General Partner Corporation
By:______________________________
Gary S. Kaminsky
Managing Director
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED
SHEPHERD INVESTMENTS INTERNATIONAL, LTD.
By:__________________________
Name:
Managing Member, Staro Asset Management, LLC
Investment Manager, Shepherd Investments
International, Ltd.
DATE:
STARK INTERNATIONAL
By:_____________________________
Name:
Managing Member, Staro Asset Management, LLC
Investment Manager, Stark International
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED
SOCIETE GENERALE
By:_______________________
Name:
Title:
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
ELARA LTD.
By:__________________________
Geoffrey Tirman, Talisman Capital
President, Elara Ltd.
DATE:
[SIGNATURES CONTINUED ONTO NEXT PAGE]
PURCHASERS CONTINUED:
KEYWAY INVESTMENTS
By:___________________________
Gregory W. Murphy
Title:
DATE:
<PAGE>
Exhibit 99.3
BASE TEN SYSTEMS, INC.
CERTIFICATE OF AMENDMENT
OF
RESTATED
CERTIFICATE OF INCORPORATION
PROVIDING FOR DESIGNATION,
PREFERENCES AND RIGHTS
OF THE
CONVERTIBLE PREFERRED SHARES, SERIES A
(Par Value $ 1.00 Per Share)
of
BASE TEN SYSTEMS, INC.
Base Ten Systems, Inc., a corporation (the "Corporation") organized under
the laws of the State of New Jersey, to amend its Restated Certificate of
Incorporation in accordance with Chapter 9 of the New Jersey Business
Corporation Act, hereby certifies:
FIRST: The name of the Corporation is Base Ten Systems, Inc.
SECOND: The Board of Directors of the Corporation, at a meeting held on
December 2, 1997, pursuant to Section 14A:7-2 of the New Jersey Business
Corporation Act and the authority vested in the Board of Directors by the
Restated Certificate of Incorporation, as amended, adopted the following
resolution providing for the issuance of a new series of the Corporation's
Preferred Shares, par value $1.00 per share, consisting of up to 19,000 shares
of Convertible Preferred Shares, Series A:
RESOLVED, that pursuant to the authority vested in this
Board of Directors in accordance with the provisions of the
Corporation's certificate of incorporation, as amended, a
new series of Preferred Shares of the Corporation known as
Convertible Preferred Shares, Series A, be, and hereby is,
created, classified, authorized and the issuance thereof
provided for, and that the designation and number of shares,
and relative rights, preferences and limitations thereof are
hereby fixed, and Article 6 of the Certificate of
Incorporation of the Corporation, as amended, is hereby
amended by adding Article 6(d) thereto, to read, in its
entirety, as follows:
(d) A. Designation and Amount. The shares of the new series of Preferred
Shares shall be designated as "Convertible Preferred Shares, Series A" and the
number of shares constituting such series shall initially be 19,000, with a par
value of $1.00 per share. Fractional Preferred Shares shall be permitted. The
relative rights, preferences, restrictions and other matters relating to the
Preferred Shares are contained in this Certificate of Amendment. The number of
Preferred Shares may be increased, subject to and in accordance with the New
Jersey Business Corporation Act, without approval of the existing holders of
Preferred Shares, solely for the purpose of issuance pursuant to Section C(l)
hereof.
B. Definitions. As used in this Certificate of Amendment, the following
terms shall have the following meanings:
"Board of Directors" means the board of directors of the Corporation.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in the City of New York, New York are authorized or
obligated by law or executive order to close.
"Capital Stock" means any and all shares, rights to purchase, warrants,
options, convertible securities, participation or other equivalents of or
interests (other than security interests) in (however designated and whether
voting or nonvoting) corporate stock.
"Certificate of Amendment" means this Certificate of Amendment,
establishing the Preferred Shares pursuant to Chapter 9 of the New Jersey
Business Corporation Act, as the same may be amended, supplemented or modified
from time to time in accordance with the terms hereof and pursuant to applicable
law.
"Conversion Default Payments" has the meaning set forth in Section H(2)
hereof.
"Closing Bid Price" means, for any security as of any date, the closing bid
price of such security on the principal securities exchange or trading market
where such security is listed or traded, as reported at the close of normal
trading hours, New York time, by Bloomberg Financial Markets or a comparable
reporting service of national reputation selected by the Corporation and
reasonably acceptable to holders of the Preferred Shares then holding a majority
of the then outstanding Preferred Shares ("Majority Holders") if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported sale price of such security in the over-the-counter market on the
electronic bulletin board of such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the
Corporation and reasonably acceptable to the Majority Holders, with the costs of
such appraisal to be borne by the Corporation.
"Closing Date" means the date on which Preferred Shares are initially
issued.
"Common Shares" means the Class A Common Shares, par value $1.00 per share,
of the Corporation and all shares hereafter authorized of any class of Common
Shares of the Corporation, and, in the case of a reclassification,
recapitalization or other similar change in such Common Shares or in the case of
a consolidation or merger of the Corporation with or into another Person, such
consideration to which a holder of a share of Common Shares would have been
entitled upon the occurrence of such event. Common Shares shall not include the
Corporation's Class B Common Shares, par value $1.00 per share.
"Conversion Date" has the meaning set forth in Section H(2) hereof.
"Conversion Notice" has the meaning set forth in Section H(2) hereof.
"Conversion Price" has the meaning set forth in Section H(l) hereof.
"Default Redemption Amount" has the meaning set forth in Section F(4)
hereof.
"Default Redemption Notice" has the meaning set forth in Section F(4)
hereof.
"Delay Compensation" has the meaning set forth in Section 3(f) of the
Registration Rights Agreement.
"Delisting Payments" has the meaning set forth in Section 4.5 of the
Securities Purchase Agreement.
"Dividend Payment Date" has the meaning set forth in Section C(l) hereof.
"DTC" has the meaning set forth in Section H(11) hereof.
"Fiscal Quarter" means a calendar quarter ended on March 31, June 30,
September 30 or December 31, as the case may be.
"Five Percent Limitation" has the meaning set forth in Section H(l) hereof.
"Illiquidity Payment" has the meaning set forth in Section C(l) hereof.
"Initial Closing Cap Amount" has the meaning set forth in Section H(l)
hereof.
"Initial Conversion Price" means $12.50 (subject to adjustment pursuant to
Section H(4) hereof).
"Late Registration Payments" has the meaning set forth in Section 2(b) of
the Registration Rights Agreement.
"Junior Stock" means Common Shares and any other class or series of Capital
Stock of the Corporation now or hereafter issued and outstanding that ranks
junior as to dividends and/or liquidation to the Preferred Shares.
"Mandatory Redemption Price'; has the meaning set forth in Section F(2)
hereof.
"Market Value" as of any date means the average Closing Bid Price of Common
Shares for the ten consecutive Trading Days ending on the date prior to such
date.
"Maturity Date" means the third anniversary date of the Closing Date,
provided, however, that such original Maturity Date shall be extended by a
number of Trading Days equal to the aggregate number of Trading Days during the
period from March 1, 1998 to and including the original Maturity Date during
which the holders of Preferred Stock are restricted from selling Common Shares
by reason of (x) Section 2(d) of the Registration Rights Agreement, (y) any
Delay Period(s) (as defined in Section 3(f) of the Registration Rights
Agreement), but only if the total number of days in any Delay Period(s) within a
twelve-month period exceed thirty (30) days, or (z) any Redemption Event.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Permanent Cap Amount" has the meaning set forth in Section H hereof.
"Person" means an individual, a corporation, a partnership, a joint
venture, an association, a joint-stock company, a trust, a business trust, a
government or any agency or any political subdivision, any unincorporated
organization, or any other entity.
"Preferred Shares" means the Convertible Preferred Shares, Series A.
"Purchase Price" shall mean $1,000 per Preferred Share.
"Redemption Date" means any date on which shares of Preferred Shares are to
be redeemed pursuant to Section F hereof.
"Redemption Event" means any one of the following:
(i) the Common Shares (including any of the Common Shares issuable upon
conversion of the Preferred Shares or required from time to time to be reserved
pursuant to this Certificate of Amendment) are suspended from trading on, or are
not listed (and authorized) for trading on, the NASDAQ Small Cap Market, the
NASDAQ National Market System, the American Stock Exchange, or the New York
Stock Exchange for an aggregate of thirty (30) Trading Days in any eighteen (18)
month period;
(ii) the Company fails: (x) to cause the registration statement required
pursuant to Section 2(a) of the Registration Rights Agreement to be declared
effective on or before the one hundred eightieth (180th) day following Closing
in a manner which would allow the sale of all Registrable Securities (as defined
in the Registration Rights Agreement) to the fullest extent permitted under
Section 2(a) of the Registration Rights Agreement; or (y) to cause the holders
of Preferred Shares to be able to utilize such registration statement for the
resale of all of their Registrable Securities (as defined in the Registration
Rights Agreement), unless the Company is using its best efforts to remedy such
inability to utilize such registration statement, subject to the Company's Board
of Directors having determined in their good faith business judgment by
resolution that the continued effectiveness of such registration statement would
have a material adverse effect on the Company's ability to consummate a
financing, acquisition, merger or joint venture, the failure of which to
consummate would have a material adverse effect on the Company's financial
condition, results of operations or future prospects; provided that in no event
shall such failure described in this clause (y) exist for a total of more than
thirty (30) Trading Days in any eighteen (18) month period;
(iii) The Company fails to (x) issue Common Shares to a holder of the
Preferred Shares upon exercise by the holder of its conversion rights in
accordance with the terms of this Certificate of Amendment; (y) transfer or to
cause its transfer agent to transfer any certificate for Common Shares issued to
a holder upon conversion of the Preferred Shares as and when required by this
Certificate of Amendment or the Registration Rights Agreement; or (z) remove any
restrictive legend on any certificate for any Common Shares issued to a holder
of the Preferred Shares upon conversion of the Preferred Shares as and when
required by this Certificate of Amendment, the Securities Purchase Agreement or
the Registration Rights Agreement; and any such failure described above shall
continue uncured for ten (10) Business Days; or
(iv)The Corporation fails to pay to a holder of Preferred Shares any
amounts due hereunder or pursuant to the Securities Purchase Agreement or
Registration Rights Agreement (including but not limited to dividends and
Illiquidity Payments, Conversion Default Payments, Late Registration Payments
and Delay Compensation thereon) when due and any such failure shall continue
uncured (after written notice and demand to cure from the holder of Preferred
Shares) for ten (10) Business Days.
"Redemption Price" means the Optional Redemption Price, the Mandatory
Redemption Price or the Default Redemption Price, as the case may be, each of
which terms shall have the respective meanings set forth in Section F hereof.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Closing Date between the Corporation and the initial purchasers
of the Preferred Shares, a copy of which will be on file in the offices of the
Corporation and available for inspection by shareholders of the Corporation.
"Rule 4460 Amount" has the meaning set forth in Section H(l) hereof.
"Second Closing" has the meaning set forth in Section 1.1 of the Securities
Purchase Agreement.
"Securities Purchase Agreement" means the Securities Purchase Agreement
dated as of the Closing Date between the Corporation and the initial purchasers
of the Preferred Shares, a copy of which will be on file in the offices of the
Corporation and available for inspection by shareholders of the Corporation.
"Shareholder Approval" has the meaning set forth in Section 4.8 of the
Securities Purchase Agreement.
"Trading Day" means, with respect to the Common Shares: (i) if any series
of Common Shares is quoted on the NASDAQ National Market System, any similar
system of automated dissemination of quotations of securities prices, or the
National Quotation Bureau Incorporated, each day on which quotations may be made
on such system; or (ii) if any series of Common Shares is listed or admitted for
trading on any national securities exchange, days on which such national
securities exchange is open for business; or (iii) if the Corporation's Common
Shares are not quoted on any system or listed or admitted for trading on any
securities exchange, a Business Day.
"Underwriter's Lock-Up" has the meaning set forth in Section 2(d) of the
Registration Rights Agreement.
"Variable Conversion Price" means the Weighted Average Price of Common
Shares for any two Trading Days selected by a holder in the twenty (20)
consecutive Trading Day period ending on the day prior to the day a holder of
Preferred Shares delivers a Conversion Notice or Default Redemption Notice
(subject to equitable adjustment for events during such Trading Day period of
the nature described in Section H(4)), provided, however, that a holder may not
select the Trading Day on which the lowest Weighted Average Price of the Common
Shares in the twenty (20) consecutive Trading Day period was reported.
"Weighted Average Price" means for any security for any date or dates, the
volume weighted average price of such security on the principal securities
exchange or trading market where such security is listed or traded, as reported
at the close of normal trading hours, New York time, by Bloomberg Financial
Markets or a comparable reporting service of national reputation selected by the
Corporation and reasonably acceptable to holders of the Preferred Shares then
holding a majority of the then outstanding Preferred Shares ("Majority Holders")
if Bloomberg Financial Markets is not then reporting volume weighted average
prices of such security (collectively, "Bloomberg"), or if the foregoing does
not apply, the last reported sale price of such security in the over-the-counter
market on the electronic bulletin board of such security as reported by
Bloomberg, or, if no sale price is reported for such security by Bloomberg, the
average of the bid prices of any market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc. If the Weighted Average
Price cannot be calculated for such security for such date or dates on any of
the foregoing bases, the Weighted Average Price of such security for such date
or dates shall be the fair market value as reasonably determined by an
investment banking firm selected by the Corporation and reasonably acceptable to
the Majority Holders, with the costs of such appraisal to be borne by the
Corporation.
C. Dividends and Certain Other Payments. The holders of the Preferred
Shares shall be entitled to receive, when and as declared by the Board of
Directors, out of funds legally available therefor, dividends and certain other
payments as set forth in this Section C.
(1) If (i) the Closing Bid Price of the Corporation's Common Shares is less
than $8.00 per share (adjusted for events of the nature described in Section
H(4)(i)) for ten (10) consecutive Trading Days during any Fiscal Quarter, the
holders of the Preferred Shares shall be entitled to receive dividends at a rate
of $20.00 per share for such entire Fiscal Quarter, or (ii) the number of Common
Shares issued upon conversion of Preferred Shares by a holder equals, prior to
the Second Closing, the Initial Closing Cap Amount with respect to that holder
and, after the Second Closing, the Permanent Cap Amount with respect to that
holder, or a holder of Preferred Shares is subject to an Underwriter's Lock-Up,
that holder (but not any other holder) shall be entitled to receive a payment
(an "Illiquidity Payment") at the rate of $20.00 per Preferred Share for each
Fiscal Quarter in which such event occurs or is continuing. Dividends and
Illiquidity Payments shall be payable at the option of the Board of Directors
(x) in cash, or (y) provided Shareholder Approval has been obtained, and further
provided that this Certificate of Amendment or the Corporation's Certificate of
Incorporation shall have been appropriately amended, solely to the extent
necessary to increase the number of Preferred Shares authorized so as to make
sufficient Preferred Shares available for issuance pursuant to this Section
C(l), in a number of Preferred Shares (which may include fractional Preferred
Shares) equal to the product of (A) the cash amount of such quarterly dividend
or Illiquidity Payment, as the case may be, multiplied by (B) 1.25, divided by
(C) the Purchase Price per Preferred Share.
(2) The holders of Preferred Shares shall be entitled to participate with
the holders of Common Shares in any dividends paid or set aside for payment with
respect to the Common Shares so that the holders of Preferred Shares shall
receive with respect to each Preferred Share an amount equal to (x) the dividend
payable with respect to each Common Share multiplied by (y) the number of Common
Shares (and fraction of a Common Share, if any) into which such Preferred Share
is convertible as of the record date for such dividend.
(3) Dividends and Illiquidity Payments shall accrue (whether or not
declared) from and including the first day of the relevant Fiscal Quarter to and
including the date on which the Redemption Price is paid on such shares or on
which such shares are converted or redeemed and, to the extent not paid for any
relevant Fiscal Quarter, will be cumulative. Dividends and Illiquidity Payments
on the Preferred Shares, to the extent payable, shall be payable quarterly, in
arrears, on the last day of each relevant Fiscal Quarter (each such date, a
"Dividend Payment Date"), except that if any such date is not a Business Day,
then such dividend or Illiquidity Payment shall be paid on the next succeeding
Business Day. Each such dividend or Illiquidity Payment shall be payable to
holders of Preferred Shares at the close of business on the Dividend Payment
Date. Dividends on the Preferred Shares shall accrue on a daily basis during the
relevant quarterly period whether or not the Corporation shall have earnings or
surplus at the time.
D. Voting Rights. The holders of Preferred Shares shall have the following
voting rights:
(1) Each holder of Preferred Shares shall be entitled to such number of
votes for the Preferred Shares held by him on all matters submitted to a vote of
the Corporation's shareholders as shall be equal to the largest number of whole
Common Shares into which all of his Preferred Shares are then convertible (after
giving effect, and subject to, the Five Percent Limitation, the Permanent Cap
Amount, and any other then applicable limitations set forth in Section (H)(1));
(2) Except as otherwise provided herein or by law, the holders of Preferred
Shares and the holders of Common Shares shall vote together as one class on all
matters submitted to a vote of the Corporation's shareholders.
(3) So long as any Preferred Shares are outstanding, the Corporation shall
not, without first obtaining the approval of the holders of two-thirds of the
Preferred Shares:
(i) alter or change the rights, preferences or privileges of the Preferred
Shares;
(ii) issue any other class or series of Capital Stock having rights upon
liquidation or rights as to dividends which are senior to or pari passu with the
rights of the holders of Preferred Shares; or
(iii) issue any additional Preferred Shares in excess of the 19,000
Preferred Shares authorized hereunder, other than any additional Preferred
Shares which may be issued pursuant to Section C(l) hereof.
E. Liquidation Preference. In the event of any liquidation, dissolution, or
winding up of the Corporation, either voluntary or involuntary, after the
payment or the setting apart of payment to the holders of any class or series of
Capital Stock of the Corporation hereafter issued and outstanding that ranks
senior as to dividends and/or liquidation to the Preferred Shares, the holders
of Preferred Shares shall be entitled to receive out of assets of the
Corporation available for distribution to shareholders, an amount equal to the
Mandatory Redemption Price of such shares, before any payment shall be made or
any assets distributed to the holders of Junior Stock. If the assets and funds
to be distributed to the holders of the Preferred Shares, and the holders of any
other Capital Stock ranking pari passu with the Preferred Shares, shall be
insufficient to permit the payment to all such holders of their full
preferential amount, the assets and funds legally available shall be distributed
ratably, among the holders of such other Capital Stock ranking pari passu with
the Preferred Shares, in proportion to the full preferential amount each such
holder is otherwise entitled to receive. Neither the consolidation or merger of
the Corporation with or into any other entity nor the sale or transfer by the
Corporation of all or substantially all of its assets shall, for the purposes
hereof, be deemed to be a liquidation, dissolution or winding up of the
Corporation.
F. Redemption.
(1) Optional Redemption by the Company. While a Registration Statement (as
defined in the Registration Rights Agreement) is effective with respect to the
Common Shares issuable on conversion of the Preferred Shares and so long as no
Redemption Event has occurred and is continuing, the Corporation may, at its
option at (i) any time within 45 days prior to or 15 days after the commencement
of a firm commitment public offering of its equity securities, or (ii) at any
time or from time to time after the first anniversary date of the Closing Date,
redeem for cash, out of funds legally available therefor, all or any part of
(but not less than 1,900 Preferred Shares in any single redemption) of the
outstanding Preferred Shares at a price per Preferred Share equal to the greater
of (x) 130% of the then applicable Mandatory Redemption Price per Preferred
Share or (y) the sum of (A) the then applicable Mandatory Redemption Price per
Preferred Share, plus (B) the difference between (I) the Market Value of the
Common Shares into which each Preferred Share is convertible on the Redemption
Date and (II) the Closing Bid Price of the Common Shares into which each
Preferred Share is convertible on the Redemption Date (the "Optional Redemption
Price").
(2) Mandatory Redemption by the Company. The Corporation shall redeem all
outstanding Preferred Shares on the Maturity Date at a price per share equal to
the sum of (x) the Purchase Price, (y) any accrued and unpaid dividends thereon
through the date of final distribution to shareholders, whether or not declared,
and any Illiquidity Payments and Conversion Default Payments thereon, and (z)
any Late Registration Payments, Delay Compensation and Delisting Payments
thereon (collectively, the "Mandatory Redemption Price"). All Conversion Default
Payments, Late Registration Payments, Delay Compensation and Conversion Default
Payments shall be payable on the Maturity Date in cash, out of funds legally
available therefor. The balance of the Mandatory Redemption Price (the
"Remaining Redemption Amount") shall be payable on the Maturity Date at the
option of the Board of Directors (x) in cash, out of funds legally available
therefor; or (y) while a Registration Statement (as defined in the Registration
Rights Agreement) is effective with respect to the Common Shares issuable on
redemption of the Preferred Shares, in Common Shares having an aggregate Market
Value on the Maturity Date equal to (A) the Remaining Redemption Amount
multiplied by (B) 1.25.
(3) Procedures for Redemption by the Company.
(i) At least 30 days (45 days if the Redemption Price is to be paid in
Common Shares) but not more than 60 days before the applicable Redemption Date,
the Corporation or its transfer agent shall mail a notice of redemption by
first-class mail postage prepaid to each holder of Preferred Shares, addressed
to such holders at their last addresses shown on the stock transfer books of the
Corporation. Such notice shall indicate that Preferred Shares are to be redeemed
and shall, among other things, state:
(a) the Redemption Date;
(b) the number of Preferred Shares being redeemed;
(c) the Optional Redemption Price or Mandatory Redemption Price, as the
case may be, including the amount of unpaid dividends, Illiquidity Payments,
Conversion Default Payments, Late Registration Payments, Delay Compensation and
Delisting Payments with respect to such shares;
(d) that the Preferred Shares called for redemption must be surrendered to
the Corporation to collect the Redemption Price;
(e) that Preferred Shares called for redemption may be converted at any
time before the close of business on the first Business Day preceding the
Redemption Date.
Failure to give notice or any defect in the notice to any holder shall not
affect the validity of the notice given to any other holder.
(ii) As long as the Corporation has complied with the requirements set
forth in this Section F, from and after the applicable Redemption Date,
dividends on, and Illiquidity Payments, Conversion Default Payments, Late
Registration Payments, Delay Compensation and Delisting Payments with respect to
the shares of Preferred Shares so called for redemption shall cease to accrue as
of the applicable Redemption Date, such shares shall be canceled and shall no
longer be deemed to be outstanding, and all rights of the holders thereof as
shareholders of the Corporation (except the right to receive from the
Corporation the Redemption Price) shall cease.
(4) Optional Redemption By Holder. (i) Upon the occurrence of a Redemption
Event, each holder of Preferred Shares shall have the right to elect at any time
and from time to time by delivery of a Default Redemption Notice (as defined
herein) to the Corporation while such Redemption Event continues, to require the
Corporation to purchase for cash, out of funds legally available therefor, for
an amount per share equal to the Default Redemption Amount (as defined herein),
any or all of the then outstanding shares of Preferred Shares held by such
Holder. The "Default Redemption Amount" with respect to each Preferred Share
means an amount equal to the greater of (i) 1.25 times the then effective
Mandatory Redemption Price per share of each Preferred Share for which a demand
for redemption is being made or (ii) (x) the then effective Mandatory Redemption
Price of each Preferred Share for which a demand for redemption is being made,
divided by (y) the then effective Conversion Price, multiplied by (z) the Market
Value of the Common Shares.
(ii)If the Corporation fails to pay any holder the Default Redemption
Amount with respect to any Preferred Shares within five (5) Business Days of its
receipt of a notice requiring such redemption (a "Default Redemption Notice"),
then the holder delivering such Default Redemption Notice shall be entitled to
interest on the Default Redemption Amount at a per annum rate equal to the lower
of (x) the sum of prime rate published from time to time by the Wall Street
Journal plus five percent (5%) and (y) the highest interest rate permitted by
applicable law from the date of the Default Redemption Notice until the date of
redemption hereunder. In the event the Corporation is not able to redeem all of
the shares of Preferred Shares subject to Default Redemption Notices because of
insufficient shareholders equity, restrictions under applicable law or pursuant
to agreements, or lack of cash, the Corporation shall redeem shares of Preferred
Shares from each holder, to the maximum extent, pro rata, based on the total
number of shares of Preferred Shares included by such holder in the Default
Redemption Notice relative to the total number of shares of Preferred Shares in
all of the Default Redemption Notices.
G. Consolidation, Merger and Sale of Assets, etc. The Corporation shall not
consolidate with or merge into, or transfer all or substantially all of its
assets to, another Person unless (i) in the case of a merger or consolidation,
the Corporation is the surviving entity and the rights and preferences of the
Preferred Shares are not modified, or (ii) (A) the surviving, resulting or
acquiring Person is a Person organized under the laws of the United States, any
state thereof or the District of Columbia, or a Person organized under the laws
of a foreign jurisdiction whose equity securities are listed on a national
securities exchange in the United States or authorized for quotation on NASDAQ,
and (B) the Corporation shall make effective provision such that, upon
consummation of such transaction, the holders of Preferred Shares shall receive
preferred stock of the surviving entity having substantially identical terms and
registration rights as the Preferred Shares.
H. Conversion of Preferred Shares.
(1) Right of Conversion of Preferred Shares. Each Preferred Share shall be
convertible at the option of the holder thereof, at any time or from time to
time after the Closing Date, into a number of fully paid and nonassessable
Common Shares equal to (x) the then applicable Mandatory Redemption Price of
such Preferred Share, divided by (y) the lesser of (A) the Variable Conversion
Price as of the Conversion Date or (B) 130% of the Initial Conversion Price (the
"Conversion Price"); provided, however, that:
(I) in no event shall the aggregate number of Common Shares issuable upon
conversion of all of the Preferred Shares exceed (except at the option of the
Company by reason of a Mandatory Redemption by the Company on the Maturity Date
or at the option of the Company by reason of the issuance of Common Shares upon
conversion of Preferred Shares issued at any time or from time to time in
payment of accrued and unpaid dividends or Illiquidity Payments):
(x) prior to the Second Closing, 1,500,000 Common Shares (the "Initial
Closing Cap Amount"), and
(y) after the Second Closing, 3,040,000 Common Shares (the "Permanent Cap
Amount");
(II) in no event shall any issuance by the Company of Common Shares in payment
of dividends, Illiquidity Payments or any other amounts payable pursuant to this
Certificate of Amendment reduce the aggregate number of Common Shares issuable
upon conversion of the Preferred Shares to less than:
(x) prior to the Second Closing, the Initial Closing Cap Amount, and
(y) after the Second Closing, the Permanent Cap Amount;
(III) for so long as the Common Shares are listed on NASDAQ, the American Stock
Exchange or the New York Stock Exchange (or any other exchange or quotation
system with a rule in effect similar to NASDAQ Rule 4460(i)(D) as in effect on
the Closing Date), prior to obtaining Shareholder Approval, in no event shall
the aggregate number of Common Shares issued upon conversion of the Preferred
Shares or otherwise issued by the Company pursuant to this Certificate of
Amendment exceed 1,528,789 Common Shares (the "Rule 4460 Amount"); and
(IV) in no event shall any holder of Preferred Shares be entitled to receive
Common Shares upon a conversion to the extent that the sum of (x) the number of
Common Shares beneficially owned by that holder and its affiliates (exclusive of
shares issuable upon conversion of the unconverted portion of any Preferred
Shares or the unexercised or unconverted portion of any other securities of the
Corporation subject to a limitation on conversion or exercise analogous to the
limitations contained herein) and (y) the number of Common Shares issuable upon
the conversion of the Preferred Shares with respect to which the determination
of this subclause is being made, would result in beneficial ownership by the
holder and its affiliates of more than 4.9% of the outstanding Common Shares
(the "Five Percent Limitation"), and for purposes of this subclause, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder, except as
otherwise provided in clause (x) above. To the extent the Five Percent
Limitation applies, the determination of whether Preferred Shares shall be
convertible (vis-a-vis other securities owned by a holder) shall be in the sole
discretion of the holder and submission of a Conversion Notice shall be deemed
to be the holder's determination of whether the Preferred Shares are convertible
in whole or in part, subject to such aggregate Five Percent Limitation. No prior
inability to convert the Preferred Shares pursuant to this clause shall have any
effect on the applicability of the provisions of this clause with respect to any
subsequent determination of ability to convert. The provisions of this clause
may be amended and/or implemented in a manner otherwise than in strict
conformity with the terms of this clause with the approval of the Board of
Directors of the Company and the affected Holder; the provisions of this clause
may be waived by the affected holder upon ninety (90) days prior written notice
from such holder to the Company. The limitations contained in this clause shall
apply to a successor holder concurrently with its acquisition of such Preferred
Shares, such election to be promptly confirmed in writing to the Company
(provided no transfers to a successor holder or holders shall be used by a
holder to evade the limitations contained herein).
The Initial Closing Cap Amount or if applicable, the Permanent Cap Amount,
shall be allocated among the holders of Preferred Shares in the same proportion
as the number of Preferred Shares initially held by each holder bears to the
aggregate number of outstanding Preferred Shares. Each increase to the Initial
Closing Cap Amount or Permanent Cap Amount shall be allocated pro rata among the
holders based on the number of Preferred Shares held by each holder at the time
of the increase in the Initial Closing Cap Amount or Permanent Cap Amount. In
the event a holder shall sell or otherwise transfer any of such holder's
Preferred Shares, each transferee shall be allocated a pro rata portion of such
transferor's Initial Closing Cap Amount or Permanent Cap Amount. Any portion of
the Initial Closing Cap Amount or Permanent Cap Amount which remains allocated
to any Person which does not hold any Preferred Shares shall be allocated among
the remaining holders, pro rata based on the number of Preferred Shares then
held by such holders.
(2) Conversion Procedures. In order to exercise the conversion privilege,
the holder of any Preferred Shares to be converted in whole or in part shall
give written notice to the Corporation ("Conversion Notice") by confirmed
facsimile, courier delivery (with receipt acknowledged), personal delivery, or
registered or certified mail (with receipt acknowledged) that the holder elects
to convert such shares or the portion thereof specified in said notice into
shares of Common Shares and shall, within five (5) Business Days thereafter,
surrender the certificate or certificates evidencing such shares to the
Corporation. The Conversion Notice shall specify the effective date of such
conversion, which shall be no earlier than the date of receipt and no later than
30 days following receipt, and shall also state the name or names (with address)
in which the certificates for Common Shares which shall be issuable upon such
conversion shall be issued. Each certificate evidencing Preferred Shares
surrendered for conversion shall, unless the shares issuable on conversion are
to be issued in the same name as the registration of such Preferred Shares, be
duly endorsed by, or be accompanied by instruments of transfer in form
satisfactory to the Corporation duly executed by, such holder or its duly
authorized attorney.
Within three (3) Business Days after receipt of a Conversion Notice, but
not prior to the specified effective date of conversion, and following (and in
no event prior to) surrender of the certificate or certificates evidencing the
Preferred Shares relating thereto, the Corporation shall issue and deliver to
such holder (or upon the written order of such holder) a certificate or
certificates for the number of full Common Shares issuable upon the conversion
of such Preferred Shares or portion thereof in accordance with the provisions of
this Section H, and a check or cash in respect of any fractional Common Shares
issuable upon such conversion, as provided in Section H (3). If the Corporation
fails to issue certificates upon any such conversion of Preferred Shares, the
Corporation shall pay to any holders of such converted Preferred Shares an
amount equal to (i) 1% of the Conversion Price per day multiplied by the number
of Common Shares issuable upon conversion of the Preferred Shares subject to the
applicable Conversion Notice for the first 30 days after the scheduled delivery
date of such certificates, and (ii) thereafter, 2% of the Conversion Price per
day multiplied by the number of Common Shares issuable upon conversion of the
Preferred Shares subject to the applicable Conversion Notice ("Conversion
Default Payments"). Notwithstanding the foregoing, if the Corporation's failure
to issue such certificates is a result of an error made by its transfer agent,
such amount shall not accrue until after the third day following the scheduled
delivery date of such certificate. In the event that less than all the Preferred
Shares represented by a certificate are to be converted, the Corporation shall
issue and deliver or cause to be issued and delivered to (or upon the written
order of) the holder of the Preferred Shares so surrendered, without charge to
such holder, a new certificate or certificates representing a number of
Preferred Shares equal to the unconverted portion of the surrendered
certificate.
Each conversion shall be deemed to have been effected as of the date (the
"Conversion Date") specified in the applicable Conversion Notice, or if no date
is specified, as of the date on which a Conversion Notice with respect to
Preferred Shares shall have been received by the Corporation by facsimile or
otherwise, as described above, but only if the certificate or certificates
evidencing Preferred Shares shall have been surrendered to the Corporation or
its transfer agent within five (5) Business Days after receipt of the Conversion
Notice relating thereto and, if such certificate or certificates shall not have
been surrendered within such time period, such Conversion Notice shall be
ineffective and void ab initio. Any Person in whose name any certificate or
certificates for Common Shares shall be issuable upon conversion shall be deemed
to have become the holder of record of the shares represented thereby on the
Conversion Date; provided, however, that the receipt of a Conversion Notice on
any date when the share transfer books of the Corporation shall be closed shall
constitute the Person in whose name the certificates are to be issued as the
record holder thereof for all purposes on the next succeeding day on which such
share transfer books are open, but such conversion shall be at the Conversion
Rate in effect on the Conversion Date.
Except as otherwise provided in this Section H, no payment or adjustment
will be made for dividends or other distributions with respect to any Common
Shares issuable upon conversion of Preferred Shares as provided herein. Full
payment shall be made by the Corporation to any holder of Preferred Shares
surrendered for conversion in respect of dividends accrued since the last
preceding Dividend Payment Date on the Preferred Shares surrendered for
conversion; the dividend due on such Dividend Payment Date shall be payable with
respect to such Preferred Shares notwithstanding such conversion, and such
dividend (whether or not punctually paid or duly provided for) shall be paid to
the holder of such shares as of the close of business on such record date.
(3) Cash Payments in Lieu of Fractional Shares. No fractional Common Shares
or scrip representing fractional shares shall be issued upon conversion of
Preferred Shares. If any fractional Common Share would, but for this Section H,
be issuable upon the conversion of any Preferred Shares, the Corporation shall
make a payment therefor in cash on the third Business Day immediately following
the Conversion Date equal to the Conversion Price of such fractional share.
(4) Adjustment of Conversion Privileges. The Initial Conversion Price and,
if any such event shall take place during a twenty (20) consecutive Trading Day
calculation period, the Variable Conversion Price, shall be adjusted from time
to time by the Corporation as follows:
(i) In case the Corporation shall (A) declare a dividend, or make a
distribution, in shares of any series of its Common Shares, on any series of its
Common Shares, (B) subdivide or reclassify any series of its outstanding Common
Shares into a greater number of shares, (C) combine any series of its
outstanding Common Shares into a smaller number of shares, (D) pay a dividend or
make a distribution on any series of its Common Shares in shares of any series
of its Capital Stock other than Common Shares, or (E) issue by reclassification
of any series of its Common Shares of any series of its Capital Stock, the
conversion privilege and the Conversion Price in effect immediately prior
thereto shall be adjusted so that the holder of any shares of Preferred Shares
thereafter surrendered for conversion shall be entitled to receive the number of
Common Shares or other Capital Stock of the Corporation which such holder would
have owned or have been entitled to receive after the happening of any of the
events described above had such Preferred Shares been converted immediately
prior to the happening of such event. An adjustment made pursuant to this
Section H(4) shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event referred to above
shall occur. In the event such dividend, distribution, subdivision,
reclassification or combination is not so made, the conversion privilege then in
effect shall be readjusted to the conversion privilege which would then be in
effect if such dividend, distribution, subdivision, reclassification or
combination had not been declared or made, but such readjustment shall not
affect the number of Common Shares or other Capital Stock delivered upon any
conversion prior to the date such readjustment is made.
(ii) In case the Corporation shall distribute to all holders of any series
of its Common Shares any of its assets or debt securities, or rights, options,
warrants or convertible or exchangeable securities of the Corporation (including
securities for cash, but excluding distributions of Capital Stock referred to in
Section H(4)(i) above, if the adjustment to the Conversion Price under that
Section would be greater than an adjustment under this Section), then in each
such case, the Conversion Price shall be adjusted to equal the Conversion Price
in effect immediately prior to such distribution less an amount equal to the
then fair market value (as reasonably determined by the Board of Directors, in
good faith and as described in a resolution of the Board of Directors) of the
portion of the assets or debt securities of the Corporation so distributed or of
such rights, options, warrants or convertible or exchangeable securities
applicable to one share of Common Shares. Such adjustment shall become effective
immediately after the record date for the determination of shares entitled to
receive such distribution. Notwithstanding the foregoing, no adjustment of the
Conversion Price shall be made upon the distribution to holders of any series of
Common Shares of such rights, options, warrants, convertible securities, assets
or debt securities if the plan or arrangement under which such rights, options,
warrants, convertible securities, assets or debt securities are issued provides
for their issuance to holders of shares of Preferred Shares in the same pro rata
amounts upon conversion thereof. Such adjustment shall be made successively
whenever any event listed above shall occur.
(iii) Anything in this Section H(4) to the contrary notwithstanding, the
Corporation shall be entitled to make such reductions in the Conversion Price,
in addition to those required by this Section H(4), as it in its reasonable
discretion shall determine to be advisable in order that any stock dividends,
subdivision of shares, distribution of rights to purchase stock or securities,
or distribution of securities convertible into or exchangeable for stock
hereafter made by the Corporation to its shareholders, shall not be taxable.
(iv) Whenever the Conversion Price is adjusted as provided in this Section
H(4), or the Preferred Shares becomes convertible into shares of stock,
securities, property or assets pursuant to Section H(5) below, or the
Corporation reduces the Conversion Price pursuant to Section H(6) below, the
Corporation shall prepare a notice of such adjustment of the Conversion Price
setting forth the adjusted Conversion Price and the date on which such
adjustment becomes effective, and setting forth in reasonable detail the facts
requiring such adjustment and the calculation of such adjustment, and shall mail
such notice of adjustment to all holders of Preferred Shares at their last
addresses appearing on the share transfer books of the Corporation.
(v) In any case in which this Section H(4) provides that an adjustment
shall become effective immediately after a record date for an event, the
Corporation may defer until the occurrence of such event (i) issuing to the
holder of any Preferred Shares converted after such record date and before the
occurrence of such event the additional Common Shares issuable upon such
conversion by reason of the adjustment required by such event over and above the
Common Shares issuable upon such conversion before giving effect to such
adjustment, and (ii) paying to such holder any amount in cash in lieu of any
fractional Common Share pursuant to Section H(3).
(vi)For purposes of any computations pursuant to this Section H(4),
respecting consideration received, the following shall apply:
(a) in the case of the issuance of shares of Capital Stock for cash, the
consideration shall be the amount of such cash, provided that in no case shall
any deduction be made for any commissions, discounts or other expenses incurred
by the Corporation for any underwriting of the issue or otherwise in connection
therewith;
(b) in the case of the issuance of shares of Capital Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof as reasonably
determined in good faith by the Board of Directors or a duly authorized
committee thereof (irrespective of the accounting treatment thereof), and
described in a resolution of the Board of Directors or such committee; and
(c) in the case of the issuance of securities convertible into or
exchangeable or exercisable for shares of Capital Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Corporation for the issuance of such securities plus the additional
minimum consideration, if any, to be received by the Corporation upon the
conversion or exchange thereof (the consideration in each case to be determined
in the same manner as provided in clauses (a) and (b) of this Section).
(vii) If after an adjustment a holder of Preferred Shares may, upon
conversion of such security, receive shares of two or more classes of Capital
Stock of the Corporation, the Corporation shall determine on a fair basis the
allocation of the adjusted Conversion Price between the classes of Capital
Stock. After such allocation, the conversion privilege and the Conversion Price
of each class of Capital Stock shall thereafter be subject to adjustment on
terms comparable to those applicable to Common Shares in this Section H.
(viii) In no event shall an adjustment pursuant to this Section H(4) or any
other provision of this Certificate of Amendment reduce the Conversion Price
below the then par value, if any, of the Common Shares issuable upon conversion
of Preferred Shares.
(5) Effect of Reclassification, Consolidation, Merger or Sale. If any of
the following events occur, namely (i) any reclassification or change of
outstanding Common Shares issuable upon conversion of Preferred Shares (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), (ii) any
consolidation or merger of the Corporation with another Person shall be effected
as a result of which holders of Common Shares issuable upon conversion of
Preferred Shares shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Shares, or (iii) any sale or conveyance of the properties and assets of
the Corporation as, or substantially as, an entirety to any other Person, but in
no event including a sale of the Company's Government Technology Division, then
the Corporation or such successor or purchasing Person, as the case may be,
shall make provisions in its certificate or articles of incorporation or other
constituent documents to establish that each Preferred Share then outstanding
shall be convertible into the kind and amount of shares of stock and other
securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of Common Shares issuable upon conversion of such Preferred Shares
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. Such provisions shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section H.
If this Section H(5) applies with respect to a transaction, Section H(4)
shall not apply with respect to that transaction. The above provisions of this
Section H(5) shall similarly apply to successive reclassifications,
consolidations, mergers and sales.
(6) Voluntary Adjustment. Subject to the Ownership Limitation, the
Corporation at any time may reduce the Initial Conversion Price by any amount
and for any period of time, provided that such period is not less than twenty
(20) Business Days. Whenever the Initial Conversion Price is reduced pursuant to
this Section 8(f), the Corporation shall mail to the Holders, a notice of the
reduction at least 15 days before the date the reduced Initial Conversion Price
takes effect and such notice shall state the reduced Initial Conversion Price
and the period it will be in effect.
(7) Taxes on Shares Issued. The issuance of share certificates upon
conversion or transfer of Preferred Shares shall be made without charge to the
converting holder for any tax in respect of the issuance thereof.
(8) Reservation of Shares; Shares to be Fully Paid; Compliance with
Governmental Requirements. The Corporation shall reserve, free from preemptive
rights, out of its authorized but unissued shares, or out of shares held in its
treasury, sufficient Common Shares to provide for the conversion at any time or
from time to time, and/or redemption at the Maturity Date at the then applicable
Mandatory Redemption Price, of all Preferred Shares from time to time
outstanding. The Corporation covenants that all Common Shares which may be
issued upon conversion of Preferred Shares will upon issuance be fully paid and
nonassessable by the Corporation and free from all taxes, liens and charges with
respect to the issuance thereof.
(9) Notice to Holders Prior to Certain Actions. In the event:
(i) that the Corporation shall take any action that would require an
adjustment in the Conversion Price pursuant to clauses (i), (ii) or (iii) of
Section H(4) above; or
(ii) that any event described in Section H(5) above shall occur; or
(iii) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation;
the Corporation shall cause notice of such proposed action or event to be mailed
to each holder of record of Preferred Shares at its address appearing on the
stock transfer books of the Corporation, as promptly as possible but in any
event at least thirty (30) days prior to the record date for such proposed
action or the effective date of such event; provided, however, that in the event
that the Corporation provides public notice of such proposed action or event
specifying the information set forth below at least ten (10) days prior to the
proposed record date or effective date, the Corporation shall be deemed to have
satisfied its obligation to provide notice pursuant to this Section H(9). In any
event, such notice shall specify (A) the date on which a record is to be taken
for the purpose of such action, or, if a record is not to be taken, the date as
of which the holders of record of Common Shares are to be determined, or (B) the
date on which such proposed event is expected to become effective, and the date
as of which it is expected that holders of record of Common Shares shall be
entitled to exchange their Common Shares for securities or other property
deliverable upon such event. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of such action or event.
(10) Conversion Disputes. In the case of any dispute with respect to a
conversion, the Corporation shall promptly issue such number of Common Shares as
are not disputed in accordance with Section H hereof. If such dispute involves
the calculation of the Conversion Price, the Corporation shall submit the
disputed calculations, and shall permit any holder to simultaneously submit its
data and views, to a "Big Six" independent accounting firm selected by the
Corporation via facsimile within two (2) business days of receipt of the
Conversion Notice. The accounting firm shall audit the calculations and notify
the Corporation and the holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accounting firm's
calculation shall be deemed conclusive, absent manifest error. The Company shall
then issue the appropriate number of Common Shares in accordance with Section
H(2) hereof.
(11) Electronic Transmission. In lieu of delivering physical certificates
representing the Common Shares issuable upon the conversion of Preferred Shares,
provided the Corporation's transfer agent is participating in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer program, upon the
written request of a holder who shall have previously instructed such holder's
prime broker to confirm such request to the Corporation's transfer agent, the
Corporation shall use its commercially reasonable efforts to cause its transfer
agent to electronically transmit the Common Shares issuable upon conversion to
the holder by crediting the account of holder's prime broker with DTC through
its Deposit Withdrawal Agent Commission "DWAC") system.
I. Transfers; Replacement of Certificates.
(1) Transfers. Subject to any restrictions on transfer under applicable
securities or other laws, Preferred Shares may be transferred on the books of
the Corporation by the surrender to the Corporation of the certificate therefor
properly endorsed or accompanied by a written assignment and power of attorney
properly executed, with transfer stamps (if necessary) affixed, and such proof
of the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
(2) Replacement of Certificates. If any mutilated certificate representing
Preferred Shares is surrendered to the Corporation, or if a holder claims the
certificate representing Preferred Shares has been lost, destroyed or willfully
taken, the Corporation shall issue a replacement certificate of like tenor and
date if (i) the holder provides an indemnity bond or other security sufficient,
in the reasonable judgment of the Corporation, to protect the Corporation and
any authenticating agent and any of their officers, directors, employees or
representatives from any loss which any of them may suffer if a certificate
representing Preferred Shares is replaced, and (ii) the holder satisfies any
other reasonable requirements of the Corporation.
J. Reacquired Shares. Any Preferred Shares which are converted, purchased,
redeemed or otherwise acquired by the Corporation, shall be retired and canceled
by the Corporation promptly thereafter. No such shares shall upon their
cancellation be reissued.
K. Substitution of Senior Subordinated Notes for Non-Convertible Preferred
Shares. From and after the issuance to a holder of Preferred Shares upon
conversion of Preferred Shares of a number of Common Shares equal to (1) prior
to the Second Closing, the Initial Closing Cap Amount with respect to that
holder, and (2) after the Second Closing, the Permanent Cap Amount with respect
to that holder, that holder shall have right, from and after that date, and
exercisable upon 90 days' prior written notice to the Corporation, to require
the Corporation to purchase all of the then outstanding shares of Preferred
Stock held by such holder for an amount per share equal to the Mandatory
Redemption Price, payable at the option of the Board of Directors (x) in cash,
or (y) by delivery of a senior subordinated promissory note of the Corporation
in the principal amount of the Mandatory Redemption Price in the form attached
hereto as Exhibit A. In the event the Corporation is not able to purchase all of
the Preferred Shares subject to such notices because of insufficient
shareholders equity, restrictions under applicable law or pursuant to
agreements, the Corporation shall purchase Preferred Shares from each holder who
has given such notice, to the maximum extent, pro rata, based on the total
number of Preferred Shares held by each holder who has given such notice
relative to the total number of Preferred Shares held by all holders who have
given such notices.
THIRD: That the Corporation's Restated Certificate of Incorporation is
amended so that the designation and number of shares of the Preferred Shares
acted upon in the foregoing resolution, and the relative rights, preferences and
limitations of such series, are as stated in the foregoing resolution.
FOURTH: This Certificate of Amendment shall become effective upon filing.
<PAGE>
IN WITNESS WHEREOF, Base Ten Systems, Inc. has caused its duly authorized
officer to execute this Certificate on this 4th day of December, 1997.
BASE TEN SYSTEMS, INC.
By:___________________________
Name: Thomas E. Gardner
Title: President and Chief Executive Officer
Attest:
By:____________________________
Name: Edward J. Klinsport
Title: Secretary
<PAGE>
Exhibit 99.4
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED OR SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS OR
UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
COMMON STOCK PURCHASE WARRANT CERTIFICATE
Dated: [ISSUANCE DATE] December 4, 1997
to Purchase 98,684 Shares of Common Stock of
BASE TEN SYSTEMS, INC.
BASE TEN SYSTEMS, INC., a New Jersey corporation (the "Company"), hereby
certifies that [NAME OF HOLDER]SOCIETE GENERALE, its permissible transferees,
designees, successors and assigns (collectively, the "Holder"), for value
received, is entitled to purchase from the Company at any time commencing on
December 4[ISSUANCE DATE], 1997 and terminating on March 1, 2001 up to Ninety
Eight Thousand Six Hundred Eighty Four (#98,684) shares (each a "Share" and
collectively the "Shares") of the Company's common stock (the "Common Stock"),
at an exercise price of [130% CLOSING PRICE]$16.25 per Share (the "Exercise
Price").
The number of Shares purchasable hereunder and the Exercise Price are subject to
adjustment as provided in Section 4 hereof.
1. Exercise of Warrants.
(a) Upon presentation and surrender of this Common Stock Purchase Warrant
Certificate ("Warrant Certificate" or "Certificate"), or Lost Certificate
Affidavit, accompanied by a completed Election to Purchase in the form attached
hereto as Exhibit A (the "Election to Purchase") duly executed, at the principal
office of the Company at One Electronics Drive, Trenton, NJ 08619, Attn: [NAME]
Mr. Alexander M. Adelson, together with a check payable to the Company in the
amount of the Exercise Price multiplied by the number of Shares being purchased,
the Company or the Company's Transfer Agent, as the case may be, shall, within
two (2) trading days of receipt of the foregoing, deliver to the Holder hereof,
certificates of fully paid and non-assessable Common Stock which in the
aggregate represent the number of Shares being purchased; provided, however,
that the Holder may elect, with the written consent of the Company which may be
granted or withheld in the Company's sole discretion (except that such consent
may not be withheld if the Shares being purchased are not then registered for
resale pursuant to an effective registration statement), to utilize the cashless
exercise provisions set forth below in lieu of tendering the Exercise Price in
cash. The certificates so delivered shall be in such denominations as may be
reasonably requested by the Holder and shall be registered in the name of the
Holder or such other name as shall be designated by the Holder. All or less than
all of the Warrants represented by this Certificate may be exercised and, in
case of the exercise of less than all, the Company, upon surrender hereof, will
at the Company's expense deliver to the Holder a new Warrant Certificate or
Certificates (in such denominations as may be requested by the Holder) of like
tenor and dated the date hereof entitling said holder to purchase the number of
Shares represented by this Certificate which have not been exercised and to
receive Registration Rights with respect to such Shares, and all other rights
with respect to the shares which the Holder has on the date hereof.
(b) Cashless Exercise. Notwithstanding the foregoing provision regarding
payment of the Exercise Price in cash, the Holder may elect, subject to the
provisions of Section l(a), to receive a reduced number of Shares in lieu of
tendering the Exercise Price in cash. In such case, the number of Shares to be
issued to the Holder shall be computed using the following formula:
X = Y(A-B)
A
where: X = the number of Shares to be issued to the Holder;
Y = the number of Shares to be exercised under this Warrant
Certificate;
A = the Market Value (defined below) of one share of Common Stock; and
B = the Exercise Price.
As used in this Section 1, "Market Value" refers to the Current Market Value of
the Common Stock on the day before the Election to Purchase and this Warrant
Certificate are duly surrendered to the Company for a full or partial exercise
hereof.
2. Exchange, Transfer and Replacement. (a) At any time prior to the
exercise hereof, this Certificate may be exchanged upon presentation and
surrender to the Company, alone or with other Certificates of like tenor of
different denominations registered in the name of the same Holder, for another
Certificate or Certificates of like tenor in the name of such Holder exercisable
for the aggregate number of Shares as the Certificate or Certificates
surrendered.
(b) Replacement of Warrant Certificate. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant Certificate and, in the case of any such loss, theft, or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company (collectively, a "Lost Certificate Affidavit"),
or, in the case of any such mutilation, upon surrender and cancellation of this
Warrant Certificate, the Company, at its expense, will execute and deliver in
lieu thereof, a new Warrant Certificate of like tenor.
(c) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
Certificate in connection with any transfer, exchange or replacement as provided
in this Section 2, this Warrant Certificate shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses (other than legal expenses, if any, incurred by the
Holder or transferees) and charges payable in connection with the preparation,
execution and delivery of Warrant Certificates pursuant to this Section 2.
(d) Warrant Register. The Company shall maintain, at its principal
executive offices (or at the offices of the transfer agent for the Warrant
Certificate or such other office or agency of the Company as it may designate by
notice to the holder hereof), a register for this Warrant Certificate (the
"Warrant Register"), in which the Company shall record the name and address of
the person in whose name this Warrant Certificate has been issued, as well as
the name and address of each permitted transferee and each prior owner of this
Warrant Certificate.
3. Rights and Obligations of Holders of this Certificate. The Holder of
this Certificate shall not, by virtue hereof, be entitled to any rights of a
stockholder in the Company, either at law or in equity; provided, however, that
in the event any certificate representing shares of Common Stock or other
securities is issued to the holder hereof upon exercise of some or all of the
Warrants, such holder shall, for all purposes, be deemed to have become the
holder of record of such Common Stock on the date on which this Certificate,
together with a duly executed Purchase Form, was surrendered and payment of the
aggregate Exercise Price was made, irrespective of the date of delivery of such
share certificate.
4. Adjustments.
(a) Stock Dividends, Reclassifications, Recapitalizations, Etc. In the
event the Company: (i) pays a dividend in Common Stock or makes a distribution
in Common Stock, (ii) subdivides its outstanding Common Stock into a greater
number of shares, (iii) combines its outstanding Common Stock into a smaller
number of shares or (iv) increases or decreases the number of shares of Common
Stock outstanding by reclassification of its Common Stock (including a
recapitalization in connection with a consolidation or merger in which the
Company is the continuing corporation), then (1) the Exercise Price on the
record date of such division or distribution or the effective date of such
action shall be adjusted by multiplying such Exercise Price by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately before such event and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event, and (2) the
number of shares of Common Stock for which this Warrant Certificate may be
exercised immediately before such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the Exercise Price immediately
before such event and the denominator of which is the Exercise Price immediately
after such event.
(b) Cash Dividends and Other Distributions. In the event that at any time
or from time to time the Company shall distribute to all holders of Common Stock
(i) any dividend or other distribution of cash, evidences of its indebtedness,
shares of its capital stock or any other properties or securities or (ii) any
options, warrants or other rights to subscribe for or purchase any of the
foregoing (other than in each case, (w) the issuance of any rights under a
shareholder rights plan, (x) any dividend or distribution described in Section
4(a), (y) any rights, options, warrants or securities described in Section 4(c)
and (z) any cash dividends or other cash distributions from current earnings),
then the number of shares of Common Stock issuable upon the exercise of each
Warrant Certificate shall be increased to a number determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrant
Certificate immediately prior to the record date for any such dividend or
distribution by a fraction, the numerator of which shall be such Current Market
Value (as hereinafter defined) per share of Common Stock on the record date for
such dividend or distribution, and the denominator of which shall be such
Current Market Value per share of Common Stock on the record date for such
dividend or distribution less the sum of (x) the amount of cash, if any,
distributed per share of Common Stock and (y) the fair value (as determined in
good faith by the Board of Directors of the Company, whose determination shall
be evidenced by a board resolution, a copy of which will be sent to the Holders
upon request) of the portion, if any, of the distribution applicable to one
share of Common Stock consisting of evidences of indebtedness, shares of stock,
securities, other property, warrants, options or subscription or purchase
rights; and the Exercise Price shall be adjusted to a number determined by
dividing the Exercise Price immediately prior to such record date by the above
fraction. Such adjustments shall be made whenever any distribution is made and
shall become effective as of the date of distribution, retroactive to the record
date for any such distribution. No adjustment shall be made pursuant to this
Section 4(b) which shall have the effect of decreasing the number of shares of
Common Stock issuable upon exercise of each Warrant Certificate or increasing
the Exercise Price.
(c) Rights Issue. In the event that at any time or from time to time the
Company shall issue rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock, or securities convertible into or
exchangeable or exercisable for Common Stock to all holders of Common Stock
(other than in connection with the adoption of a shareholder rights plan by the
Company) without any charge, entitling such holders to subscribe for or purchase
shares of Common Stock at a price per share that as of the record date for such
issuance is less than the then Current Market Value per share of Common Stock,
the number of shares of Common Stock issuable upon the exercise of each Warrant
Certificate shall be increased to a number determined by multiplying the number
of shares of Common Stock theretofore issuable upon exercise of each Warrant
Certificate by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding on the date of issuance of such rights, options,
warrant or securities plus the number of additional shares of Common Stock
offered for subscription or purchase or into or for which such securities that
are issued are convertible, exchangeable or exercisable, and the denominator of
which shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, option, warrants or securities plus the total number of
shares of Common Stock which the aggregate consideration expected to be received
by the Company (assuming the exercise or conversion of all such rights, options,
warrants or securities) would purchase at the then Current Market Value per
share of Common Stock. In the event of any such adjustment, the Exercise Price
shall be adjusted to a number determined by dividing the Exercise price
immediately prior to such date of issuance by the aforementioned fraction. Such
adjustment shall be made immediately after such rights, options or warrants are
issued and shall become effective, retroactive to the record date for the
determination of stockholders entitled to receive such rights, options, warrants
or securities. No adjustment shall be made pursuant to this Section 4(c) which
shall have the effect of decreasing the number of shares of Common Stock
purchasable upon exercise or each Warrant Certificate or of increasing the
Exercise Price.
(d) Combination: Liquidation. (i) Except as provided in Section 4(d)(ii)
below, in the event of a Combination (as defined below), each Holder shall have
the right to receive upon exercise of the Warrant Certificates the kind and
amount of shares of capital stock or other securities or property which such
Holder would have been entitled to receive upon or as a result of such
Combination had such Warrant Certificate been exercised immediately prior to
such event (subject to further adjustment in accordance with the terms hereof).
Unless paragraph (ii) is applicable to a Combination, the Company shall provide
that the surviving or acquiring Person (the "Successor Company") in such
Combination will assume by written instrument the obligations under this Section
4 and the obligations to deliver to the Holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, the Holder may be
entitled to acquire. The provisions of this Section 4(d)(i) shall similarly
apply to successive Combinations involving any Successor Company. "Combination"
means an event in which the Company consolidates with, mergers with or into, or
sells all or substantially all of its assets to another Person, where "Person"
means any individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity,
but shall not include the sale of substantially all of the assets of the
Government Technology Division of the Company.
(ii) In the event of (x) a Combination where consideration to the holders
of Common Stock in exchange for their shares is payable solely in cash or (y)
the dissolution, liquidation or winding-up of the Company, the Holders shall be
entitled to receive, upon surrender of their Warrant Certificates, distributions
on an equal basis with the holders of Common Stock or other securities issuable
upon exercise of the Warrant Certificates, as if the Warrant Certificates had
been exercised immediately prior to such event, less the Exercise Price. In case
of any Combination described in this Section 4(d)(ii), the surviving or
acquiring Person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company, shall deposit promptly following the consummation
of such combination or at the time of such dissolution, liquidation or
winding-up with an agent or trustee for the benefit of the Holders of the funds,
if any, necessary to pay to the Holders the amounts to which they are entitled
as described above. After such funds and the surrendered Warrant Certificates
are received, the Company is required to deliver a check in such amount as is
appropriate (or, in the case of consideration other than cash, such other
consideration as is appropriate) to such Person or Persons as it may be directed
in writing by the Holders surrendering such Warrant Certificates.
(e) Notice of Adjustment. Whenever the Exercise Price or the number of
shares of Common Stock and other property, if any, issuable upon exercise of the
Warrant Certificates is adjusted, as herein provided, the Company shall deliver
to the holders of the Warrant Certificates in accordance with Section 10 a
certificate of the Company's Chief Financial Officer setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a description of the basis on which
(i) the Board of Directors determined the fair value of any evidences of
indebtedness, other securities or property or warrants, options or other
subscription or purchase rights and (ii) the Current Market Value of the common
Stock was determined, if either of such determinations were required), and
specifying the Exercise Price and number of shares of Common Stock issuable upon
exercise of Warrant Certificates after giving effect to such adjustment.
(f) Purchase Price Adjustment. In the event that the Company issues or
sells any Common Stock or securities which are convertible into or exchangeable
for its Common Stock or any convertible securities, or any warrants or other
rights to subscribe for or to purchase or any options for the purchase of its
Common Stock or any such convertible securities (other than shares or options
issued or which may be issued pursuant to the Company's employee or director
option plans or shares issued upon exercise of options, warrants or rights
outstanding on the date of the Agreement and listed in the Company's most recent
periodic report filed under the Exchange Act or disclosed in Schedule 3.3 to the
Purchase Agreement) and other than the Second Closing (as defined in the
Purchase Agreement) at an effective purchase price per share which is less than
the Current Market Value of the Common Stock on the trading day next preceding
such issue or sale, then in each such case, the Exercise Price in effect
immediately prior to such issue or sale shall be reduced effective concurrently
with such issue or sale to an amount determined by multiplying the Exercise
Price then in effect by a fraction, (x) the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding immediately prior to
such issue or sale, plus (2) the number of shares of Common Stock which the
aggregate consideration received by the Company for such additional shares would
purchase at such Current Market Value then in effect; and (y) the denominator of
which shall be the number of shares of Common Stock of the Company outstanding
immediately after such issue or sale.
For the purposes of the foregoing adjustment, in the case of the issuance
of any convertible securities, warrants, options or other rights to subscribe
for or to purchase or exchange for, shares of Common Stock ("Convertible
Securities"), the maximum number of shares of Common Stock issuable upon
exercise, exchange or conversion of such Convertible Securities shall be deemed
to be outstanding, provided that no further adjustment shall be made upon the
actual issuance of Common Stock upon exercise, exchange or conversion of such
Convertible Securities.
The number of shares which may be purchased hereunder shall be increased
proportionately to any reduction in Exercise Price pursuant to this paragraph
4(d), so that after such adjustments the aggregate Exercise Price payable
hereunder for the increased number of shares shall be the same as the aggregate
Exercise Price in effect just prior to such adjustment.
In the event of any such issuance for a consideration which is less than
such fair market value and also less than the Exercise Price then in effect,
than there shall be only one such adjustment by reason of such issuance, such
adjustment to be that which results in the greatest reduction of the Purchase
Price computer as aforesaid.
(g) Notice of Certain Transactions. In the event that the Company shall
propose (a) to pay any dividend payable in securities of any class to the
holders of its Common Stock or to make any other non-cash dividend or
distribution to the holders of its Common Stock, (b) to offer the holders of its
Common Stock rights to subscribe for or to purchase any securities convertible
into shares of Common Stock or shares of stock of any class or any other
securities, rights or options, (c) to effect any capital reorganization,
reclassification, consolidation or merger affecting the class of Common Stock,
as a whole, or (d) to effect the voluntary or involuntary dissolution,
liquidation or winding-up of the Company, the Company shall, within the time
limits specified below, send to each Holder a notice of such proposed action or
offer. Such notice shall be mailed to the Holders at their addresses as they
appear in the Warrant Register (as defined in Section 2(d)), which shall specify
the record date for the purposes of such dividend, distribution or rights, or
the date such issuance or event is to take place and the date of participation
therein by the holders of Common Stock, if any such date is to be fixed, and
shall briefly indicate the effect of such action on the number of shares of
Common Stock and on the number and kind of any other shares of stock and on
other property, if any, and the number of shares of Common Stock and other
property, if any, issuable upon exercise of each Warrant Certificate and the
Exercise Price after giving effect to any adjustment pursuant to Section 4 which
will be required as a result of such action. Such notice shall be given as
promptly as possible and (x) in the case of any action covered by clause (a) or
(b) above, at least 10 days prior to the record date for determining holders of
the Common Stock for purposes of such action or (y) in the case of any other
such action, at least 20 days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of Common Stock,
whichever shall be the earlier.
(h) Current Market Value. "Current Market Value" per share of Common Stock
or any other security at any date means (i) if the security is not registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (a)
the value of the security, determined in good faith by the Board of Directors of
the Company and certified in a board resolution, based on the most recently
completed arm's-length transaction between the Company and a Person other than
an affiliate of the Company or between any two such Persons and the closing of
which occurs on such date or shall have occurred within the six-month period
preceding such date, or (b) if no such transaction shall have occurred within
the six-month period, the value of the security as determined by an independent
financial expert or (ii) if the security is registered under the Exchange Act,
the average of the daily closing bid prices (or the equivalent in an
over-the-counter market) for each day on which the Common Stock is traded for
any period on the principal securities exchange or other securities market on
which the common Stock is being traded (each, a "Trading Day") during the period
commencing ten (10) Trading Days before such date and ending on the date one day
prior to such date, or if the security has been registered under the Exchange
Act for less than ten (10) consecutive Trading Days before such date, the
average of the daily closing bid prices (or such equivalent) for all of the
Trading Days before such date for which daily closing bid prices are available;
provided, however, that if the closing bid price is not determinable for at
least five (5) Trading Days in such period, the "Current Market Value" of the
security shall be determined as if the security were not registered under the
Exchange Act.
(i) Other Adjustments. If the event of any other transaction of the type
contemplated by this Section 4, but not expressly provided for by the provisions
hereof, the Board of Directors of the Company will make appropriate adjustment
in the Exercise Price so as to equitably protect the rights of the Holder.
(j) No Impairment of Holder's Rights. The Company will not, by amendment of
its certificate of incorporation or bylaws or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, except as contemplated hereby, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant Certificate, but will at all times in good faith assist in the carrying
out of all such terms and in the taking of all action as may be necessary or
appropriate in order to protect the rights of the Holder against dilution or
other impairment. Without limiting the generality of the foregoing, the Company
will not increase the par value of any shares of Common Stock receivable upon
exercise of this Warrant above the Exercise Price then in effect.
5. Company's Representations. The representations, warranties and
agreements of the Company contained in Sections 3 and 4 of the Securities
Purchase Agreement dated December 4, 1997 ("Purchase Agreement") among the
Company, the initial Holder and the other parties thereto are incorporated by
reference herein.
6. Registration Rights. The initial Holder is entitled to the benefit of
such registration rights in respect of the Shares as are set forth in the
Registration Rights Agreement dated as of December 4, 1997 by and between the
Company, the Holder and the other parties thereto, including the right to assign
such rights to certain assignees as set forth therein.
7. Issuance of Certificates. Within two (2) trading days of receipt of a
duly completed Election to Purchase form, together with this Certificate and
payment of the Exercise Price, the Company, at its expense, will cause to be
issued in the name of and delivered to the Holder of this Warrant, a certificate
or certificates for the number of fully paid and non-assessable shares of Common
Stock to which that holder shall be entitled on such exercise. In the event the
shares of Common Stock are not timely delivered to the Holder, the Company
agrees to (a) indemnify Holder for all damages, including consequential and
special damages, lost profits and expenses, including legal fees, and (b)
beginning on the fifth (5th) day following the Company's receipt of a duly
completed Election to Purchase form, pay a default premium of 2% per day of the
value of underlying shares (based on the highest closing price during the two
(2) day period preceding the date of surrender of the Warrant Certificate). In
lieu of issuance of a fractional share upon any exercise hereunder, the Company
will pay the cash value of that fractional share, calculated on the basis of the
Exercise Price. Prior to registration of the resale of the shares of Common
Stock underlying this Warrant Certificate, all such certificates shall bear a
restrictive legend to the effect that the Shares represented by such certificate
have not been registered under the Securities Act, and that the Shares may not
be sold or transferred in the absence of such registration or an exemption
therefrom, such legend to be substantially in the form of the bold-face language
appearing at the top of Page 1 of this Warrant Certificate.
8. Disposition of Warrants or Shares. The Holder of this Warrant
Certificate, each transferee hereof and any holder and transferee of any Shares,
by his or its acceptance thereof, agrees that no public distribution of Warrants
or Shares will be made in violation of the provisions of the Securities Act.
Furthermore, it shall be a condition to the transfer of the Warrants that any
transferee thereof deliver to the Company his or its written agreement to accept
and be bound by all of the relevant terms and conditions contained in this
Warrant Certificate.
9. Merger or Consolidation. The Company will not merge or consolidate with
or into any other corporation, or sell or otherwise transfer its property,
assets and business substantially as an entirety to another corporation, unless
the corporation resulting from such merger or consolidation (if not the
Company), or such transferee corporation, as the case may be, shall expressly
assume, by supplemental agreement reasonably satisfactory in form and substance
to the Holder, the due and punctual performance and observance of each and every
covenant and condition of this Warrant Certificate to be performed and observed
by the Company.
10. Notices. Except as otherwise specified herein to the contrary, all
notices, requests, demands and other communications required or desired to be
given hereunder shall only be effective if given in writing by certified or
registered U.S. mail with return receipt requested and postage prepaid; by
private overnight delivery service (e.g. Federal Express); by facsimile
transmission (if no original documents or instruments must accompany the
notice); or by personal delivery. Any such notice shall be deemed to have been
given (a) on the business day immediately following the mailing thereof, if
mailed by certified or registered U.S. mail as specified above; (b) on the
business day immediately following deposit with a private overnight delivery
service if sent by said service; (c) upon receipt of confirmation of
transmission if sent by facsimile transmission; or (d) upon personal delivery of
the notice. All such notices shall be sent to the following addresses (or to
such other address or addresses as a party may have advised the other in the
manner provided in this Section 10):
If to the Company:
Base Ten Systems, Inc.
One Electronics Drive
Trenton, NJ 08619
Telephone: (609) 586-7010
Telecopy: (609) 586-1593
Attention: Mr. Alexander M. Adelson
with a copy to:
Battle, Fowler LLP
75 East 55th Street
Park Avenue Tower
New York, NY 10022
Telephone: (212) 856-7000
Telecopy: (212) 856 7822
Attention: David Warburg, Esq.
If to Societe Generale:
Societe Generale
1221 Avenue of the Americas
6th Floor
New York, NY 10020
Telephone: (212) 278-5260
Telecopy: (212) 278-5467
Attention: Mr. Guillaume Pollet
in each case with a copy to:
Shoreline Pacific Institutional Finance
3 Harbor Drive, Suite 211
Sausalito, CA 94965
Telephone: (415) 332-7800
Telecopy: (415) 332-7808
Attention: General Counsel
and:
Cowen & Co.
1 Financial Square
New York, NY 10005
Telephone: (212) 495-3950
Telecopy: (212) 495-8305
Attention: Mr. Bill Smith
Notwithstanding the time of effectiveness of notices set forth in this
Section, an Election to Purchase shall not be deemed effectively given until it
has been duly completed and submitted to the Company together with the original
Warrant Certificate to be exercised and payment of the Exercise Price in a
manner set forth in this Section.
11. Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the Company's jurisdiction of incorporation (in
respect of matters of corporation law) and the laws of the State of New York (in
respect of all other matters) applicable to contracts made and to be performed
in the State of New York. The parties hereto irrevocably consent to the
jurisdiction of the United States federal courts and state courts located in the
Borough of Manhattan in the State of New York in any suit or proceeding based on
or arising under this Agreement or the transactions contemplated hereby and
irrevocably agree that all claims in respect of such suit or proceeding may be
determined in such courts. The Company and the Holder irrevocably waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding
in such forum. The Company and the Holder further agree that service of process
upon the Company or the Holder, as applicable, mailed by the first class mail in
accordance with Section 10 shall be deemed in every respect effective service of
process upon the Company or the Holder in any suit or proceeding arising
hereunder. Nothing herein shall affect the Holder's right to serve process in
any other manner permitted by law. The parties hereto agree that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner. The parties hereto irrevocably waive any right to trial by jury
under applicable law.
12. Limitations on Holdings. The Warrant shall not be exercisable by a
Holder to the extent (but only to the extent) that, if exercised by such Holder,
the Holder would beneficially own in excess of 4.9% (9.9% if the applicable box
on the signature page of the Securities Purchase Agreement for such Holder is
marked) (the "Applicable Percentage") of the shares of Common Stock. To the
extent the foregoing limitation applies, the determination of whether this
Warrant Certificate shall be exercisable (vis-a-vis other securities owned by
such Holder) shall be in the sole discretion of the Holder and submission of an
Election to Purchase shall be deemed to be the Holder's determination of whether
the Warrant Certificate is exercisable in whole or in part, subject to such
aggregate percentage limitation. No prior inability to exercise the Warrant
Certificate pursuant to this Section shall have any effect on the applicability
of the provisions of this Section with respect to any subsequent determination
of ability to exercise. For the purposes of this Section, beneficial ownership
and all calculations, including without limitation, with respect to calculations
of percentage ownership shall be determined in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended, and Regulation 13D-G
thereunder. The provisions of this Section may be amended and/or implemented in
a manner otherwise than in strict conformity with the terms of this Section with
the approval of the Board of Directors of the Company and the affected Holder:
(i) with respect to any matter to cure any ambiguity herein, to correct this
subsection (or any portion thereof) which may be defective or inconsistent with
the intended Applicable Percentage beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to such Applicable Percentage limitation; and (ii) with respect to
any other matter, with the further consent of the holders of majority of the
then outstanding shares of Common Stock; the provisions of this Section may be
waived with the approval of the affected Holder upon ninety (90) days prior
written notice from such Holder to the Company and all other Holders. The
limitations contained in this Section shall apply to a successor Holder of
Preferred Stock this Warrant if, and to the extent, elected by such successor
Holder concurrently with its acquisition of such Preferred Stock this Warrant,
such election to be promptly confirmed in writing to the Company (provided no
transfer or series of transfers to a successor Holder or Holders shall be used
by a Holder to evade the limitations contained herein).
13. Successors and Assigns. This Warrant Certificate shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
14. Headings. The headings of various sections of this Warrant Certificate
have been inserted for reference only and shall not affect the meaning or
construction of any of the provisions hereof.
15. Severability. If any provision of this Warrant Certificate is held to
be unenforceable under applicable law, such provision shall be excluded from
this Warrant Certificate, and the balance hereof shall be interpreted as if such
provision were so excluded.
16. Modification and Waiver. This Warrant Certificate and any provision
hereof may be amended, waived, discharged or terminated only by an instrument in
writing signed by the Company and the Holder.
17. Specific Enforcement. The Company and the Holder acknowledge and agree
that irreparable damage would occur in the event that any of the provisions of
this Warrant Certificate were not performed in accordance with their specific
terms or were otherwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent or cure breaches of
the provisions of this Warrant Certificate and to enforce specifically the terms
and provisions hereof, this being in addition to any other remedy to which
either of them may be entitled by law or equity.
18. Assignment. This Warrant Certificate may be transferred or assigned, in
whole or in part, at any time and from time to time by the then Holder by
submitting this Warrant to the Company together with a duly executed Assignment
in substantially the form and substance of the Form of Assignment which
accompanies this Warrant Certificate and, upon the Company's receipt hereof, and
in any event, within three (3) business days thereafter, the Company shall issue
a Warrant Certificate to the Holder to evidence that portion of this Warrant
Certificate, if any as shall not have been so transferred or assigned.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or by facsimile, by one of its officers thereunto duly
authorized.
BASE TEN SYSTEMS, INC.
Date:____________________ By:_________________________
Name:
Title:
ELECTION TO PURCHASE
To Be Executed by the Holder
in Order to Exercise the Common Stock
Purchase Warrant Certificate
The undersigned Holder hereby elects to exercise _________ of the Warrants
represented by the attached Common Stock Purchase Warrant Certificate, and to
purchase the shares of Common Stock issuable upon the exercise of such Warrants,
and requests that certificates for securities be issued in the name of:
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:
-----------------------------------------------------------------------
[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. 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
<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 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
<PAGE>
TABLE OF CONTENTS
PAGE
---------
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
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
<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.
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 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, 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.
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.
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 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 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 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 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
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 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, 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, 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 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.
<PAGE>
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 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 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").
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 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.
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.
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.
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 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.
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 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.
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.
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
---------- --------- ------------- ----------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C>
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
---------- --------- ------ ----------
---------- --------- ------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
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>
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.
<PAGE>
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
COMPANY COMPANY
HISTORICAL SALE(1) PRO-FORMA
---------- --------- -----------
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
---------- --------- -----------
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.
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
----------- --------- -----------
REVENUES
<S> <C> <C> <C>
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.
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 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,
--------------------------- -----------------------------------------------------
JULY 31,
JULY 31, 1997 1996 1996 1995 1994 1993 1992
------------- ------------ --------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
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,
-----------------------------------------------------
AS OF JULY
31, 1997 1996 1995 1994 1993 1992
------------ --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
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.
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 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 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 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.
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, 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 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.
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 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 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.
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
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
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.
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:
CLASS B COMMON STOCK
CLASS A COMMON STOCK
BID PRICE BID PRICE
------------------------ ----------------------
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
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
<PAGE>
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.
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 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
<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.
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.
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>
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
</TABLE>
NUMBER
OF
NAME UNITS(2)
- ------------------------------- -----------
Executive Group................ N/A
Non-Executive Director Group... N/A
Non-Executive Officer Employee
Group........................ 857,600
- ------------------------
(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 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.
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.
By Order of the Board of Directors
[SIGNATURE]
Edward J. Klinsport
CHIEF FINANCIAL OFFICER,
EXECUTIVE VICE PRESIDENT AND SECRETARY
Dated: December 15, 1997
<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>
<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)
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1996 1995
------------- -------------
(AS RESTATED, SEE NOTE M)
CURRENT ASSETS:
<S> <C> <C>
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
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(AS RESTATED, SEE NOTE M)
REVENUE
<S> <C> <C> <C>
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
<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
--------- --------- --------- --------- ---------- ----------- ------------ -----------
BALANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(AS RESTATED, SEE NOTE M)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
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>
<PAGE>
See Notes to Consolidated Financial Statements
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:
Leased asset--building........................................ 15 years
3 to 10
Machinery and equipment....................................... years
3 to 20
Furniture and fixtures........................................ years
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. 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 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.
C. INVENTORIES
OCTOBER 31,
--------------------------
1996 1995
------------ ------------
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
------------ ------------
D. PROPERTY, PLANT AND EQUIPMENT
OCTOBER 31,
----------------------------
1996 1995
------------- -------------
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
------------- -------------
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
OCTOBER 31,
--------------------------
1996 1995
------------ ------------
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
------------ ------------
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 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
------------- ----------- ----------
Current:
<S> <C> <C> <C>
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>
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1996 1995
------------- -------------
CURRENT
<S> <C> <C>
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>
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
------------- ------------ ------------- -------------
YEAR ENDED OCTOBER 31, 1994:
<S> <C> <C> <C> <C>
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
------------- ------------- ------------- -------------
YEAR ENDED OCTOBER 31, 1995:
<S> <C> <C> <C> <C>
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>
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.
The Company's future minimum lease payments related to the sale-leaseback
arrangement in effect at October 31, 1996 are as follows:
FISCAL
- --------------------------------------------------
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
-------------
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 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
---------- ----------- ----------
Outstanding at October 31, 1993
<S> <C> <C> <C>
($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.
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);
AS
PREVIOUSLY AS
REPORTED RESTATED
---------- ---------
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)
<PAGE>
[This page intentionally left blank]
<PAGE>
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
AS OF OCTOBER 31,
JULY 31, 1997 1996
-------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
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
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDER'S EQUITY
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
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31 JULY 31
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
REVENUES
<S> <C> <C> <C> <C>
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
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
----------- ------------ --------- ---------- ------------- -------------- -----------
Balance -
October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
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
BASE TEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
----------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
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
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
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:
Leased asset--building........................................ 15 years
3 to 10
Machinery and equipment....................................... years
3 to 20
Furniture and fixtures........................................ years
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 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.
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. 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. 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:
FISCAL
- ----------------------------------------------------
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
-------------
-------------
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 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.
<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;
(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.
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
<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 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.
(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
(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.
* * *
<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
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
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>
